Rechar. of a Roth-is the loss deductible?
Hello all. Thank you in advance for your time.
Taxpayer contributes to a Roth, then finds he exceeded the earnings levels. He recharacterizes that and places the funds back in his pocket. In the interim, the value of the $5000 contributed dropped to $3000. We know that if recharacterizing/reversing, a gain in similar situation is taxable. Is this loss deductible?
Thanks. Albert Israel, Seattle
Permalink Submitted by Alan Spross on Tue, 2009-03-17 20:36
Albert,
While you use the term “recharacterizes” here, you actually describe a simple return of excess contributions to the Roth IRA.
The loss is not tax deductible in the typical situation becuase it occurred while the funds were in the IRA account. However, IF the taxpayer completely distributes all of their Roth IRA accounts, there is a miscellaneous itemized deduction for the amount that the balance received falls short of the amounts contributed. This deduction is subject to the 2% of AGI limit, and the taxpayer’s total itemized deductions must exceed the standard deduction.
The deduction is only available in the year that all Roth accounts are closed. In your example, if this was the only Roth contribution the taxpayer ever made, there could be a 2,000 misc itemized deduction available in the year the funds were received back from the IRA custodian. If this excess contribution was returned in 2008, but all Roths are not closed until 2009, the 2008 shortfall of 2000 is not available for deduction because it was returned in a different year than when all Roths were closed.
It is usually not a good idea to terminate all Roth accounts unless the actual deductible tax savings in relation to the amount remaining is substantial.