Method for deduction of Roth losses

Submitted by Ned Abenroth on Wed, 2009-11-11 19:47

I’ve read the relevant tax code, but while it is clear on its intent, it is short on details.

If the basis in the Roth is greater than the current value of the Roth, and the intent is to completely empty the account in order to deduct these losses:

1) Must the Roth assets be withdrawn as cash or can it be done in kind?
2) Must the Roth be left empty for a given time, or could the next day or week, the individual make his next Roth contribution back into the same Roth?
3) Must the Roth be empty at year end or just at some point during the year?
4) Would it be better to start a new Roth after emptying the old one, or does it not matter in the least?
5) Any other pointers on making this happen smoothly?



Submitted by Alan Spross on Wed, 2009-11-11 20:14

1) Must the Roth assets be withdrawn as cash or can it be done in kind? IRS has never clarified this. I would avoid having any Roth account balance as of year end of the closeout year, so there will be no 5498 showing a balance. Start again for the following year.

3) Must the Roth be empty at year end or just at some point during the year? > See above for recommendation.

4) Would it be better to start a new Roth after emptying the old one, or does it not matter in the least? > The account numbers do not matter because the rule apply to any or all Roth accounts. If you started contributions in the following year, you could still use the dormant old account # if you wanted.

5) Any other pointers on making this happen smoothly > Beware of the AMT which can erase misc deductions. Also, beware of the short term limited deduction benefit vrs loss of future earnings power of the accounts you take out to close all your Roths. Most of the time, the deduction is not worth it unless it is huge in relation to the balance you have left. If you had to later convert a TIRA balance to replace what you withdrew, then you have another tax bill due.

Submitted by Michele Huddleston on Sat, 2014-02-08 22:02

If a Roth was effectively closed in 2013 with large losses and another small Roth with gains is still held can the taxpayer decide to close the remaining Roth in a future year and take the Net Loss OR is the loss only available in the year the Roth with losses was closed?

Submitted by Alan - IRA critic on Sat, 2014-02-08 23:56

  • The misc deduction is only available in the year that all owned Roth IRAs are terminated since all your Roth IRAs are combined for tax purposes. The IRS has not indicated how much time must pass before you open an new Roth after terminating all your Roths, but the earliest possible time would be the following calendar year.
  • The 2013 Roth distribution needs to be reported on Form 8606 using the total contributions or conversion made to both accounts combined. If the losses are larger than the dollar gains, there is a net loss and the distribution will be tax free, although there could be a penalty if there were conversions in the Roth not held the required 5 years.

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