How to File for a Loss in an IRA
- 1). Determine which type of IRA loss you are calculating, either a Roth IRA loss or a traditional IRA loss. You can claim both in the same year, but you must calculate each separately.
- 2). Distribute all funds in IRAs of the chosen type. For example, if you are claiming a loss on your Roth IRAs, you must close all of your Roth IRA accounts, not just ones that are performing poorly.
- 3). Add the amount that you have had distributed over the life of the account to the amount you received when you closed the accounts. For example, if you had taken $11,000 in distributions in prior years and then received $54,000 when you closed the accounts, you would get $65,000.
- 4). Total the number of nondeductible contributions to your IRAs of the selected type to find your basis for the accounts. Nondeductible contributions are those for which you did not receive a tax deduction. This includes all contributions to a Roth IRA. Contributions to a traditional IRA are usually tax deductible unless your are covered by an employer plan and your income exceeds the annual limits.
- 5). Subtract the total amount you have had distributed, found in step 3, from the basis found in step 4. For example, if you made $70,000 in nondeductible contributions but only cashed out $65,000, the difference would be $5,000.
- 6). Calculate the amount of your deduction. Because an IRA loss is counted as a miscellaneous deduction by the IRS, you must subtract 2 percent of your adjusted gross income from the amount calculated in step 5. For example, if your adjusted gross income was $30,000, you would subtract $600 so if the amount in step 5 was $5,000, your deduction would only be $4,400.
- 7). File your taxes using Form 1040 and attach Schedule A and list your IRA loss as a miscellaneous deduction. This amount will reduce your taxable income for the year.
