Deducting IRA Losses After Total Distribution
If you lost money after the total distribution of your IRA -- that is, you contributed more funds that were ultimately paid out -- you might have found yourself confused about how to handle this complex financial topic.
When a Traditional IRA has been totally distributed and amounts received are less than the individual’s unrecovered basis in the account, a loss is recognized.
The IRA loss recognition rule applies separately to each kind of IRA, and a similar rule applies to Roth IRAs. Thus, to recognize a loss in a Traditional IRA, all amounts must be distributed from all Traditional IRAs (but not Roth IRAs) owned by the taxpayer, and to recognize a loss in a Roth IRA, all amounts must be distributed from all of the Roth IRAs owned by the taxpayer (but not traditional IRAs).
An IRA loss may be claimed as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions on Schedule A, Form 1040. (Notice 89-25, Q&A 7, 1989-1 CB 662) The TCJA suspended deduction of Tier 2 miscellaneous deductions for years 2018 through 2025, so an IRA loss will not be deductible during this period.
Example – Loss on a Traditional IRA Distribution Recognized – A mutual fund IRA, funded with 6 annual non-deductible contributions of $2,000, has a basis of $12,000 ($2,000 x 6). It is the taxpayer’s only IRA. The mutual fund lost money, and the account contained only $10,000. The account owner withdrew the entire amount in 2023 and realized a $2,000 loss in that year. However, none of the loss is deductible because of the TCJA suspension of Tier 2 miscellaneous itemized deductions.
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