Deduct Loss In IRA

[Bart]

Client retires and moves 100,000 in employer retirement fund to his own IRA. A few years later he cashes in the entire IRA for 80,000. Can he deduct the 20,000 loss?

[Jack from Ohio]

No. How can he deduct something he never had?

[RitaB]

Client retires and moves 100,000 in employer retirement fund to his own IRA. A few years later he chases in the entire IRA for 80,000. Can he deduct the 20,000 loss?

Not if the money has never been included in his taxable income, which is normally the case. If the money HAS been taxed, as in a ROTH IRA, you got a different story.

[kcjenkins]

You have to look at what his 'basis' is. If the funds in the original 401K were never taxed, his basis was zero. If he had after-tax contributions in it, those would be his basis. Let's say, for example, he put in $30K in after-tax contributions, which were matched partially by the employer, over the years at the job. So his basis was $30K when he moved it. So his GAIN is the difference between his basis and what he cashed out.. No loss to deduct.

Now if he had after-tax contributions of more than $80K, he could deduct the loss, but that is highly unlikely, isn't it?

[MAMalody]

Per the Tax Book: Losses on traditional IRAs are not deductible unless the entire account balance of all traditional IRAs are distributed and your client has unrecovered basis left in the traditional IRA. Distribution of the entire account balance applies seperately to all traditional IRAs.

[Jack from Ohio]

My answer was shorter!!

[Lion EA]

And, if a loss exists, I think it's a Schedule A, Miscellaneous, 2%, deduction. So, not very likely. In 16 years, I had one client with nondeductible IRA contributions as his income rose who cashed out everything in his IRAs as his kids went to college and he was between jobs who actually had a small deduction in that low-income year from an IRA that was less than his basis.