Dear Tax Talk:
This is part of your answer to a previous question asked by "Ann":
"Under the IRS rules that apply to IRAs, you can't claim a loss on a Roth IRA until all the amounts in all your Roth IRAs have been distributed and your distributions are less than your original contributions. There is no provision for carrying over your unused losses."
I've never considered the possibility of deducting losses in a Roth IRA, and wasn't aware it could be done at all. However, your statement above raises a further question. If there is not provision for carryover of losses (or gains) from one year to another, that implies, if one had losses and wanted to deduct them, one would have to take total distribution of all Roth assets in the same year. That seems ridiculous. Is that actually the case?
In your answer to Ann, you continue:
"You can claim the loss as a miscellaneous itemized deduction, subject to the 2 percent-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions on Schedule A, Form 1040."
This raises the question: Are you referring to the total loss after all Roths are distributed in the single year?
Could you refer me to links of further information, or IRS documents, regarding deduction of losses occurring within IRAs, Roth and traditional?
In your e-mail, you state:
"If there is not provision for carryover of losses (or gains) from one year to another, that implies, if one had losses and wanted to deduct them, one would have to take total distribution of all Roth assets in the same year. That seems ridiculous. Is that actually the case?"
While tax law may seen unfair, arbitrary or burdensome, it is hardly ridiculous.
To be clear, you can only claim a loss on an IRA if you had nondeductible contributions to the accounts. By definition, that limits you to Roth IRAs and those few people who actually put money into nondeductible IRAs. Suppose I had put $10,000 each into two Roth IRAs. One has a current value of $500, the other has a value of $10,000. Currently, I lost $9,500 on my Roths. If I only withdraw the $500 from the loss account there's a chance that the other account can recover the loss on which I won't be taxed. Hence, until you completely withdraw all IRA funds, your loss is not known.
Once you know your loss, it becomes a miscellaneous itemized deduction in a single year. Pages 40 and 66 of IRS Publication 590 discuss recognizing losses on traditional IRAs and Roth IRAs, respectively.