Dear Tax Talk,
Like so many others, I lost a lot of money on my IRAs. My statements lately also reflect small losses or, at best, little gain. I am 63 years old and would like to withdraw it all and simply invest it in bank savings accounts and/or CDs. Of course, I had capital losses last year to report.
My question: How would withdrawing the money affect my taxes? Overall, the investments still reflect losses.
-- Dick
Dear Dick,
It may be difficult to comprehend, but losses in your IRA are not tax-deductible losses. In fact, in most cases, the remaining funds are considered taxable ordinary income. I say "most cases," as most IRA funds are accumulated on a pretax basis: either they were deducted on your return in the year contributed or come from a rollover of an employer sponsored retirement plan.
In the instance where your contributions are as a result of after tax contributions, you should have completed Form 8606 to track your basis in the IRA. If you have basis in your IRA, I'll discuss the implications later.
Assuming your IRA was pretax, if you withdraw the full amount now you'll recognize ordinary income. Because you're age 63, there is no early withdrawal penalty.
If your intention is to put the money in a safe investment such as a savings account or CD, you can do this within your IRA. Just advise your IRA custodian that you want to get out of your current investments and go into a CD. It's hoped that your investments have recovered enough and that it is a good time to make a switch in investment strategy.
At age 63, your investment horizon is much shorter. Allocating some assets to safer investments is always a recommended strategy. For example, you may want to have safe investments that will be available for withdrawal to meet your needs for the next 10 years.
When you say of course you had capital losses last year, I assume they do not relate to your IRA. Losses occurring in an IRA are not capital losses. Additionally, capital losses do not offset ordinary income from an IRA except to the extent of the $3,000 overall limit on capital losses.
If you happened to have made nondeductible IRA contributions, you may have a loss on the termination of all your IRAs. If the balance on your IRA is less than your basis, you can claim a miscellaneous itemized deduction for the loss. Read more about deducting losses in a Roth IRA.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.
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