Loss On Ira Contribution Removal

[Kram BergGold]

Client put $4,000 into 2007 IRA in 2007. Removed it in 2008 and only got back $3700.
Can a 2%, miscellaneous, Schedule A deduction be claimed on an amended 2007 return?

[Lion]

All?

Only if he's distributed all IRAs of that type, not just one account of many.

[DaveO]

Only if he's distributed all IRAs of that type, not just one account of many.

And then only if he has basis as in a Roth IRA.

[Jesse]

And then only if he has basis as in a Roth IRA.

This is what is tough to explain to people. Quite a few clients pulled everything out and can't understand why they cannot take a loss. The Pretax dollars doesn't seem to sink in - they just see they lost money.

How do you explain it to your clients?

[DaveO]

I tell them that any withdrawal from the account would be taxable to them regardless of the drop in valuation. They didn't pay tax on the money when it went into the account so it's taxed when it comes out. The pain is widespread and hardly anyone didn't lose money.

A few years ago I had a couple come in with a huge IRS liability. Bankrupcty would have been a good choice since most of the tax was old enough to discharge but they didn't want to risk losing their house. He was ready to cash out his retirement plan to pay it off and in anticipation of that had moved all the funds to the fixed interest option.

I told him he would he would never get that money back in the plan and helped them to get an OIC approved. He never put the funds back into equities after that. He and his wife worked 2 or 3 jobs and paid the OIC off in 2 years. Now he has his house and all his money in his retirement plan and being 5 years older and nearer retirement he is pretty happy. He is one of a very few to escape the correction I know of.

[JG EA]

This is what is tough to explain to people. Quite a few clients pulled everything out and can't understand why they cannot take a loss. The Pretax dollars doesn't seem to sink in - they just see they lost money.

How do you explain it to your clients?

When an investment lost money or 401k etc. and they want to take a loss on their taxes I explain, but while it was growing you didn't have to pay taxes on the growth unless you sold right? So, you can't take a loss now. And then go on to explain that if they sold they would have to pay taxes on whenever there was a profit or on all of the 401k distributions, etc.

On the question of bad debt I took the advice of some on the board and said I can put what you would have gotten in income and take a bad debt. But I just now thought of anyother way. Sch C bad debt. Well, we have your material, subs, etc in expense already. We could take that out of expenses and write that part off as a bad debt if you would like.

[JohnH]

Isn't it amazing how some people can't understand why they can't take a loss when the value of their 401(k) or IRA goes down, but they had absolutely no problem understanding why they didn't' have to report income or gains when the value was going up?

Thinking through the situation, it's really no wonder there were so many sub-prime loans, liar's loans, and ARMS ready to blow up, all poised out there to take the financial system down at the first sign of a hiccup.

[Kram BergGold]

Clarification

The money deposited in 2007 was never deducted on a tax return. T/P was not allowed a 2007 dedcution so the money was removed before the 2007 filing deadline so there is basis. I just don't know if it is deductible.

[DaveO]

Yes, on liquidation of all IRA accounts of that type subject to 2% of AGI.

[RitaB]

Oh....

Since never deducted and withdrawn before due date, my completely unresearched, off-the-cuff answer is that this was not an IRA, just an investment, and report the loss on Sch D just like any non-retirement account. I will look around to see if I can find anything to support that opinion.

[Jesse]

Since never deducted and withdrawn before due date, my completely unresearched, off-the-cuff answer is that this was not an IRA, just an investment, and report the loss on Sch D just like any non-retirement account. I will look around to see if I can find anything to support that opinion.

No, it is as DaveO Said, I have the page from Publication 590 printed out and highlighted to show clients in disbelief.

http://www.irs.gov/publications/p590/ch01.html#en_US_publink10006377

[RitaB]

Duplicate post / don't look

Sorry bout that

[RitaB]

Here's another page for Kram's client

No, it is as DaveO Said, I have the page from Publication 590 printed out and highlighted to show clients in disbelief.

http://www.irs.gov/publications/p590...ublink10006377

Yeah, page 4 of the Instuctions to Form 8606 describe Kram's exact situation:

http://www.irs.gov/pub/irs-pdf/i8606.pdf

I was hoping that since "the returned contributions are treated like they were never contributed," they could be treated like any other normal crappy investment. Oh, well.