Roth IRA Loss

[S T]

Is it possible to claim a Roth IRA Loss? Seems like it is, I know that it would be subject to the 2% reduction on Schedule A. I see that a full distribution of the ROTH IRA needs to be made (of money left) So any and all Roth IRA accounts totally closed.

Conditions that I have reviewed are

T/P can not be in AMT

T/p has to close out the Roth IRA Account and any other Roth IRA accounts in total - so there are no longer ANY Roth IRA Accounts open (question, does not include Traditional IRA accounts???)

Loss on the Roth IRA account/s must exceed the 2% AGI on Schedule A, amd t/p must meet the Sched A to claim itemized deductions.

Then the calculation for the Roth IRA loss is the balance has to be less than original contributions. Calculation would be Original Contributions less any withdrawals. For this scenario there are no Withdrawals.

Question, do we include any earnings posted or ignore?

If $ 23,000 was contributed, and now only $ 980 is the loss $ 22,020 all earnings ignored.

Real amounts = Roth IRA $ 23,000 contributions - value at $ 980 and current value is not real cash-- it is being labled as "in kind" as the Client invested in Natl Notes - which is in receivorship.

Makes it a more confounding issue as there is NO Cash and another instituion would have to recognize a "promissory note" How can you do a "rollover" or a cash liquidation -- with a piece of paper??

Can T/P take a Note in kind and that would be considered as a total liquidation of the Roth IRA? Or would it be better not to accept the Note in Kind, which probably or most likely will not ever be collectible? When does the T/p on "in kind or disposal recognize the loss?


Thanks,

Sandy

[ChEAr$]

Probably no choice but to accept the note for the 980.

Thus for 2013 client will have ROTH loss of what you calculated, and later on, when that note is deemed worthless,
a capital loss for it's value.

[appelman]

It does not include traditional IRA's.

They are treated separately. But presumably earnings, if any, have been reinvested, so shouldn't they be reflected in the final value of the account?

[Roland Slugg]

Let's see if I can respond to the various questions you raised:

Yes, the loss is deductible, on Schedule A as a miscellaneous deduction subject to the 2% N/D floor. No, you don't lump his traditional IRA in with his Roth IRA. Yes, earnings on the Roth investments are taken into account, because the deductible loss is measured by subtracting: (A) the amount received when the Roth IRA is completely closed out and distributed, from (B) the total amount contributed to the Roth IRA. Amount (B) is first reduced by the total of all prior distributions, if any. Thus, the calculation of the loss results in the earnings on the Roth being taxable, in a sense, because they serve to reduce the amount of the loss that would have been deductible if there had been no earnings.

Yes, it would be difficult if not impossible to find an IRA trustee that would accept the note, but there is no need to even try, is there? If the T/P wants to close out his Roth IRA, he shouldn't be looking to roll over any amounts or other property he takes out in liquidation thereof.

The existence of this loss presents some good tax planning options. If the T/P itemizes in some years, but not all, he may be wise to close out his Roth IRA in a year when he will be itemizing, then shown how to "bunch" all his itemized deduction into that year ... delaying the payment of tax-deductible items from the year before and accelerating the payment of tax-deductible items from the year following. If the T/P's income is subject to significant variation from year-to-year, it would probably be best to liquidate his Roth IRA, and thus recognize the deductible loss, in a year when his income is high, and he is in a higher tax bracket.

Finally, how did the T/P find this bad investment? On his own, or did a financial planner/adviser steer him into it? If it was the latter, he may wish to make some noise with that adviser, and if that does no good, he may wish to consult an attorney. A 96% loss on his investment is shocking, and whoever got him into it may be culpable.