When you close your individual retirement accounts (IRAs) and have taken a loss, you may qualify to write it off on your taxes. However, the deduction is only available if you cash out all IRAs of the same type. For example, if you close one of your Roth IRA accounts, but you still have three others open, you can't deduct your losses.
To figure the amount of your loss on your IRA when you cash out, you have to first calculate your basis in the IRA. Your basis equals the amount of non-deductible contributions you've made to the account. For traditional IRAs, this only includes the contributions you made that you didn't deduct on your taxes. If you haven't made any nondeductible traditional IRA contributions, your basis is $0, and you can't claim a loss. For Roth IRA, your basis equals your total contributions.
Figuring Your Loss
To figure your loss, you have to total all of the distributions you've ever taken from the IRAs of the same type and the subtract the result from your basis. If the result is negative, you don't have a loss. For example, if your basis of your Roth IRA is $30,000 and you have withdrawn a total of $25,000, including the distribution that closes your account, your loss equals $5,000. If you had withdrawn $35,000 and your basis was $30,000, even if your account had once been worth $100,000, you don't have a deductible loss.
The Internal Revenue Service classifies the IRA loss deduction as a miscellaneous deduction, so you can only deduct the portion that, when combined with other miscellaneous deductions, exceeds 2 percent of your adjusted gross income. Other miscellaneous deductions include tax preparation expenses and unreimbursed employee expenses. For example, if your adjusted gross income is $50,000 and your loss is $5,000, your deduction would only be $4,000 because of the 2 percent threshold.
Early Withdrawl Penalties Apply
Even if you qualify to claim a loss, you'll still owe any applicable early withdrawal penalties on your distributions. For example, if you converted to a Roth IRA from a pretax account, such as a traditional IRA, within the past five years, that distribution is not a qualified distribution, so you'll still owe the 10 percent additional tax penalty even if you have a net loss on the IRA.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."