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Salvage ‘surprise’ tax loss on your IRA payouts

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in Small Business Tax

Due to recent stock market volatility, you may have taken a hit in your IRA holdings. To make matters worse, you could be “cashing out” the IRA when its overall value has dipped. Unfortunately, you can never claim a tax loss relating to funds inside an IRA … right? Wrong.

Strategy: Crunch the numbers. If your IRA has declined in value, you could possibly deduct a tax loss when you liquidate the account. The loss is essentially the difference between what you put in and what you’re taking out.

Claim any resulting loss as a miscellaneous expense on your 2007 tax return (subject to the usual 2%-of-AGI limit). This can take some of the sting out of a roiling stock market.

Here’s the whole story: If you’re a high wage earner, you probably have not been able to make deductible contributions to an IRA for several years. Reason: Deductions are not available if you actively participate in an employer-sponsored retirement plan and your AGI exceeds an annual limit. For 2007, the top dollar amount is $62,000 for single filers; $103,000 for joint filers.

However, even if you don’t qualify for deductions, you still may contribute to an IRA on a nondeductible basis. The contribution limit for 2007 is $4,000. Plus, you can salt away an extra $1,000 if you’re age 50 or older. As with deductible contributions, earnings on nondeductible contributions accumulate within your account without any current tax erosion.

If you’ve made nondeductible contributions to your IRA and then empty out your account, you can deduct a loss as long as the liquidating distribution is less than the adjusted basis.

What happens if you show a loss in a Roth IRA? The basic rules are the same, but it’s easier to figure out if you qualify for a loss. Because you can never deduct contributions to a Roth IRA, your basis is equal to the full amount of contributions. To claim a loss deduction for a traditional IRA, all of your traditional IRAs must be liquidated, and the aggregate basis must exceed the aggregate liquidating distributions. The same aggregation rule applies to Roth IRAs.

Tip: Losses for traditional and Roth IRAs are computed separately. See IRS Publication 590, Individual Retirement Accounts, at

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