Can Someone Ever Deduct a Capital Loss Against a Traditional IRA?
- When you invest in a traditional IRA, and you make deductible contributions, you are investing in an individual retirement account which functions as a tax shelter. Normally, investments that you own would be subject to capital gains if you realize a profit and they could also be written off of your taxes to a certain extent if you realize a loss. But, investments inside of the IRA are effectively removed from taxation when they are inside of the account. Because you've already taken a tax deduction on the contributions, you don't get the benefit of deducting losses, but you also don't have any gains to report either.
- The only time you may deduct a loss on your IRA is if you make non-deductible contributions to your IRA. Generally, these kinds of contributions are not made to a traditional IRA. If you do make these contributions, you must file form 8606 and keep track of your contributions. Then, if you want to claim a loss, you must liquidate the entire IRA.
- The disadvantage to traditional IRAs is that you normally cannot deduct losses due to the fact that you ordinarily make deductible contributions to the account. Because of this, you are not able to deduct losses if you are investing in stocks or some other investment where you would ordinarily be able to write off losses, and it would create an economic benefit to you. You simply lose the benefit of deducting a loss. Stocks are not normally taxed until you sell the stock, so you don't experience any added benefit from tax deferral (unless you sell your share in a company for a profit).
- As an alternative to making non-deductible contributions to an IRA, consider purchasing a variable annuity. Variable annuities invest in mutual funds, and defer income tax on all money inside of the annuity just like an IRA. They do not allow tax deductible contributions, however. Losses in an annuity may be written off. To write off losses, you must cash in the entire annuity policy. If you cash in only part of the contract, the IRS will disallow the deduction.
When cashing in an annuity, you may be required to pay a penalty if the annuity has not matured yet. Maturity refers to an amount of time that the annuity must be held before it can be cashed in. Maturities for annuities are normally between one and 10 years, but may be longer. You cannot write off the penalty as part of the loss.
