Can You Write Off IRA Losses?

In most cases you can write off realized investment losses if those occur in non-qualified accounts (non-retirement accounts). That’s one way to minimize the pain when your investing fortunes don’t pan out. But when it comes to IRA losses, you are out of luck Charlie.

This sour reality was brought home to Denise, a nice lady I recently spoke with. Two years ago her investment advisor convinced her to take her entire retirement savings and throw it into a limited partnership. Despite cheery promises made by the doofus who sold her the LP, the investment ran aground within 6 months of Denise making the transaction.

It got so bad that the partnership became insolvent. The LP offered Denise a buyout of 45 cents on the dollar – or take her chances in bankruptcy court. She wanted to know if she should take the offer or not. She also wanted to know if she could take a tax deduction if she accepted the offer.

Sadly, the answer was that she could not use the loss as a write off. Here’s why.

When you make a contribution to a retirement account you get a tax deduction (unless it’s a Roth retirement account). When you withdraw money from those retirement accounts its taxable income. Think about this example.  If your total deposits are $200,000 over the years and the account grows to be worth $500,000, the government doesn’t tax you on that growth while the money is in a retirement account. Even if you sell your $200,000 investment for $500,000 you won’t pay a cent in tax as long as the money stays in your retirement account. But the minute you make a withdrawal from your retirement account the tax trap slams down.

That’s great if your retirement account grows. But what’s good for the goose is good for the gander my sly Pilgrim. That means while
you don’t pay taxes on gains in your retirement accounts you also don’t get to deduct losses. That’s just how it works.

Unfortunately, the best advice I could give Denise was to accept the loss and make sure never to fall into that kind of trap again. How do you avoid huge losses with your retirement accounts? Of course there is no guarantee, but here are the 5 most important things to do if you want to safeguard your retirement:

• Stay away from limited partnerships (in or out of your retirement account).
• Don’t buy real estate with retirement money.
• Make sure all your retirement accounts are held by a reputable custodian
• Make sure your retirement investments are publicly traded.
• Make sure you invest based on a sound investment strategy.

What are other important tips you can share to help avoid retirement account losses?