Gary breaks it down for you:
As a result of the steep decline in the stock market in 2008 and 2009, most people have seen major losses in their retirement accounts. The obvious question we’re being asked is “How do I write of the losses in my 401-K or IRA?” Unfortunately, the answer is — you don’t. I’ll do my best to explain.
When you sell stocks or other investments that are not in your retirement plan, your gain or loss is calculated by subtracting your basis (what you paid for the investment) from the proceeds of sale (what you get when you sell the investment) :
Proceeds of Sale – Basis = Gain or Loss
If the investment sells for more than you paid for it you report the difference as income (capital gain). If it sells for less than you paid, you report a loss.
There is one major difference when the investment is in your retirement account: Money that is contributed to your IRA or 401-K is excluded from your taxes in the year that you contribute the money, so your basis for all investments is $0. That’s why all of the money that is withdrawn is taxable income in the year you receive it. Also, because your basis is $0 you can never have a tax loss. Even if the value of the investments in your IRA or 401-K drops to $0 :
$0 (Proceeds of Sale) - $0 (Basis) = $0 (Gain or Loss)
As this example shows, even in the worst case scenario you will never have a tax loss from your IRA or 401-K. In essence, you already got the “write-off” in the year that the money was contributed.
There are more issues regarding your Roth IRA and non-deductible IRA contributions. Call us and we'll fill you in.