We got an interesting question from a reader San Bruno, Cal., over the weekend. Our answer might save you money, too. Here's his predicament:
In 1998, I converted $22,860 from a regular IRA into a Roth IRA account, paying equal payments of $5,715 every year from 1998
through 2001. In bad trades, I lost all of this sum except for $1,177.15, which I withdrew in 2003, closing the account.
My question is: Am I entitled to reclaim any of these losses from the IRS?
We were happy to be able to deliver some help in making lemonade out of this lemon.
Assuming this was your only Roth IRA, then, yes, you can deduct the loss -- if you itemize and you're not subject to the Alternative Minimum Tax.
Here's how it works: When you close a Roth IRA, you compare the amount you receive to your "basis" in the account. With a Roth, your basis is the total of contributions plus any conversions minus any earlier withdrawals. The difference is a loss. But it's not a capital loss to be reported on a Schedule D. Instead, it is an ordinary loss, which is considered a miscellaneous itemized deduction on a Schedule A. The trick there is that miscellaneous expenses are deductible only to the extent that they exceed 2% of your adjusted gross income.
Let's assume your Roth loss is $21,683 -- the $22,860 converted from your traditional IRA minus the $1,177 you got when you closed the account. If your AGI for 2003 is $50,000, the first $1,000 of your miscellaneous expenses (2% of $50,000) wouldn't be deductible. But you'd still be allowed to write-off $20,683. That's clearly enough to make itemizing worthwhile, even if you have no other itemized deductions.
If you're one of the increasing number of taxpayers hit by the AMT, however, you don't get this deduction. Miscellaneous deductions are not allowed under the AMT.
GETTING STARTED
