Are Losses in an IRA Account Taxable?

Depends… This question is a bit confusing, so I’ll go over all possible scenarios that the user may have meant, and I’m going to separate this into two columns. This one will deal with losses in a Traditional IRA. The next column will deal with losses in a Roth IRA.

Q: Can you write off losses in an IRA?

A: No, not unless you’ve made non-deductible contributions to your IRA.

A Traditional IRA is tax deductible in the year that you invest the principal, and it is only taxed when you redeem (sell, or cash out). So, let’s say I invested $1,000 in an IRA in 2005 and the value has fallen to $700. I’ve already written off the $1,000 back in 2005, so I cannot make a second deduction now that I’ve lost money.

If I redeem my IRA and get the $700, then I will have to pay taxes (plus penalty, since I’m not of retirement age) on the $700. The $300 is gone, and it’s as if I never had it to begin with; I never paid taxes on it, so I can’t write it off.

Q: Do you pay taxes on losses in an IRA?

A: No.

Remember, a Traditional IRA is written off to begin with. So, you will only pay taxes on what you take out of the account.

Take the scenario above, where my $1,000 investment decreased to $700. I do not pay taxes on the $300 loss, I only pay taxes on what I take out (up to $700).

If you really want to dig deeper, here’s some light reading: IRS Publication 590: Individual Retirement Accounts (IRAs)

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