The Internal Revenue Service doesn't allow you to deduct your Roth IRA losses year after year, so the only way to deduct your losses is to close your Roth IRA accounts. The same rules apply to Roth IRAs. You were only allowed to claim the losses of a Roth IRA on your tax return if your total Roth IRA balances were withdrawn and the amount withdrawn was less than the base of your Roth IRAs. The ability to claim a loss is more likely with a Roth IRA, since Roth IRAs generally contain more foundation.
Roth IRAs contain mostly after-tax funds. That said, for tax purposes, it is possible to deduct IRA losses if all funds are withdrawn from all IRAs held by a customer. For a traditional IRA, it means that all funds must be withdrawn from all of a customer's traditional IRAs, including simplified employee pensions and IRAs that use savings incentive matches. The customer does not have to withdraw funds from Roth IRAs or legacy IRAs to claim a loss on traditional IRAs.
For example, once you have liquidated all of your IRAs, the only way to return the money to an IRA is through regular annual contributions or, in the case of Roth IRAs, regular contributions and conversions. When your investments in a Roth IRA account decrease this way, you'll want to find a way to pay off these losses, of course. The only way to deduct a loss in an IRA is when all funds are withdrawn from all IRAs, and there must be a basis. Although the SECURE Act eliminated expanded IRAs for most beneficiaries, replacing them with the 10-year post-death payment rule, some beneficiaries can still use an additional IRA.
A Roth IRA is a special individual retirement account that you finance with after-tax money (you are not allowed to deduct your contributions to the account from your income taxes). But earnings in a Roth IRA are not the basis, because those funds have not been taxed, although they may never be taxed. Rather, the ability to deduct a loss is determined by whether or not the total value of all your traditional IRAs is less than the total base of all your traditional IRAs. Because contributions to the Roth IRA are not deductible, all contributions are considered after-tax amounts (base amounts).
If your Roth IRA suffers a loss due to underperforming investments, there is a way to cancel the loss, but it involves careful planning. It also doesn't matter the value of your Roth IRA from the previous year or at any time during the time the account was open. If your Roth IRA balance has fallen below your base, you may need to act quickly to pay off the loss. Both your non-deductible IRA funds and your traditional IRA funds must be dissolved to qualify for loss deduction.
Since traditional IRAs generally include mostly deductible contributions and extensions of company plans that were also deductible contributions, it is unlikely that a loss can be claimed even if all funds were withdrawn from all traditional IRAs. Ed Slott, a certified public accountant, created the IRA Leadership Program and the Ed Slott IRA Elite Advisory Group.