Today one of my really neat clients called me with a question about an IRA. First let me say, his son was a hot baseball prospect here in San Diego County. My clients son made it to the minor leagues. It’s pretty cool when you get a W-2 from the Atlanta Braves.
Anyway, the conversation went something like this.
“I have an IRA and I would like to cash a portion of the money out. Within my IRA I have a few stocks that are “dogs”. I lost X amount of dollars on these stocks so I thought I would cash them out along with a few stocks that made gains.”
Keep in mind here that this is not a traditional stock transaction. When stocks are in an IRA you cannot cancel out the “win” and “losses” the same way you can if they were just purchased as a stand alone stock. Let’s breakdown how a loss is handled in an IRA. Three factors need to be established:
“Basis” exists in the IRA
So what is basis? Basis for this purpose is “any money that you contributed to an IRA and did not receive an immediate tax benefit” When we contribute to an IRA we get the opportunity to deduct the amount off of our individual tax rate. In some instances this cannot be done due to one spouse or individual who is involved in a retirement plan and over the income threshold.
Clear out all IRA’s
Any traditional IRA you might have, this also includes SEP’s and SIMPLE’s that are set up as an IRA must be completely liquidated to realize a loss you had in an IRA. Again, you must have “basis” stated above first for consideration.
Loss is an Itemized deduction
So let’s say both criteria are met. You have basis in your IRA and you are liquidating all of your IRA’s. Now we can take the loss right? Well, not so fast. An IRA loss is subject to the 2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions on Schedule A, Form 1040. For one thing, you need to clear the 2% of AGI before realizing loss but even still you need to itemize vs the standard deduction on your return. If you do not itemize you will not be able to take the IRA loss. If you can take the IRA loss it will reduce your taxable income. Remember, it’s not a dollar for dollar “credit”.
Researching your investments
It would behoove you to take a look at your IRA contributions over the years and rub them against your tax returns. It’s a sure thing many people do not know if they actually have “basis” in their IRA. Whether you made money in an IRA or lost money in an IRA it might not be taxable. This is a research project that can be of high value to you. Give to Caesar what is Caesar’s but why a penny more?
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Tax Group of San Diego
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