Offset 401k withdrawal with stock losses?

[David15]

My stock losses exceed the $3000 deductible limit.  Can I withdraw from my 401K (or recharacterize to Roth IRA) and offset the amount of the withdrawal against my stock losses, thus not paying taxes on the withdrawal?

[MichaelL1]

Unfortunately it will not work that way. 

The capital losses first get applied to other capital gains, then after that up to $3,000 can be deducted and will reduce the other income on the return.

But no more than $3,000, so if you took $10K out of the 401K or to a Roth, the $3,000 of capital losses would be the same regardless of what you did with the 401K.

[zenmster]

Wait - I just did my TT taxes and I was able to offset my $15000 Cap G against my $25000 in Cap losses so now my LOSS carryover is $10000. I was able to use more than $3000 of my losses!!!!!

[TomD8]

@zenmster -- Yes, you'll be able to carryover the entire $10,000 loss - but you'll only be able to apply $3,000 of it each year against income other than capital gains.

[zenmster]

So if I have a capital gain of $5500 but I have a cap loss carryover to use of $10,000 you are saying I can only use $3000 of the $10,000 to offset my $5500 gain so I’d still be paying taxes on $2500 even tho I have a carryover loss of $10,000?!

[zenmster]

Also does this apply to house sales too? Say I have a house I sell with a capital gain of $200k but I have a carryover loss of $200k- that loss can’t be used 100% to offset the $200 gain from the sale if my house?!

[TomD8]

<<So if I have a capital gain of $5500 but I have a cap loss carryover to use of $10,000 you are saying I can only use $3000 of the $10,000 to offset my $5500 gain so I’d still be paying taxes on $2500 even tho I have a carryover loss of $10,000?!>>

No.  You can apply the carryover loss to the entire $5500 gain.  But you can only use a maximum of $3000 of any remaining carryover amount to apply against other income.

[TomD8]

<<Also does this apply to house sales too? Say I have a house I sell with a capital gain of $200k but I have a carryover loss of $200k- that loss can’t be used 100% to offset the $200 gain from the sale if my house?!>>

Yes, a capital loss carryover may be deducted against the capital gain from the sale of your house.  And yes, if you had a $200K capital gain and a $200K carryover loss, you could offset the entire gain.  But you could only deduct a maximum of $3000 of any excess carryover loss against your other income.

https://www.bankrate.com/finance/taxes/use-capital-loss-carryover-to-offset-gain-on-home-sale.aspx#t....

[NCperson]

@zenmster - let me try and make everyone's responses easier: 

1) with respect to capital gains and losses, you can net them against each other. However, 

            a) long term capital losses must be netted against long term capital gains

             b) short term capital losses must be netted against long term capital gains

           c) if the result of b) is a loss, those losses can be netted against any remaining net capital gains from a)

          d) if the result of a) is a loss, then CAN NOT be netted against any remaining net capital gains from b)

2) if there is a net capital loss after working through 1), then up to $3000 of these losses can be used to reduce ORDINARY income in the current year.   Any thing above $3000 of these losses can be used to offset any CAPITAL gains next year (per for rules in #1) or again to reduce ORDINARY income by up to $3,000 next year.... and repeat the cycle until all the losses are consumed.  

Just use TT and follow the rules to input your trades; TT will figure all this out for you. 

[TaxPilot]

Hi TomD8!

If I have an existing capital loss of 100k, can I take 100k early withdrawal from my 401k and use the capital loss to offset the early withdrawal as a taxable gain?  And, would this also mitigate the 10% early withdrawal penalty?

Thank you in advance,

Chance Durham

[RaifH]

No, you cannot use a capital loss to offset a retirement distribution or the early withdrawal penalty. 

Distributions from a retirement account are considered ordinary income, not a capital gain. Capital losses can only offset $3,000 per year of ordinary income.

The early withdrawal penalty is separate and in addition to the tax you would pay on the ordinary income of the taxable distribution. If you do not qualify for any exemptions, it is for 10% of the taxable income. 

@TaxPilot