Roth IRA Liquidation Loss

[erinebarre]

I liquidated my Roth IRA for personal reasons in 2016. There was a fairly significant loss. However, I am unsure where this should be documented/reported on my taxes. Where is the best place to do this?

[jerry2000]

If you have a loss on your Roth IRA investment, you can recognize the loss on your income tax return, but only
when all the amounts in all of your Roth IRA accounts have been distributed to you and the total distributions are less
than your unrecovered basis. Your basis is the total amount of contributions in your Roth IRAs.
You claim the loss as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit that
applies to certain miscellaneous itemized deductions on Schedule A, Form 1040. Any such losses are added back to
taxable income for purposes of calculating the alternative minimum tax.

[dmertz]

This loss can be claimed only if you had a zero balance in all of your Roth IRA accounts on 12/31/2016.  TurboTax automatically calculates this deduction and reports it on Schedule A when you properly enter your Form 1099-R as VolvoGirl indicates, click the continue button on the Your 1099-R Entries page, enter the amount of basis you had in Roth IRA contributions for years prior to 2016, and indicate that you did not have any Roth IRA accounts "open" at the end of 2016.

[bbikerguy]

Thanks. I did this using the 1099-R entries.  It still came out on Schedule A line 23, which the IRS determined makes it a business expense.  Is there a different line number it where should be showing up?

[dmertz]

Schedule A line 23 is exactly where unrecoverable basis in Roth IRA contributions should appear, should you qualify for the deduction.  There are many different types of expenses that can appear on line 23, and most, if not all, have nothing to do with business.

Perhaps this has nothing to do with business expenses at all but the IRS simply believes that you do not qualify for this other-expense deduction.  For example, they could determine that you don't qualify if they have received a 2016 Form 5498 for a Roth IRA that you own indicating that you did not have a zero balance in Roth IRAs on December 31, 2016, or they can see from all (2016 and earlier) Forms 5498 from your Roth IRAs that the sum of all previous regular and conversion contributions to your Roth IRAs are less that the total gross distributions shown on all code J, T and Q Forms 1099-R and you had no Forms 1099-R indicting rollovers of basis from qualified retirement plans.  (The second case determining that you have no unrecoverable basis is a bit of a stretch for the IRS to determine.)

Since TurboTax prepares your tax return based on the information you provide, if you fail to indicate that you had a Roth IRA "open" (had a nonzero balance) on December 31, 2016, TurboTax will can obligingly create this deduction when you don't actually qualify.  The same is true if you enter an incorrectly large net basis in Roth IRA contributions or conversions.

[bbikerguy]

Thanks. The IRS letter said "We have disallowed the expenses you claimed as business expenses because it was determined they were personal expenses and not deductible"  As I followed the IRS rules for this, I think I just got a wrong review and will contest it.

[dmertz]

It seems that such a statement would only apply to an expense reported on Schedule C or Schedule F.

[nelson]

I am contemplating closing a Roth with a loss. What codes do I need to enter to indicate this. I am not getting any follow up questions on my simulation. I am interested to know if the loss will be a deduction to NII.

[dmertz]

Note that you must close all of your Roth IRAs to be able to recognize your unrecoverable Roth IRA basis.  You would do this by making a regular distribution, code J if you are under age 59½, code T if you are over age 59½ but it has been less than 5 years from the beginning of the year for which you first made a Roth IRA contribution, code Q if you are over age 59½ and it has been more than 5 years from the beginning of the year for which you first made a Roth IRA contribution.  But which of these codes you use does not really matter.  What matters is that after entering the Form 1099-R you click the Continue button on the Your 1099-R Entries and proceed to where TurboTax asks you to enter your basis in Roth IRA contributions and do so.  If your basis in Roth IRA contributions is more than the amount that you enter as the distributions to close out all of your Roth IRA accounts, TurboTax will automatically report the unrecoverable basis as a miscellaneous deduction on Schedule A line 23.

[VolvoGirl]

You will get a 1099R for the distribution.  You can just type 1099R into the search box at the top of your return, then find and it will give you a Jump To link to go right to it.

OR
Enter a 1099R under
Federal Taxes Tab
Wages & Income
Choose Jump to Full List -or I'll choose what I work on,

Then scroll way down to Retirement Plans and Social Security,
Then IRA, 401(k), Pension Plans (1099R) - click Start or Update

Pick the right kind of 1099R you have and on the same screen be sure to pick which person it is for if you are filing a Joint return.

After you enter the 1099R be sure to answer all the follow up questions on the next screens to determine how much is taxable or not. Go all the way to the end of the section. You have to enter it from the 1099R because there are codes on it you need to enter properly.

[Duluthguy12]

Is this still correct for 2019 filing?  Misc deductions are now on line 16 and the instructions seem to indicate Roth liquidation losses are not allowed.  I followed the steps in turbo tax but the program did not generate a deduction.

[DianeC958]

Under the new tax law, Miscellaneous Deductions are not allowed so you cannot deduct a loss on your Roth account.

Link to more information about Miscellaneous Deductions.

[dmertz]

The dates on the older posts above are inaccurate to because of being transferred over from the old forums.  They actually apply to tax returns prior to 2018.  The suspension of miscellaneous deductions subject to the 2% of AGI floor is set to expire after 2025, but it still won't do much good if your itemized deductions are less than your standard deduction.