Deducting loss on Roth IRA investment

[iraed]

My adjusted gross income for the year 2021 was $294K. I opened a traditional IRA account in March 2022 and contributed $12K after tax money in the same month ($6K for the year 2021 & $6K for the year 2022). After losing $11980.40, I closed Roth IRA account and withdrew $19.60. Traditional IRA account is still open.

I received two 1099-R statements for the year 2022 with below distribution codes:

1. Code: 2, gross distribution: $12000, Taxable amount not determined is checked, IRA/SEP/SIMPLE is checked

2. Code J, gross distribution: $19.60, Taxable amount not determined is checked, IRA/SEP/SIMPLE is unchecked

While filling returns, turbox tax treats 12020 (12000 + 19.60 rounded) as income and bumped up tax dues.

Q1: Is this really treated as income (I believe, it should be treated as a loss)?

Q2: How can I deduct this as capital loss?

[DanaB27 · Accepted solution]

To confirm, you made the contribution for 2022 and 2021, then converted it in 2022, and then took a distribution from the Roth IRA in 2022.

Q1) No if you entered the nondeductible contributions and conversions correctly none of it will be taxable (assuming all of your traditional/SEP/SIMPLE IRAs were empty on December 31, 2022).

Q2) No, unfortunately, you can no longer deduct losses from a Roth IRA (since 2018). Please see Are Losses on a Roth IRA Tax Deductible? for details.

First, please make sure you had entered the nondeductible contribution for 2021 on your 2021 tax return and had the basis on line 14 of the 2021 Form 8606. This will be entered on your 2022 tax return.

To enter the nondeductible contribution to the traditional IRA:

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “IRA contributions” 
3. Click on “Jump to IRA contributions"
4. Select “traditional IRA”
5. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
6. Enter the amount you contributed
7. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
8. Answer the next questions until you get to “Any Nondeductible Contributions to Your IRA?” and select “Yes” if you had a nondeductible contribution before this tax year.
9. Enter your basis in the Traditional IRA from your 2021 Form 8606 line 14 (if you had a basis in the prior year)
10. On the “Choose Not to Deduct IRA Contributions” screen choose “Yes, make part of my IRA contribution nondeductible” and enter the amount (if you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a warning and then a screen saying $0 is deductible).

To enter Forms 1099-R for the conversion and distribution from the Roth IRA 

1. Click on "Search" on the top right and type “1099-R”  
2. Click on “Jump to 1099-R”
3. Click "Continue" and enter the information from your 1099-R  code 2
4. Answer questions until you get to “Tell us if you moved the money through a rollover or conversion” and choose “I converted some or all of it to a Roth IRA”
5. On the "Review your 1099-R info" screen click "Add Form 1099-R"
6. Enter your Form 1099-R with code J
7. On the "Review your 1099-R info" screen click "Continue"
8. Answer the questions until the "Any nondeductible Contributions to your IRA?" screen and answer "yes" since you had any nondeductible contributions in prior years.
9. Answer the questions about the basis from line 14 of your 2021 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs
10. Answer the follow-up Roth IRA question.

[iraed]

Wow, thanks @DanaB27 for the quick response.

Forgot to ask about state taxes. I live in PA. Followup to Q1, could you please confirm same applies to state taxes? I mean, no need to pay taxes on 12K distribution.

[DanaB27 · Accepted solution]

Yes, it isn't taxable in PA.

You will have retirement follow-up questions during the state interview. Please check your selection on the “What kind of retirement income do you have from Pennsylvania?” screen during the state interview. Then on the “Tell Us About Your Retirement Income” screen you must enter your basis (for the conversion $12,000 and  for the Roth distribution $19.60)

“Distributions (from Roth IRA) are includable in income to the extent that contributions were not previously included if made before the individual for whom the account is maintained obtains age 59 ½ or retires from service. The cost recovery method is used to determine the portion of a distribution to be included in income.

The conversion of a traditional IRA to a Roth IRA is generally not taxable.  That is, monies transferred from a traditional IRA to a Roth IRA via conversion (whether by a trustee-to-trustee transfer or a roll-over within 60 days) are generally not subject to Pennsylvania personal income tax.” (PA DOR)