Is the amount withdrawn from IRA or Sep IRA taxed in anyway if it's a loss?

[TuckerdogAVL]

I always love it when I see investments referred to as "Tax free growth" ... is similar to the "winnings" when you cash out with what's left from the slot machine. 🙂 Haven't you seen the asterisk? "Investments may lose value." Yep. 

Yes, investments outside of the IRA and SEPs make sense. So, if you are careful, watch cap gains, income and take advantage to minimize those, the gains can fall within 0% for a tax bracket.  

If there are no beneficiaries (another asterisk or footnote that is usually assumed but often has no bearing on a person's individual situation) that can be another box to uncheck. (Just try to find online "advice" on where to live, retire, what to invest in that isn't all about the kids, or not being white, married and straight). 

IRA and SEP are just another vehicle that a person can use to defer paying taxes immediately to 1)lower your taxes by taking a deduction; 2) in order to pay less to the federal government.  And actually, you can save quite a bit over the years in taxes by taking advantage of the deduction and putting those to work in a low/no cost account that is connected to your bank. You know, for all those winnings.  (especially after 59 1/2). 

There are few deductions left, especially if you aren't self-employed, and even then they are being reduced (meals, entertainment, or mileage now are a nightmare to figure). And actually, setting up the 401K for SE makes great sense - but the asterisk/footnote/secret is you can't wait until April 15th like you can with the others; it has to be done per calendar year. But, self employed people should look into them because you can defer a larger portion of taxed income when you need to. Anyway, that's my two cents. I'm not an expert; I just play one on tv. 

[CFP]

Tucker,

While you cannot deduct losses in qualified accounts, one way to make "lemonade from lemons" is to convert part/all of your Traditional IRA to a Roth IRA when your account balance is down, which if you are like virtually everyone else, 2022 was not kind to you.  The idea is you are is you are "selling low" when you convert, and then hoping the rebound will come once that money is in your Roth IRA.  In effect, you "recover" your loss with tax-free gain.

I hope that helps.  I am a big fan of converting qualified money to a Roth IRA, provided the taxpayer is in a lower tax bracket.  If taxpayers can convert money and keep their total income in the 12% federal tax bracket, I think they should.  Also, to get the most out of the conversion, taxpayers should not withhold any money from the IRA to pay for taxes, but she pay the tax from other, nonqualified sources.  The reason is that the taxpayer should convert as much as possible, and if they withhold money for taxes, that money of course never goes into the Roth IRA.

If you are like a lot of advisors, I think we will see tax rates go up in the future.  That is the best reason to convert now, provided the taxpayer is in a lower tax bracket. 

RT, CFP  

[TuckerdogAVL]

I'll look into the conversion, though I assume I'll have to pay taxes on something right? 

[CFP]

Yes, you will have to pay income taxes on the conversion.  I know it is tough to pay another tax bill, but it is hard to imagine a future tax rate of lower than 12% (if that is where you are at).  And depending on your state tax laws, you may or may not have to pay state income taxes.  But maybe not.

But building up a nice size Roth IRA, and knowing ALL of that money won't ever be subject to income taxes, is really nice.  I sure wish Roth IRAs existing back when I was starting to invest (I am 61).

As a side note, a good investment strategy for Roth IRAs is to put the investments you expect to grow the most in your Roth, e.g. stocks.  The reason is, you want as much tax-free growth as possible in the Roth.  This is how I manage my clients investment accounts whenever possible.  So it is one more incentive to convert your money to a Roth if you have a portfolio of stocks and bonds in various accounts.