Question: I recently closed a ROTH account, feeling that the money could best be used elsewhere, since I still have a fair amount in other retirement funds, even after all the recent market trouble. I had been contributing $100 per month for about seven years, yet the cash out value, even before 10% government withholding and surrender fees, was less than the total of my contributions by several hundred dollars. What is my tax liability? Can I claim a loss on this year's taxes? Can I expect to get my 10% withholding back at some point? Thanks! Joe, Milwaukee, WI
Answer: There is nothing simple about Roth-IRAs and taxes. Yes, under certain conditions can claim a tax deduction for the loss from closing the Roth-IRA account. But there are a number of twists and turns in the tax code about liquidating a Roth. My best advice is to strongly urge you to consult a professional advisor.
That said, if you're in a similar position as Joe in Milwaukee you can stop reading this post right now. Go get professional help.
Here's a brief overview of the basic rules for those of you that remain curious. In order qualify for a tax loss from closing a Roth you must liquidate all your Roth-IRAs. The amount of money you have at liquidation must be less than your "basis." A basis is defined as the amount of money you contributed to the Roth; plus any money you may have added to it by converting a traditional IRA into a Roth; and subtract any sums of money you've withdrawn. (From Joe's email it looks like he has a loss by this definition.) You must itemize on your taxes to claim the loss. The amount that can deducted is limited to 2% of adjusted gross income. By the way, the 10% penalty doesn't apply if the Roth is made up from annual contributions.
There are a few more wrinkles, but you get the basic idea. And you see why I say work with a tax pro.