The more you learn about personal finance, the more complicated your questions are likely to get. But never fear: Hosts Robert Brokamp and Alison Southwick named their podcast Motley Fool Answers for a reason, and the Oct. 29 episode -- the monthly mailbag show -- the co-hosts will tackle a whole bunch of money conundrums with a bit of help from Motley Fool Wealth Management Director of Financial Planning Megan Brinsfield, CPA, CFP, and all-around fine human being.
In this segment, they reply to an email from Jackie, whose missteps have trimmed about a third of the value from her individual retirement account, and wonders if there's a good way for her to take some of the sting out of those losses, perhaps by recording a loss on her taxes.
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This video was recorded on Nov. 29, 2019.
Alison Southwick: The next question comes from Jackie. "This is an embarrassing scenario and I don't know where to go from here. I started out with $94,000 from my retirement fund which I converted into an IRA with an advisor. I realized they were taking unreasonably large commissions, so I removed my money but lost $10,000. I then invested some of it in Bitcoin and Ethereum and lost more money. I am down to about $64,000 due to bad choices and I'm wondering if it would help to remove the money and take a tax loss. I'm 65 years old."
Megan Brinsfield: Jackie has had a bumpy road with investing and I think it's fair to say we've all had times that we've had some bumpy roads. When it comes to deducting a loss on your IRA, this is a place where our recent tax law changes come into play, because that used to be an itemized deduction subject to the 2% threshold. Those miscellaneous itemized deductions no longer exist under our current tax code.
I think the short answer is no, we can't deduct that loss. Even under the old rules, when you could deduct it, you had to completely close out any like accounts, so if this was a traditional IRA, she would have had to close down all of her traditional IRAs to be able to take that loss and then when you're calculating the loss it's based on your actual tax cost basis. Because you got that tax break up-front, most people don't have a tax basis in their traditional IRAs, so functionally it would be really difficult.
I think one thing that's helpful, though, to put losses in perspective globally -- whether it's inside an IRA or not -- is what the value of a tax loss is. It is the loss times your marginal tax rate. So if I have a $10,000 tax loss and I'm in the 30% bracket, the value of that to me is max $3,000. And usually that is not as much value as just investing a little bit better.
In Jackie's case, it's kind of saying, "I want a fresh slate." You can do that within the IRA without incurring all these tax consequences of taking the money out of the IRA and then claiming a tax loss against it to end up in a better place.
Robert Brokamp: The one thing I'll add is she didn't say if this is her only retirement savings, but if that is the case, Jackie is a prime example of someone whose situation really would entail that she has to work a little longer because she's going to be relying on Social Security and by delaying that every year and getting that 8% bump to her benefit each year, that will make a world of difference for her.