The losses that most investors have seen in their investments haven't made them happy. And when you lose money in your retirement accounts, it's especially annoying -- because falling stocks turn the tax benefits that typically come with such accounts into tax liabilities.

The best thing about investing in IRAs is that you don't have to pay tax on your investment income or capital gains until you actually use the money in retirement. With Roth IRAs, you can even withdraw the money tax free after you retire. If you have losses rather than gains, however, those features aren't worth anything -- and even worse, you can't harvest tax losses the same way you can in a regular taxable account.

Still, there is something you can do to make the most of either gains or losses in your IRAs. Although the rules are fairly complicated, recharacterizing your IRA can help you take maximum advantage of losses while also potentially sheltering gains.

How recharacterization works
The recharacterization rules for IRAs were originally meant to help taxpayers who made mistakes in choosing among IRA options. Because the rules and restrictions on contributing are different for traditional IRAs versus Roth IRAs, you could easily find yourself in a situation in which you opened a particular type of IRA early in a given year, only to find out later that you weren't really allowed to do so.

Recharacterizing lets you fix such mistakes. For instance, say you opened a Roth IRA last year and only later discovered that you earned too much money to be eligible to contribute. If your contribution was for the 2008 tax year, you'd have until the due date of your 2008 tax return -- with extensions, as late as Oct. 15, 2009 -- to recharacterize the contribution as a traditional IRA contribution.

Dealing with gains and losses
But recharacterizing can be worth more. Done right, it can let you make the most of gains or losses.

For instance, say you opened a Roth IRA in early 2008 and bought these five stocks in your account:


Return 1/1/2008 to 4/7/2009



Eastman Kodak (NYSE:EK)




Fifth Third Bancorp (NASDAQ:FITB)


Citigroup (NYSE:C)


 Source: Yahoo! Finance.

Obviously, you'd have had bad luck; an original $5,000 investment would have left you with less than $750 in your Roth. And locked inside your Roth, you wouldn't get any tax benefit from those losses even if you sold your shares.

Recharacterizing your Roth as a traditional IRA wouldn't get those losses back. But they would let you claim the full deduction for your contributions -- up to the $5,000 contribution if you qualify -- even though the amount you have left is much smaller.

Making gains tax free
The same holds true with gains. If you were lucky enough to own these stocks in a newly created traditional IRA, you've seen some sizable gains:


Return 1/1/2008 to 4/7/2009

Family Dollar (NYSE:FDO)


Fidelity National


Big Lots (NYSE:BIG)


AutoZone (NYSE:AZO)


Darden Restaurants (NYSE:DRI)


 Source: Yahoo! Finance.

If you simply keep those stocks in your traditional IRA, you'll eventually have to pay tax on them. But by recharacterizing to a Roth, you can make those gains tax free -- and only give up the $5,000 deduction for your original contribution, even though the account is worth more than $7,000 now. Over time, that difference could mean thousands more in your pocket.

Follow the rules
Unfortunately, these rules aren't always easy to follow. For instance, you have to track your gains and losses closely to make sure you recharacterize the proper amount. But the rules do let you salvage something from your losses, and potentially keep more of your gains.

For more details on these and many other tricky rules for retirement accounts, you can turn to our experts at The Motley Fool's Rule Your Retirement newsletter. With tax laws always changing, it can be hard to keep up -- but you can count on up-to-date advice from the RYR team. Give it a try today -- it's free with a 30-day trial, and you might find some tax savings you can capitalize on right now, before the April 15 tax deadline.

For more on making the most from your investments, read about:

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Fool contributor Dan Caplinger is always on the lookout for nifty tax tricks. He doesn't own shares of any of the companies mentioned. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy makes you a winner.