No, this is not a way to get your investment losses back.

But there are two situations that at least allow you to make some lemonade of your lemons. Caution: You should consult with your tax adviser before acting, a mistake could cost you big time.

You made a 2007 contribution to an IRA account. The value of your IRA account has decreased since then.
The law allows you to withdraw your contribution plus earnings from your IRA account up to the due date of your tax return (including extensions). If the value of your account has gone down since you made the contribution, your earnings will be a negative number. That's OK. For example, if you put $4000 into your IRA account, but the value of your account has shrunk by 25% since then, you can take out $3000 and it will be treated as if you had never made the original contribution.

After you take out your original contribution, you are again free to contribute the maximum amount for 2007. So, while you will not get any losses back, you get the opportunity to add more money to your IRA account (and hopefully make better investment choices this time).

Points to remember: For this to work this value of your ENTIRE account must have gone down. It does not matter if the value of the specific investments you bought with your 2007 contribution went up or down. You do not have to redeem the specific investment you made with your 2007 contribution, but you may redeem any investment that is in the same account. The deadline for making a 2007 contribution is April 15, 2008 -- no extensions are allowed.

If you want to withdraw your 2007 contribution plus earnings, please be sure to inform your IRA custodian that you are taking a corrective distribution so that they code the distribution properly in reports sent to the IRS. You should ask the custodian to calculate the earnings for you, but if they refuse, use Worksheet 1-4 in Publication 590.

You converted a part of your Traditional IRA into a Roth IRA in 2007, but the Roth IRA is now worth less.

Say you converted $10,000 from your Traditional IRA (TIRA) to a Roth IRA. But the Roth IRA is now worth only $5000. You still have to pay taxes on the full $10,000 you converted (assuming it was all before-tax). It just doesn't seem fair, does it?

You can use what is called a "recharacterization" to unconvert that money and put it right back into a Traditional IRA account and you can forget about paying any taxes on that conversion you did in 2007.

You have to recharacterize the converted amount plus earnings. Again, the earnings can be a negative number. Earnings are calculated using the change in value of the ENTIRE Roth IRA account in which the converted funds were placed. So it does not matter whether the specific investments you bought with the converted funds went up or down.

You have until the due date of your return (plus extensions) to recharacterize any conversion you performed during calendar year 2007. If you file your 2007 return by April 15, 2008, you get an automatic extension until October 15, 2008. Otherwise you need to file Form 4868 by April 15 to get an extension. So even if the value of your account hasn't gone down yet, if it goes down by October 15th, you can still uncovert and file an amended return to get your money back.

You can reconvert after waiting 30 days, but the reconversion will be reported on your 2008 return. It is too late now to do a conversion or reconversion for 2007.

Again, make sure that both the custodians of the Roth account and the TIRA account know that you are performing a recharacterization so that the transaction will be coded properly. Ask the custodian of the Roth account to calculate the earnings. If they refuse, use Worksheet 1-3 in Publication 590.

Recommended Reading
"Contributions Returned Before Date of Return." Publication 590, page 33.
"Recharacterizations." Publication 590, page 30.
"Recharacterizations" Form 8606 Instructions, page 3.
"Return of IRA Contribtions" Form 8606 Instructions, page 4.

Quick question, can I claim the money I lost in the withdrawn money as investment loss?

Assuming that this is a Trditional IRA and not a Roth IRA you deducted the total investment when you made the IRA contribution so your uncle in Washington is already taking the loss on what you put in vs what you got out/

EugeneV said:Can you withdraw contribution plus earnings as described from a Rollover IRA? I rolled mine over to BAI (got a distribution from a previous custodian and made a contribution at BAI 60 days later) and they don't even know my basis.
The strategy depends on the fact that there is still time to make a 2007 annual contribution to your IRA after you have withdrawn your original contribution. Unfortunately, if 60 days have passed since you rolled over from your previous account, it's too late to do the rollover over again.

Technologist said:I will not take your answer as gospel (as you suggested we check with a tax advisor).....but:

how does this affect rollovers?

I rolloed over 12K plus from a 401k into an existing IRA.... the market dropped out WHILE I was putting the money in and continued to plunge. I am down for the year. can I get the 125K (or more) back out, and chose new funds (or stock, etc...)???

I don't really understand, but you can't magically get more money out that what your investments are presently worth. This case is where I'm paying a tax now to save down the road (from tradional IRA to roth). If my funds went down, it would be advantageous to undo the transaction and do it over again, assuming my tax liabilities will be the same in 2007 and 2008. You are not paying any taxes now for a 401k to IRA rollover, so I don't see why it would matter to undo that transaction.

I lost about a grand in my conversion from last year. I'll keep an eye on it for the next few weeks, and if it drops any more, I'll likely undo the tranaction.

frootmall said:You made a 2007 contribution to an IRA account. The value of your IRA account has decreased since then.
The law allows you to withdraw your contribution plus earnings from your IRA account up to the due date of your tax return (including extensions). If the value of your account has gone down since you made the contribution, your earnings will be a negative number. That's OK. For example, if you put $4000 into your IRA account, but the value of your account has shrunk by 25% since then, you can take out $3000 and it will be treated as if you had never made the original contribution.Pub. 590 is clear that the earnings you withdraw can be negative, and that "you must include in income any earnings on the contributions you withdraw" in the year of the contribution. If I make a deductible contribution of $4000, and withdraw $3000, shouldn't I have a deduction of $4000 and $3000 of income, not "as if you had never made the original contribution" (for income purposes)?

For Roth IRAs, this is unambiguously a good idea. What if a person eligible for a Roth IRA contribution opens 2 accounts, contributes the maximum to EACH of them, waits until just before the deadline and then takes a corrective distribution from whichever is performing more poorly? You're exempt from the excess-contributions penalty as long as you withdraw by the deadline, right?

LH2004 said:Pub. 590 is clear that the earnings you withdraw can be negative, and that "you must include in income any earnings on the contributions you withdraw" in the year of the contribution. If I make a deductible contribution of $4000, and withdraw $3000, shouldn't I have a deduction of $4000 and $3000 of income, not "as if you had never made the original contribution" (for income purposes)?

Page 4 of the Form 8606 Instructions.
"If, in 2007, you made traditional IRA contributions or Roth IRA contributions for 2007 and you had those contributions returned to you with any related earnings (or less any loss) by the due date (including extensions) of your 2007 tax return, the returned contributions are treated as if they were never contributed."

Or we can refer to the primary source material:
IRC Sec 408(d):
"(d) Tax treatment of distributions
(1) In general
Except as otherwise provided in this subsection, any amount paid or distributed out of an individual retirement plan shall be included in gross income by the payee or distributee, as the case may be, in the manner provided under section 72.
.
.
.
(4) Contributions returned before due date of return
Paragraph (1) does not apply to the distribution of any contribution paid during a taxable year to an individual retirement account or for an individual retirement annuity if—
(A) such distribution is received on or before the day prescribed by law (including extensions of time) for filing such individual’s return for such taxable year,
(B) no deduction is allowed under section 219 with respect to such contribution, and
(C) such distribution is accompanied by the amount of net income attributable to such contribution.
In the case of such a distribution, for purposes of section 61, any net income described in subparagraph (C) shall be deemed to have been earned and receivable in the taxable year in which such contribution is made. "

For Roth IRAs, this is unambiguously a good idea. What if a person eligible for a Roth IRA contribution opens 2 accounts, contributes the maximum to EACH of them, waits until just before the deadline and then takes a corrective distribution from whichever is performing more poorly? You're exempt from the excess-contributions penalty as long as you withdraw by the deadline, right?
You also forfeit any possible capital loss from the poorly performing one and if you are under 59 1/2 pay a 10% penalty on any gain from the poorly performing one. Any gain would also become ordinary income.

Investment firms are likely to cut you off once you've reached your maximum, so you'd have to use multiple firms.

It seems that it should work, but everyone I know is loathe to be this aggressive in recommending this approach.

frootmall said:Section 408(d)(2) said:(C) such distribution is accompanied by the amount of net income attributable to such contribution.
In the case of such a distribution, for purposes of section 61, any net income described in subparagraph (C) shall be deemed to have been earned and receivable in the taxable year in which such contribution is made.Doesn't the flush text at the end mean that you add the net income to your income for the contribution year? Shouldn't that apply the same way whether the earnings were positive or negative? Or does the reference to sec. 61 mean that this only applies to gain, but any loss is just forfeited?

If you get no benefit from any loss, I can't see how you can come out ahead by using this strategy with a traditional IRA: you invest more money today, but get no deduction or additional basis, so you are paying more tax in the future without any benefit today.

frootmall, thanks very much for bringing this to everyone's attention. I very much appreciate your patience in helping me try to get these rules through my thick skull; I'm just not there yet.

frootmall said:LH2004 said:Doesn't the flush text at the end mean that you add the net income to your income for the contribution year? Shouldn't that apply the same way whether the earnings were positive or negative? Or does the reference to sec. 61 mean that this only applies to gain, but any loss is just forfeited?I think the text is just meant to clarify the year of inclusion and not to establish any new rules for includability/excludability of income.OK, but, under the rule for calculating net income that you have been explaining, which is in reg. sec. 1.408-11(a), net income can be a negative number. Under Code sec. 408(d), you include net income in your gross income. Doesn't it follow that if net income is a negative number, you include that negative number? I realize there are times when something counts if it's positive and not if it's negative (like gain or loss on personal-use property), but I think there is generally a fairly clear statement of the rule when you have a discontinuity like that.
So assuming you had already maxxed out your IRA contributions for the year, if the government offered you the chance to add an extra $1000 to your Roth IRA for a $250 fee, would you take it? Would you rather have $1250 growing in your taxable account or $1000 in your Roth?

Do you see any holes in this logic?That logic sounds right, and I agree that $1000 in a Roth IRA would be better for many people (not all) -- assuming you are correct about the tax treatment.

LH, sounds really nice except I think the IRS would take notice to the $100k Roth IRA contribution form/account balance statement that gets sent in to them, especially if one is over the roth ira contribution maximum. Is there a standard timeframe that those notices are sent? If you could time the reversal right before the contribution notices went out it might be a winner.