Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

if an individual granted a security interest in the IRA to secure indebtedness incurred in his nonIRA accounts.

C. IRA and nonIRA transactions matched for wash sale purposes. Under the “wash sale” rule, you cannot deduct a loss on the sale of securities if you repurchase substantially identical securities within 30 days before or after the loss-generating sale. § 1091(a) . Rev. Rul. 2008-5, 2008-3 IRB 1, holds that a purchase of securities inside an IRA or Roth IRA will be matched with an outside sale of securities within the applicable 30-day period for purposes of applying § 1091 . Furthermore, the taxpayer does not get to increase his basis in the IRA by the amount of the disallowed loss, despite the fact that § 1091(d) allows such a basis adjustment when the wash sale rule is applied to deny a loss. This ruling creates a compliance nightmare for tax preparers, who will now apparently have to inspect all of their clients’ IRA and Roth IRA brokerage statements to determine whether the wash sale rule applies to outside-the-plan loss sales. The ruling cites, as its only authority for this position, Security First National Bank of Los Angeles, 28 BTA 289 (1933), in which the wash sale rule was applied to a taxpayer’s sale of securities when he repurchased identical securities inside a trust that he controlled. However, this case has been “statutorily overruled”: Since enactment of the 1954 Code, the grantor trust rules of Subchapter J ( § 671–§ 679 ) have been the exclusive means by which the IRS is permitted to treat trust-owned assets as if they were owned directly by an individual. § 671 . But the IRS cannot use the grantor trust rules to achieve its result because the grantor trust rules don’t apply to an IRA (see ¶ 8.1.05 (C)), thus the reliance on an obsolete case. In the author’s opinion, Rev. Rul. 2008-5 is wrong.

Investment losses and IRAs

This ¶ 8.1.02 discusses an IRA owner’s options for dealing with investment losses inside an IRA. For a loss that occurs upon the conversion of a traditional IRA into a Roth IRA, see ¶ 5.4.03 (C).

Generally, losses on investments inside an IRA are not deductible:

Gail Example: Gail made a tax-deductible contribution of $5,000 to her IRA. She used the $5,000 to purchase 100 shares of Omega stock inside the IRA. After a year, the Omega stock value had climbed to $50,000. A market crash caused the Omega stock value to plunge back to $1,000. Although Gail has “lost” $4,000 of her original investment, and $49,000 of its peak value, none of this loss can be deducted because it occurred inside an IRA. For an IRA “loss” to be deductible, two things have to be true. First, the individual has to have cashed out all of his “aggregated” IRA or Roth IRA accounts; see “A” below. Second, the amount he received as a result of this cashout must be less than his “income tax “basis” in his IRAs or Roth IRAs; see “B.” For what type of deduction this loss generates, see “C.” For other approaches to dealing with an IRA loss, see “D.” A. How to realize an IRA loss. The individual must close out the Roth account, or the traditional IRA account as the case may be, because there must be a “closed and completed transaction” in order to recognize a loss. Reg. § 1.165-1(b); Notice 87-16, 1987-1 CB 446, Part III, D5.