Life and Death Planning for Retirement Benefits

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388 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 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 Furthermore, the taxpayer does not get to increase his basis
in the IRA by the amount of the disallowed loss, despite the fact tha 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 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. 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 C)), thus the reliance on an obsolete case. In the author’s opinion, Rev. Rul. 2008-5
is wrong.
8.1.02 Investment losses and IRAs
This 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
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 C.B. 446,
Part III, D5.