Roth IRA Losses: Are They Tax Deductible After the TCJA?

Roth IRA losses are not tax deductible. The narrow deduction that once let you write off a Roth shortfall was suspended by the Tax Cuts and Jobs Act starting in 2018, and the One Big Beautiful Bill Act made that elimination permanent by adding Section 67(h) to the Internal Revenue Code.¹ If your Roth IRA is worth less than what you put in, there is no federal write-off available in 2026 or any future year.

What the Deduction Used to Be

Before 2018, a Roth IRA funded with after-tax dollars could produce a recognized economic loss if the account’s value dropped below your total contributions. The gap between your basis and what came back to you was treated as a miscellaneous itemized deduction subject to the 2% adjusted gross income floor under Section 67 of the Internal Revenue Code.²

Even then, the deduction rarely helped anyone. You had to itemize instead of taking the standard deduction. You could only deduct the portion of miscellaneous items that exceeded 2% of your AGI. And because the IRS treats every Roth IRA you own as a single combined account, you couldn’t close just one losing account. Every Roth IRA you held, across every custodian, had to be fully liquidated before any loss counted. Most people who lost money in a Roth never cleared all those hurdles.

Why the Write-Off Is Gone for Good

The Tax Cuts and Jobs Act of 2017 suspended all miscellaneous itemized deductions subject to the 2% AGI floor for tax years 2018 through 2025. The Roth IRA loss deduction fell inside that category. That suspension was set to expire after 2025, which would have brought the deduction back for 2026.

The One Big Beautiful Bill Act closed that door permanently. Formerly deductible items like unreimbursed employee expenses, investment advisory fees, and Roth IRA basis losses are now permanently non-deductible at the federal level.¹ Closing all your Roth IRAs at a loss produces no federal tax benefit. If you have read older guidance suggesting you can write off Roth losses by liquidating your accounts, that guidance describes rules that no longer exist.

What Happens When You Pull Money From an Underwater Roth

An underwater Roth IRA is less punishing than it looks, because of how withdrawals are ordered. The statute pulls money out in a fixed sequence: contributions first, then conversions and rollovers, then earnings.³

Contributions come out tax-free and penalty-free at any age, because you already paid tax on that money. If you contributed $50,000 and the account is now worth $42,000, the entire $42,000 is treated as a return of your contributions when you withdraw it. No income tax. No 10% early withdrawal penalty. You still lost $8,000 in economic terms, but nothing you take out is taxed.

That same ordering rule is what made the old loss deduction so rare in the first place. Because contributions come out ahead of earnings, you recover your after-tax principal first, and a deductible loss only appeared when the whole account fell below the total you had put in.

Conversions carry their own five-year holding period. If you withdraw converted amounts within five years of the conversion and you’re under 59½, the 10% early distribution penalty under Section 72(t) can apply to those dollars.⁴ Contributions still come out first, but once those are exhausted, conversion money is next in line. Accounts with layered conversions over different years can get complicated quickly, and a tax professional can help you sort the order.

What Actually Helps When Your Roth Is Down

Since the deduction is off the table, the useful question is what to do with an underwater account. A few options do carry real tax or economic value.

Don’t sell at the bottom. The Roth’s whole advantage is tax-free growth over long stretches of time. Liquidating during a downturn locks in the loss with nothing to show for it.
Rebalance inside the account. Selling losing positions within a Roth and buying different ones triggers no tax and no wash sale problem. If you’ve lost confidence in a holding, swap it without leaving the account.
Consider a Roth conversion from a traditional IRA. A down market means a lower balance to convert, which means a smaller income tax bill on the conversion. The converted money then grows tax-free going forward.
Harvest losses in a taxable account instead. Capital losses in a regular brokerage account offset capital gains and up to $3,000 of ordinary income per year. If you hold similar investments in both a Roth and a taxable account, the taxable side is where a loss actually produces a deduction.
Keep contributing. The 2026 contribution limit is $7,500, or $8,600 if you’re 50 or older. Buying when prices are low means more shares for the same dollars.⁵

Watch for Outdated Advice

Older articles, and even some tax software that hasn’t been fully updated, may still describe the Roth IRA loss deduction as if it were available. Claiming it on a 2026 or later return will cost you. If the IRS disallows the deduction, you owe the tax and interest, and an accuracy-related penalty of 20% of the underpayment can apply where the IRS finds negligence or a substantial understatement of income tax.⁶

The 2026 standard deduction is $16,100 for single filers and $32,200 for married couples filing jointly.¹ Even under the old rules, most taxpayers would need substantial other itemized deductions before a Roth loss produced any benefit. Between the permanent elimination and the higher standard deduction, this is a closed door from every direction. A preparer who suggests writing off a Roth IRA loss on a current return is working from rules that no longer apply.

Keep Your Contribution Records Anyway

Even without a loss deduction, your basis still matters every time you take a distribution. It determines how much you can pull out tax-free. Custodians report contributions each year on Form 5498, but no one consolidates that record across every account you’ve ever held.⁷ Keep a running total of every Roth contribution by year and amount, and track any conversions separately with their dates, because each conversion carries its own five-year clock. If you’ve lost track, request transcripts from the IRS or ask your custodian for historical records while they’re still retrievable.

1
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill
2
Office of the Law Revision Counsel. 26 U.S. Code 67 – 2-Percent Floor on Miscellaneous Itemized Deductions
3
Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs
4
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
5
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026; IRA Limit Increases to $7,500
6
Office of the Law Revision Counsel. 26 U.S. Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments
7
Internal Revenue Service. Form 5498 – IRA Contribution Information