What to Do With Losses in a Roth IRA: Deductions, Withdrawals, and Wash Sales

Roth IRA losses are not deductible on your federal tax return. The narrow deduction that once let you write off a closed-out Roth for less than you contributed was suspended in 2018 and made permanent by the One Big Beautiful Bill Act of 2025.¹ What you can still do is pull your original contributions out tax-free, recharacterize a current-year contribution into a traditional IRA, correct an excess contribution at the reduced amount, or leave the money alone and let it recover.

Why You Can’t Deduct the Loss

Before 2018, claiming a Roth loss required closing every Roth IRA you owned and receiving less back than you had contributed. Even then, the loss only counted as a miscellaneous itemized deduction subject to the 2 percent adjusted gross income floor. The Tax Cuts and Jobs Act suspended miscellaneous itemized deductions, and the 2025 law removed the sunset date.¹ There is no version of the current rules under which a Roth IRA loss reduces your taxable income.

A taxable brokerage account is different. There you can offset capital gains, deduct up to $3,000 of net losses against ordinary income each year, and carry the rest forward. Inside a Roth, that mechanism does not exist. Tax-free growth on the upside comes with no tax relief on the downside.

Withdrawing Your Contributions Tax-Free

You can pull your original contributions out of a Roth IRA at any age, at any time, without tax or penalty. The IRS distributes Roth money in a fixed order: regular contributions first, then conversion or rollover amounts, then earnings. If your balance has dropped below the total you contributed, every dollar you withdraw is a return of your own after-tax money.²

The trap sits on the other side of a recovery. If the account rebounds and you keep withdrawing past your contribution basis, the next layers are conversions and earnings. Earnings pulled before age 59½ from an account less than five years old are taxed as income and hit with a 10 percent early withdrawal penalty.³

To use this option well, you need to know your basis. Your custodian files Form 5498 each year showing your contribution.⁴ The sum across every year you contributed is your total basis, and that number, not the current account value, is the ceiling on what you can take out tax-free. For 2026, the annual Roth contribution limit is $7,500, or $8,600 if you are 50 or older.⁵

There is also no requirement to touch the account at all. Roth IRAs have no required minimum distributions during the original owner’s lifetime, so a depressed balance can sit and recover without forcing a sale.

Recharacterizing a Current-Year Contribution

If you made a Roth contribution this tax year and the money is now worth less, you can recharacterize it as a traditional IRA contribution. The custodian moves the original amount adjusted for gain or loss, so a $7,000 contribution that dropped to $6,000 transfers over as roughly $6,000.⁶

The payoff is a potential upfront deduction. A traditional IRA contribution may be deductible depending on your income and whether you or your spouse are covered by an employer plan. You give up tax-free growth on money that is already underwater, and in exchange you get a deduction in the current year.

Two limits matter:

The recharacterization must be done by your tax-filing due date, including extensions. If you filed on time without doing it, you have six months from the original due date to complete the transfer and file an amended return.⁶
A conversion from a traditional IRA to a Roth cannot be reversed. That door closed in 2018 and only regular contributions are eligible for recharacterization.⁶

Report the recharacterization on Form 8606 with an attached statement explaining the transfer. The custodian issues Form 1099-R for the year the recharacterization happens.

Correcting an Excess Contribution in a Down Market

If you put more than the annual limit into your Roth and the account has since fallen, the correction actually favors you. You have to withdraw the excess plus the net income attributable to it, and when the account lost value that net income figure is negative. You take out less than you put in as an excess.⁷

The IRS formula compares the account value just before the contribution to the value at the time of the corrective withdrawal. A $1,000 excess in an account that dropped 10 percent works out to a withdrawal of roughly $900.⁷

The deadline is your tax-filing due date, including extensions. Miss it and the excess draws a 6 percent excise tax for every year it stays in the account. Note that any negative net income figure gets reported as gross income for the year of the contribution, not the year of the withdrawal.⁷

The Wash Sale Trap Between Your Brokerage Account and Your Roth

Sell a losing stock or fund in a taxable account and then buy the same security in your Roth IRA within 30 days, and the loss is gone. Revenue Ruling 2008-5 held that a purchase of a substantially identical security through an IRA within the wash sale window disallows the loss, even though the IRA is a separate tax-exempt account.⁸

In an ordinary wash sale between two taxable accounts, the disallowed loss gets added to the basis of the replacement shares, so you recover it later. Roth IRA assets have no taxable basis you can ever use, so a wash sale into a Roth destroys the loss permanently.⁸

Two ways to avoid it: wait at least 31 days after the taxable-account sale before repurchasing inside the Roth, or buy something similar but not substantially identical, such as a different index fund tracking a comparable but distinct benchmark.

If the Losses Are in an Inherited Roth IRA

The same distribution ordering rules apply to inherited Roth IRAs: the original owner’s contributions come out first tax-free, then conversions, then earnings.⁹ The loss itself is still not deductible.

Most non-spouse beneficiaries must empty the account within 10 years of the original owner’s death, which can force a sale of depressed investments before they recover. A surviving spouse can treat the inherited Roth as their own and drop the 10-year clock. Falling short of a required distribution in any year triggers a 25 percent excise tax on the shortfall.⁹

1
Office of the Law Revision Counsel. 26 USC 67 – 2-Percent Floor on Miscellaneous Itemized Deductions
2
Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs
3
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
4
Internal Revenue Service. About Form 5498, IRA Contribution Information
5
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
6
Internal Revenue Service. Instructions for Form 8606 (2025)
7
Internal Revenue Service. Publication 590-A (2025), Contributions to Individual Retirement Arrangements (IRAs)
8
IRS.gov. Revenue Ruling 2008-5
9
Internal Revenue Service. Publication 590-B (2025), Distributions from Individual Retirement Arrangements (IRAs)