Can 401k Losses be Tax Deductible?
James Lawson- A 401(k) plan is a retirement savings plan that an employee can fund with pre-tax funds. 401k losses can be deducted, but only if you cashed out the plan. 401(k) plans are some of the best ways to save for retirement.
401k losses can be tax-deductible. However, the deduction is only available if the losses occurred due to the cashing out of the 401k plan. This means that you cannot write off losses that occurred after you or your beneficiaries cashed out the account.
What Can Be Deducted?
If you are a single filer, you can deduct up to $12,000 in 2020 and $24,000 in 2021 and 2022. For married taxpayers filing jointly, the limit is $24,000 in 2020 and 2021 and $36,000 in 2022.
Note: The limits are adjusted annually for inflation.
What Can't Be Deducted?
401(k) losses can be deducted from your taxable income. But the losses can't exceed the amounts contributed to your 401(k).
Your Contribution
Some contributions to traditional 401k plans can be tax deductible. The amount that is tax deductible depends on your income and whether you have other retirement plans available to you. In 2021, contributions to a traditional 401k plan that are deducted from your salary are tax deductible up to the limit set by the Internal Revenue Service (IRS). For single filers, the limit is $19,000 and for married couples filing jointly, the limit is $38,000.
Your Investment Earnings
If you made a profit on your investment, it is taxable as ordinary income.
Your Investment Losses
Your losses are deductible against your ordinary income, up to $3,000 per year, and any losses beyond that limit can be carried forward indefinitely.
Your Interest Income
The interest paid on any money contributed to your 401k is tax-deductible. The Internal Revenue Code (IRC) generally allows all qualified 401k plans to make yearly contributions up to the lesser of $19,000 or 100% of compensation, plus an additional $6,000 catch-up contribution from age 50 to 70.
If your plan allows, you can also make deposits to a traditional IRA (Individual Retirement Account), which are subject to the same deductible limits, plus an additional catch-up contribution of $1,000 for people 50 and older.
Investment Fees
Investment fees, including management fees, commissions, and custodian fees, are tax-deductible. You cannot deduct transaction fees, such as trading commissions and 401k fees that are used to cover plan administration.
Your Losses
If you lose money in your 401k, the IRS allows you to deduct up to $3,000 per tax year. Every $1,000 of losses over $3,000 is deducted from your taxable income.
For example, if you lost $10,000, you can deduct $3,000 from your income. The remaining $7,000 would be deducted from your income.
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The Bottom Line
The losses you suffer in a 401k account are tax-deductible when you invest in qualified investments, and that investment can be in company stock. So, if you have losses in a 401k, you can deduct them. But, there's a catch: the losses can't be more than 10% of your adjusted gross income (AGI).
