Can I write off or deduct a 401k loss or losses on my taxes? What about investment losses?

With the market in turmoil, many people are facing losses in their 401k, 403b, 457b and are wondering if they have the ability to claim those losses on their taxes.

You cannot claim losses on investments that were made pre-tax, only on investments that were made after tax (and there is a threshold of 2% of adjusted gross income in order to qualify, kind of similar to the requirements for reporting health expenses).

Why? Let’s think about this for a minute; What are you doing when filing taxes? In essence, (if you are an employee of a company) throughout the year you have designated the amount of taxes to be withheld from your pay, in order to ensure your taxes owed at year end are covered.

When you start your return, you enter your take home income, which if you are investing in a 401k for example, does not include your pre-tax investments. Thus, you are already receiving a deduction in your taxes as you are reporting a lower income. If you were to report losses on your 401k, you would be doubling the benefit or deduction from income, if you will. Take John Boy for example, let’s say his salary was $100,000 for the year. He invests 5% pretax into his 401k. Thus, his take home pay would be $100,000 – $5,000 or $95,000, less the taxes he paid on the $95,000. Let’s assume his tax rate is 25% (and this was estimated and deducted from his paychecks throughout the year), his take home pay would be $71,250 and that would be reported as the starting point on his taxes. ow, let’s say he lost $4,000 out his $5,000 he invested. If he were to report that loss, he would be saying lower my income by an additional $4,000 to $67,250, which wouldn’t be true, he already lowered his starting point in the beginning! If he were to report a deduction to income on 401k investments, he would be reporting it twice.

Now, If John Boy made those investments with after-tax dollars, he would have a case for taking the deduction as a loss, because his starting point didn’t account for this already.

So, think about these things in simple terms and as to what you are trying to accomplish in lowering your tax liability, you can only lower that liability once, not twice.

I hope this helps!

Similar related questions:

Can I write off IRA losses? Can I deduct an IRA loss? What can I write off as a loss on my taxes? Can I write off a Roth IRA loss or losses? Can I deduct a 403b loss? Can I deduct a 457b loss? Can I deduct a loss from my 401k? Can I write off or deduct a capital loss on my 401k? Can I deduct losses in my 401k or IRA? I’ve lost money in my 401k, can I deduct or write off those losses on my taxes? Can I write off investment losses? Can I deduct investment losses on my taxes? Can I write off a loss on a 529 plan?

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1 Comment

  1. Jim Weibel says:

    Your answer makes perfect sense, however these deductions are not totally pretax as you pay both SS and MC tax on that money. Now explain why this reasoning isn’t used in calculating the taxable amount of SS benefits. Since the employer matches 1/2 of the employees contribution, I can understand taxing up to 50% but why 80-85%?

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