M is for Money

I see a lot of traffic from searchers wondering if they can write-off the recent losses in their 401k. I hate to disappoint these folks but the quick answer is no, you cannot take a tax write-off for your 401k losses. The money invested in your 401k is taken out before taxes are calculated. Then when you begin taking distributions in retirement you will pay taxes on the money removed, at your current income tax rate. But you can’t take a tax write-off for the loss on your quarterly statement.

In a way your taxes are reduced courtesy of the current bear market - you only pay taxes on the amount withdrawn. Since you have less money in your account to withdraw you pay less taxes! Probably not the answer you were hoping for.

To write-off losses from stocks or mutual funds you have to “realize” the loss, meaning you have to sell the investment. Paper losses do not count. Changing the assets in your retirement account has no effect either. You’ll only pay taxes on your 401k when you retire and take distributions or if you cash out the account. Meanwhile your 401k losses are only paper losses, they cannot be deducted.

The deferred taxes are a central pillar of retirement plans like the 401k. If you could write-off losses, then you would also have to pay taxes each time your account balance grew. Most people enjoy the current system, though perhaps not the loss and risk. Of course it’s important to understand the tax implications of all your investments.


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