QUESTION: Could you please tell me whether losses in a 401K plan are
deductible from taxes owed? I was 100% invested in the common stock of
my employer (USAirways), when the company declared bankruptcy and the
stock became worthless.
REPLY: Income that is used to contribute to a tax deductible and tax
deferred retirement savings plan such as a 401(k), IRA, SEP, KEOGH,
etc. is not subject to income tax until the funds are withdrawn. When
a taxpayer takes distributions from a retirement savings plan, the
distributions are taxable at that time.
Losses incurred on investments made within a retirement savings plan
will reduce the amount of future distributions that are available to
the taxpayer and become "deductible" in the sense that future income
is reduced. However, there is no immediate deduction for investment
losses incurred by a retirement savings plan.
The information herein is not intended to be personal
tax or financial advice and may not be appropriate or
applicable for every recipient of this message.