This week's question is brought to you by  Cindy Hockenberry, EA, from NATP's Tax Knowledge Center. June 24, 2010 Question: Your client, a retired school teacher, maintains two traditional IRAs. One IRA has all deductible contributions and the other has deductible and nondeductible contributions. She also has a Roth IRA and a 403(b) annuity. The IRA containing all deductible contributions was invested in mutual funds that performed poorly, resulting in a drastic drop in the fair market value. She was told she would be allowed a deduction on her tax return for this loss. How do you advise her? Answer:  While it’s true that taxpayers may be allowed a deduction for a loss in an IRA, rarely are they allowed a loss for the full drop in value. For starters, a loss in an IRA is deducted on Schedule A as a miscellaneous itemized deduction subject to the 2% AGI floor. Additionally, a loss is only allowed to the extent of the taxpayer's unrecovered basis in all IRAs. For this purpose, traditional IRAs and Roth IRAs are considered separately.  A taxpayer only has basis if there were nondeductible contributions made to the IRA. If all contributions were deductible, there is no basis and no loss. Before any loss is allowed, all the IRAs of the same type the taxpayer owns must be distributed and the distribution must be less than the unrecovered basis.  If the taxpayer only suffered a drop in value and did not take a complete distribution of all IRAs, there is no reportable loss. In this case, the taxpayer must withdraw both traditional IRAs and then her loss would be allowed to the extent of her unrecovered basis.