Does Tax Loss Harvesting Apply to Roth IRA? – Avoid This Mistake + FAQs

No, tax loss harvesting does not apply to Roth IRAs or Roth 401(k)s, because losses inside these tax-advantaged accounts aren’t deductible and gains aren’t taxed.

According to a 2019 national retirement study, only 34% of Americans feel knowledgeable about IRAs, leaving many investors confused about tax strategies.

You can’t use losses in a Roth account to offset other income on your tax return. This comprehensive guide explores why that is, what pitfalls to avoid, and how to optimize your investments under IRS rules.

• 💡 Quick takeaway: Roth IRAs and Roth 401(k)s do not benefit from tax-loss harvesting, since their growth is tax-free and losses aren’t tax-deductible.

• ⚖️ IRS rules explained: Understand the legal framework that prevents deducting Roth IRA losses (and the one rare exception that existed before tax laws changed).

• 🚫 What to avoid: Common mistakes investors make with Roth accounts – including wash sale traps that can nullify tax losses in taxable portfolios.

• 📊 Real-world examples: A side-by-side look at taxable vs. Roth account scenarios, plus a table of pros and cons, to see how tax-loss rules play out.

• 🗽 Beyond federal taxes: How state tax laws align with federal rules on Roth IRAs, and how both traditional and Roth retirement plans compare when it comes to handling losses.

Why You Can’t Harvest Tax Losses in a Roth IRA (The Straight Answer)

Tax loss harvesting doesn’t work in Roth IRAs or Roth 401(k)s. The reason is simple: these accounts enjoy tax-free growth, so there’s no taxable capital gain to offset with a loss. Tax loss harvesting is a strategy where investors sell investments at a loss to reduce their taxable income from capital gains or other income.

But in a Roth IRA, your investments grow without incurring any current tax, and qualified withdrawals are tax-free. Because you never owe capital gains tax on profitable Roth IRA investments, the IRS won’t give you a tax break for investments that lose money in the account.

Think of a Roth IRA as a tax-sheltered bubble: gains inside the bubble aren’t taxed, and losses inside the bubble aren’t deductible. If a stock in your Roth IRA drops in value and you sell it, you won’t owe any tax on that sale – but you also can’t deduct the loss on your tax return.

In contrast, in a taxable brokerage account, a realized loss can be used to offset other gains or up to $3,000 of ordinary income each year. With a Roth, there’s simply no tax liability to reduce in the first place, so tax loss harvesting has no benefit.

In summary, the IRS does not allow tax-loss harvesting within Roth IRAs or any retirement plan that is tax-deferred or tax-free. The tax rules treat retirement accounts very differently from regular investment accounts. Next, we’ll break down exactly how tax-loss harvesting works in taxable accounts versus what happens inside a Roth.

Tax Loss Harvesting 101: How Offsetting Investment Losses Saves Taxes

To appreciate why Roth IRAs are different, let’s briefly recap what tax-loss harvesting means in a regular investment account. When you sell an investment in a taxable account (like stocks, ETFs, or mutual funds in a brokerage account) for less than what you paid, you incur a capital loss.

Under U.S. tax law, capital losses can offset capital gains dollar-for-dollar. If your losses exceed your gains, up to $3,000 of the excess loss can also offset other income (like salary) each tax year. Any remaining loss beyond that can carry forward to future years.

Here’s how tax-loss harvesting works: Suppose you have some stocks that went up and some that went down. By selling a losing investment, you “harvest” that loss to reduce your taxable gains. For example, if you realized a $5,000 capital gain from one stock sale but also realize a $5,000 loss from another, they offset – leaving you with no net capital gain to tax.

This can significantly reduce your tax bill, especially for investors in higher tax brackets or those with large gains. Many advisors suggest harvesting losses strategically to maximize after-tax returns.

However, there are important rules and limitations. The wash sale rule is a big one: after selling a security at a loss, you cannot buy the same or a “substantially identical” security within 30 days before or after the sale, or else the loss is disallowed. This rule prevents people from selling just for a tax benefit and immediately re-buying the investment.

If a wash sale is triggered, the loss is not usable for tax purposes – it’s essentially as if it never happened (more on a special Roth-related wash sale trap later).

In essence, tax-loss harvesting is a valuable tool for taxable accounts because it lets you use the tax code to your advantage. It’s often used near year-end or during market downturns to soften the blow of capital gains taxes. But all of these benefits apply only to taxable investment accounts. Retirement accounts like IRAs and 401(k)s follow a completely different set of tax rules.

Roth IRAs and Roth 401(k)s: Tax-Free Growth Means No Tax Offsets Needed

Roth IRAs (and employer-sponsored Roth 401(k) plans) are unique because they provide tax-free investment growth. You contribute to a Roth with after-tax dollars (meaning you don’t get a tax deduction up front), but in exchange, all earnings and withdrawals can be tax-free in retirement if you follow the rules. Since Uncle Sam isn’t taxing your gains in these accounts, he also doesn’t offer relief for your losses.

In a taxable account, every sale might result in a taxable gain or loss that you report each year. In a Roth IRA or Roth 401(k), by contrast, you do not report gains or losses on annual taxes at all. There is no Schedule D or Form 8949 involved for your Roth transactions, because the IRS ignores those internal transactions.

The only time a Roth IRA generally interacts with your tax return is when you make contributions (which aren’t deductible) or when you take distributions (which, if qualified, aren’t included in income). Your Roth custodian will send you a Form 1099-R for distributions and a Form 5498 for contributions, but you will never get a tax form for capital gains or losses inside the account.

The bottom line: a loss in a Roth IRA has no effect on your tax bill – it simply reduces the account’s value. Likewise, a gain in a Roth isn’t taxed, which is a huge benefit. This trade-off is by design. The tax-free nature of Roth accounts is extremely powerful for long-term growth, but the “cost” is that you can’t claim deductions for bad years.

With a Roth IRA or Roth 401(k), you’re accepting that any investment losses are on you, with no tax consolation prize, while all gains will eventually be yours tax-free.

It’s worth noting that this isn’t unique to Roths – any tax-deferred or tax-exempt retirement plan shares this characteristic. Traditional IRAs, traditional 401(k)s, 403(b)s, 457 plans, and even education accounts like 529 plans all operate under a similar principle: you don’t pay taxes on earnings as they happen, so you generally can’t claim losses either.

For traditional (pre-tax) retirement accounts, you defer taxes until withdrawal (then pay tax on withdrawals as ordinary income). For Roth accounts, you pay taxes up front and then no taxes on withdrawals. In neither case do you get to deduct interim investment losses.

Are Losses in a Roth IRA Ever Deductible? (The Rare Exception to the Rule)

With all the above said, you might wonder if there’s ever a way to get a tax deduction for a loss in a Roth IRA. In the past, there was a very narrow exception, but recent tax law changes have closed that window for now.

Historically, if you incurred a loss across your entire Roth IRA (meaning the total you received from the account was less than your contributions), you could claim that loss as a miscellaneous itemized deduction. To do this, you had to completely close all of your Roth IRA accounts and withdraw all the money. If the amount you withdrew was less than the sum of all contributions you had made over the years, that shortfall was considered a deductible loss.

For example, say you contributed a total of $20,000 to Roth IRAs over time, and due to market downturns your account is now worth only $15,000. If you withdrew the $15,000 and closed the Roth IRA, you’d have a $5,000 loss. Prior to 2018, you could potentially deduct that $5,000 on Schedule A as an itemized deduction (subject to certain limits).

However, as of 2018, the tax laws changed. The Tax Cuts and Jobs Act of 2017 eliminated miscellaneous itemized deductions for tax years 2018 through 2025. The deduction for a loss on IRA investments fell into this category. In practical terms, that means from 2018 onward you cannot deduct Roth IRA losses even if you close your account.

The IRS explicitly notes that a loss on your traditional or Roth IRA (when all funds have been distributed) is a miscellaneous deduction that is no longer allowed. Unless Congress reinstates this provision in the future (it’s uncertain if it will return after 2025), there is currently no way to write off a Roth IRA loss.

It’s important to emphasize that even when it was allowed, this deduction was rare. It required you to liquidate your retirement account entirely. Most investors wouldn’t want to close out a Roth IRA — forfeiting future tax-free growth — just to claim a loss, unless they were abandoning the retirement account altogether. Now that this deduction is off the table (at least until 2026 or further notice), the average Roth investor has no recourse to deduct losses at all.

Common Mistakes and Pitfalls to Avoid with Roth Accounts

Understanding these rules can help you avoid some costly mistakes. Here are a few common pitfalls investors should steer clear of regarding tax-loss harvesting and Roth IRAs or Roth 401(k)s:

1. Trying to “harvest” losses inside a retirement account: Some investors mistakenly sell losing investments in their Roth IRA thinking they can claim a tax benefit. They later discover that the loss isn’t reported on their taxes at all. Remember, transactions inside your Roth do not show up on your tax return. If an investment in your Roth IRA is down and you don’t believe it will recover, you can certainly sell it and reinvest in something else as part of sound portfolio management. But do it for investment reasons, not for tax reasons, because the tax benefit simply doesn’t exist.

2. Expecting a tax form for Roth IRA losses: In a taxable account, your brokerage sends you a Form 1099-B each year listing your gains and losses from sales. With an IRA, you get no such form for gains or losses. Don’t waste time looking for a place to report Roth IRA investment losses on your tax return – there isn’t one. The only exception would be the total account loss scenario discussed above, which isn’t reportable under current law anyway.

3. Withdrawing funds to claim a loss: One might think, “If I can’t deduct a loss while the money stays in the Roth, what if I withdraw the money?” Unfortunately, taking a distribution doesn’t help. If you withdraw after a loss, you’re still not getting a deduction; you’re simply pulling out the reduced amount of money. In fact, if you withdraw Roth IRA earnings before age 59½ (and not for an allowed exception), you could owe taxes or penalties on that withdrawal – making a bad situation worse. Simply put, withdrawing money from your Roth IRA just because the investments lost value is usually a mistake and won’t trigger any tax write-off.

4. Neglecting the wash sale rule across accounts: This is a critical pitfall that ties taxable accounts and IRAs together. The wash sale rule doesn’t apply within your Roth IRA (you can sell and rebuy inside a Roth without any wash sale concerns since losses aren’t deductible anyway). However, it can apply across accounts. For example, imagine you sell a stock in your taxable brokerage account at a loss to harvest a tax deduction, and then within 30 days you (or your spouse) buy the same stock in your Roth IRA or 401(k). This cross-account transaction will trigger the wash sale rule. The IRS will disallow your capital loss deduction because you effectively repurchased the stock in a tax-advantaged account. Even worse, the disallowed loss doesn’t get added to your basis in the Roth IRA – it’s just lost forever. This is a trap that many unwary investors fall into. Avoid coordinating trades between taxable and retirement accounts in a way that could nullify your tax losses. If you harvest a loss on a security, be sure not to buy that same asset in your IRA for at least 30 days before and after the sale.

5. Assuming all accounts work the same: Investors sometimes generalize strategies across all their accounts. It’s vital to recognize that strategies like tax-loss harvesting, which are effective in taxable investing, do not translate to retirement accounts. Similarly, strategies that work in IRAs (like tax-deferred compounding or Roth conversions) are not relevant to taxable accounts. Tailor your strategy to the account type. For instance, don’t hold back on selling a dud stock in your Roth IRA out of tax considerations (since none exist), and conversely, don’t ignore tax planning in your brokerage account by treating it like an IRA.

By understanding these pitfalls, you can manage your Roth IRA and Roth 401(k) more effectively and coordinate them with your other investments without running afoul of IRS rules.

Example Scenarios: Taxable Account vs. Roth IRA Outcomes

Let’s illustrate the differences with a few simple scenarios. Below is a comparison of three common situations related to losses and tax-loss harvesting, and how the outcomes differ between taxable accounts and Roth retirement accounts:

As you can see, only the first scenario (a loss in a regular taxable account) yields a tax-saving benefit. Losses inside a Roth or other retirement account are invisible for tax purposes. And mixing transactions between accounts can inadvertently wipe out the taxable loss through the wash sale rule.

Key takeaway: Use tax-loss harvesting in your taxable investing account, but don’t bother trying it in your Roth. And be careful to avoid interactions (like quick repurchases in an IRA) that could invalidate your harvested losses in the taxable account.

The IRS Tax Code and Regulations Behind the Scenes

It may help confident investors and tax geeks to know the legal framework that underpins these rules. The Internal Revenue Code treats retirement accounts differently from regular investments:

• A Roth IRA is defined in Section 408A of the tax code as a tax-exempt individual retirement plan. It’s basically a trust that grows tax-free. Because the trust itself is not subject to tax on its investment income, there is no mechanism for it to claim losses. (It’s similar to how a charitable endowment or other tax-exempt entity can’t deduct losses since it isn’t paying taxes on gains either.)

• For regular taxable investments, Sections 1211 and 1212 of the Internal Revenue Code outline the use of capital losses by individual taxpayers (how losses offset gains and carry over). These provisions apply to your personal taxable income. But assets inside an IRA aren’t in your personal taxable income until they are distributed. Thus, those code sections don’t apply to your Roth’s day-to-day losses.

• In the past, the ability to deduct a total IRA loss came from treating the loss as a personal loss on a transaction entered into for profit (under Code Section 165) and as a miscellaneous deduction (under Section 67). When you closed an IRA below basis, you were effectively claiming, “I had a loss in a transaction for profit (my IRA investment) that I can deduct.” The tax regulations required that all IRA funds be distributed and that it was after-tax money at stake (since you can’t double-dip on pre-tax dollars). This was always a niche deduction, and the tax code change in 2017 (specifically Section 67(g) added by the Tax Cuts and Jobs Act) suspended these miscellaneous deductions.

• The IRS has published guidance (like IRS Publication 590-B for IRAs and Publication 529 for miscellaneous deductions) confirming that as of now, losses in IRAs are not deductible. Publication 529 explicitly lists “Loss on traditional IRAs or Roth IRAs, when all amounts have been distributed” as a miscellaneous deduction that is not currently allowed. This backs up the fact that even the last-resort Roth IRA loss deduction is off the table until the law changes.

• Meanwhile, IRS rules like the wash sale rule (under Code Section 1091) apply across accounts. Notably, IRS Revenue Ruling 2008-5 clarified that if a taxpayer sells stock at a loss in a taxable account and their IRA (traditional or Roth) buys the same stock within 30 days, the loss is disallowed just as if the individual bought it themselves. Moreover, the ruling stated that the disallowed loss doesn’t increase the IRA’s basis (since IRAs don’t have a taxable basis in that sense). This kind of guidance shows how seriously the IRS takes preventing abuse of tax-loss rules using retirement accounts.

In short, the law is deliberately structured to segregate your retirement accounts from your taxable income in terms of gains and losses. The IRS and Congress give us big tax breaks either at contribution time (traditional IRA/401k) or at withdrawal time (Roth), but they also close the door on using these accounts for annual tax-loss strategies.

How State Taxes View Roth IRA Gains and Losses

When it comes to state income tax, the rules generally mirror the federal treatment for retirement accounts. Most states use your federal adjusted gross income as the starting point for state taxes, which means if something isn’t in your federal taxable income, it’s usually not taxed (or deductible) at the state level either.

• State taxation of Roth IRAs: Qualified Roth IRA distributions are tax-free federally, and states typically honor that as well. If your state has an income tax, it usually will not tax Roth IRA earnings on distribution, since those earnings aren’t in federal AGI. Likewise, a loss in a Roth IRA isn’t deductible at the state level because it’s not a recognized loss federally. There’s no entry on your state return to deduct an IRA loss independently of the federal return.

• Exceptions or nuances: A few states have quirks. For example, states like New Jersey and Massachusetts do not allow a deduction for traditional IRA contributions on the state return (since they piggyback on federal definitions). As a result, those states consider distributions partly tax-free to avoid double taxation of the previously taxed contributions. But even in those cases, there’s no mechanism to deduct investment losses inside the IRA. They simply ensure you don’t pay state tax twice on the same dollars. Some states also still allow certain miscellaneous deductions that the federal law suspended (for instance, Alabama and California at one point allowed some itemized deductions disallowed federally). It’s conceivable a state could let you deduct an IRA loss if it decoupled from the federal suspension, but this would be highly unusual and would still require the federal deduction to exist in the state’s starting point. In practice, no significant state-level tax relief exists for Roth IRA losses.

• No state capital gains benefit needed: Remember that since Roth IRAs don’t generate taxable gains, they also don’t require any special state capital gains treatment. In a taxable account, some states tax capital gains at the ordinary income rate, while others have exclusions or deductions. None of that matters for a Roth. State tax law, like federal, essentially ignores what happens inside your Roth IRA.

The key point is that state tax laws align with the federal stance – they won’t tax your Roth profits, but they won’t let you deduct your Roth losses either. Always check your specific state’s rules if you’re unsure, but you can be confident that no state will give you a tax loss harvesting break on a Roth IRA that the IRS doesn’t allow.

Smart Strategies for Roth IRA Investors (Beyond Tax Loss Harvesting)

Just because you can’t harvest losses in a Roth IRA doesn’t mean you can’t be strategic with your Roth accounts. Here are some tips and alternative strategies to make the most of your Roth and overall portfolio:

• Leverage the Roth’s tax-free growth: Since all gains in a Roth are tax-free, consider holding your highest-growth or highest-potential investments in your Roth account. For example, stocks or funds you expect to soar in value over the long term can be ideal for a Roth – any growth will never be taxed. On the flip side, because you get no tax help on the downside, you should still diversify and avoid overly risky “long-shot” bets with your entire Roth. But in general, Roth money is “long-term, no tax” money, so it’s well-suited for aggressive growth assets if appropriate for your risk tolerance.

• Use taxable accounts for tax strategies: If you have a mix of taxable and retirement accounts, use each for what it’s best at. Do your tax-loss harvesting in the taxable account where it counts. Some investors purposely maintain a taxable investment account (even after maxing out IRAs/401ks) to have flexibility with capital gains, capital loss harvesting, tax-efficient withdrawals, etc. For instance, you might keep bonds or dividend-paying stocks in your Roth (since interest and dividends are tax-free there) and keep some stock index funds in a taxable account where you can tax-loss harvest if the market dips. This way you get the best of both worlds: tax-free compounding in the Roth and tax-loss leverage in the brokerage account.

• Mind your asset location and risk: There’s a subtle balance with Roths regarding risk and reward. A Roth IRA is a great place for volatile investments because the upside is untaxed – but if an investment bombs, the downside doesn’t get a tax write-off. If you have a particularly speculative investment, some advisors might suggest putting it in a taxable account so that if it fails, at least you harvest a loss, and if it succeeds, you pay tax on the gain. Meanwhile, putting more stable growth investments in the Roth ensures you get tax-free growth with less risk of a total loss. Consider your overall strategy: you might accept that Roth accounts are for long-term winners (with the understanding that any losers are just part of investing and won’t get tax help). It often makes sense to prioritize maximizing growth in Roth, since the benefit of tax-free compounding generally outweighs the occasional lost deduction on a losing investment.

• Roth conversions during down markets: If you have a traditional IRA or 401(k), one tax strategy you can use is a Roth conversion. A conversion means moving money from a pre-tax account to a Roth and paying income tax on that transfer. Conversions are advantageous to do when your account value is down (for example, after a market correction). Why? Because if the value dropped, you’ll pay tax on a smaller amount now, and any future rebound will occur inside the Roth tax-free. This isn’t tax-loss harvesting per se, but it is a way to take advantage of a downturn. Essentially, you’re “locking in” the lower value for tax purposes. Converting a depressed traditional IRA balance means you incur tax on that lower balance, and then if the investments recover, all that growth is sheltered in the Roth. It’s akin to making lemonade out of lemons in a different way – turning a temporary loss in your account into a long-term tax win. Always consult a tax advisor on conversions, as they have immediate tax costs and other implications, but it’s a smart move many consider in a down market.

• Rebalance without tax impact: One underappreciated advantage of Roth (and all retirement accounts) is the ability to rebalance or change investments without tax consequences. In a taxable account, you might hesitate to sell a winner because of capital gains tax, or to sell a loser because you already used enough losses this year. In a Roth IRA, you can make portfolio changes purely based on investment merits. Feel free to sell or buy different funds within your Roth to maintain your desired asset allocation – there will be no tax hit when you sell a winner and, as we know, no tax deduction when you sell a loser. The freedom from tax considerations can actually be very liberating for managing your investments optimally.

In summary, while tax loss harvesting isn’t applicable to Roth IRAs, you can still maximize the effectiveness of your Roth by smartly coordinating it with your other accounts. Take advantage of what the Roth is best at (sheltering gains) and use your taxable accounts for what they’re best at (harvesting losses, benefiting from lower capital gains tax rates, etc.). This holistic approach will improve your overall after-tax outcomes.

Pros and Cons of Tax Loss Harvesting as a Strategy

To put things in perspective, here is a quick overview of the advantages and disadvantages of tax-loss harvesting (in taxable accounts), especially as it relates to your broader investment strategy that includes retirement accounts:

As you weigh these pros and cons, remember that Roth IRAs already eliminate the need for many tax strategies on investment gains. The “pro” of not paying any tax on gains (Roth benefit) arguably outweighs the benefits of harvesting losses in a taxable account, which only provide partial relief. For most long-term investors, maximizing contributions to tax-advantaged accounts (to get tax-free or tax-deferred growth) is priority number one. Only after that does it make sense to focus on taxable account tactics like tax-loss harvesting.

That said, tax-loss harvesting remains a valuable strategy for your taxable investments, and it can complement your retirement investing. It’s just important to use it where it works and not expect it to do the impossible in accounts where it doesn’t apply.

Frequently Asked Questions (FAQ)

Q: Can I use tax loss harvesting in a Roth IRA or Roth 401(k)?
A: No. Tax loss harvesting only works in taxable accounts. Losses inside a Roth IRA or Roth 401(k) are not deductible and cannot offset any gains or income on your taxes.

Q: Do I pay capital gains tax when I sell investments in my Roth IRA?
A: No. Selling investments inside a Roth IRA does not trigger capital gains tax. Roth IRAs are tax-free for qualified distributions, so gains and losses inside the account do not appear on your tax return.

Q: My Roth IRA dropped in value—can I claim a tax deduction for that loss?
A: Generally, no. You cannot deduct losses in a Roth IRA. The only exception (closing all Roth accounts to claim a loss) is currently unavailable under tax law changes from 2018 onward.

Q: Does tax loss harvesting apply to traditional IRAs or 401(k)s?
A: No. Traditional IRAs and 401(k)s are tax-deferred accounts, so you also cannot harvest losses in them. You don’t pay taxes on gains in those accounts each year, so losses aren’t deductible either.

Q: What happens if I sell a stock at a loss in a taxable account and buy it in my Roth IRA?
A: This triggers a wash sale. The IRS will disallow the loss deduction on your taxable sale because you repurchased the stock in an IRA within 30 days. You get no tax benefit from the loss.

Q: Do I need to report losses in my Roth IRA on my tax return?
A: No reporting is required (or available) for Roth IRA losses. You only report contributions or withdrawals from a Roth IRA. Investment gains or losses inside the account are not reported to the IRS annually.

Q: Are Roth IRA losses ever deductible at the state level?
A: No. State tax laws mirror federal rules here. If a Roth IRA loss isn’t deductible on your federal return, it won’t be deductible on your state return either.

Q: Should I change my investments if my Roth IRA is losing money?
A: No tax benefit comes from selling in a Roth at a loss, so only change investments for investment reasons. Rebalance if needed, but remember that selling losers in a Roth won’t generate any tax break.

Q: If my traditional IRA lost value, is converting to a Roth a good idea?
A: Possibly yes. If your traditional IRA balance is down, a Roth conversion will cost less tax. You’ll pay tax on a smaller amount now, and future rebound growth becomes tax-free in the Roth.

Q: Is maximizing my Roth IRA still beneficial if I can’t deduct losses?
A: Yes. The tax-free growth in a Roth IRA outweighs any tax deduction you miss on losses. The inability to harvest losses doesn’t reduce the overall benefits of maxing out your Roth contributions.