Questions on 401(k) losses

No tax loss on 401(k) stock drop

Q: I retired last year and have several tax issues with my 401(k). I'd been contributing to a company 401(k) since the 1970s. The company match to the plan was paid in company stock. I held this stock for many years within the plan until the stock's value began dropping. I transferred the current value of the stock into a safer investment in the 401(k). This was at a substantial loss. How do I reflect the losses within the plan for tax purposes?

The problem is that the 401(k) plan administrators were changed several times, and when I call the current plan administrator, they apparently don't have the information that goes that far back. I called the IRS and could not get a straight answer. Do I just give up or do you have a suggestion? -- WP, Colliersville, Tenn.

A: I know the disappointment you must feel after watching your employer's stock fall so dramatically.

Obviously, a tax break for the loss would help ease the pain a bit. Unfortunately, there's no such break coming. Losses incurred inside retirement accounts, such as 401(k)s, IRAs and the like cannot be claimed on your income tax return.

The reasoning is this: Because the money in the plan went in on a before-tax basis (i.e., you were not taxed on the deposits), you cannot claim a loss. When your employer kicked in the match, you did not report the deposits as income. As the account balance fell, you saw a loss in your account, but you did not suffer a loss as far as the taxman is concerned. In fact, even if your account fell 99 percent, you'd be taxed on whatever was left when you withdrew the remaining balance.

The only time you can claim a loss on a retirement account is when you have after-tax contributions and, when the account is closed, the total distributions are worth less than the after-tax contributions.