Converting to Roth from nondeductible IRA with losses
Client is under 50, has large 401k, and $400k plus income. In 2006, we started non deductible IRAs to convert in 2010 and pay taxes in 2011 and 2012. So far both him and his wife have contributed $4,000 in 2006, $4,000 in 2007, $5,000 in 2008, and $5,000 in 2009. Current basis is now $18,000 in both IRAs but unfortunately account value is only about $13,500 in each because of market drop.
What happens in 2010 when we want to convert this money to a Roth and he has less to convert than his non-deductible IRA basis?
No taxes will be due but can a loss be taken somewhere?
Would you still do it?
Permalink Submitted by Alan Spross on Wed, 2009-02-11 19:10
This is another question that is typical of some of those that never would have surfaced prior to the market meltdown.
It might be best to delay the conversion until either the value recovers to 18,000 OR the difference of 4,500 can be utilized as a misc itemized deduction. Otherwise the write off for the loss is forfeited.
Since all traditional IRA accounts for each spouse are being fully distributed, and the basis is 4,500 more than the distribution, each spouse should be eligible for a misc itemized deduction of 4,500 subject to 2% of AGI floor. Of course, they must be able to itemize and also must not be subject to AMT to take advantage of the misc deduction.
The total basis of 18,000 cannot be transferred to the Roth IRA as the Roth basis cannot be more than the amount contributed (13,500). Therefore, even though a Roth conversion is a rollover, since the full basis cannot be rolled over and the Roth is a different type of IRA, the misc deduction should be permitted.