Offsetting Roth conversion fee using investment losses
I have a large amount of investment loss carryforwards from 2008 that I will still have in 2010. It is more than the value of my traditional IRA that I wish to convert to a Roth IRA. Can I use these loss carry forwards to offset the tax I will owe on my conversion?
Permalink Submitted by Alan Spross on Mon, 2009-06-22 04:41
Only to a very limited degree. Your capital losses including carryovers are first applied against current gains, and then against ordinary income up to $3,000. Therefore, $3,000 (1,500 if married filing separately) is the most that your conversion income will be reduced as a result of these losses, since a Roth conversion or any other IRA distributions is ordinary income, not capital gain income.
Your standard or itemized deductions reduce both ordinary and capital gain income, so if you have a year of high itemized deductions such as for medical costs, charitable contributions, etc, you could convert more in that year without incresing taxable income.
You also need to be aware of the unique 2010 conversion rule that allows conversions done next year to have the conversion income reported 50% in 2011 and 50% in 2012 rather than all in 2010. This not only defers the tax bill, but also splits the amount of the conversion so it is less likely to inflate your tax bracket. This applies in 2010 only, but can complicate overall Roth conversion planning because of the 3 year tax picture to consider.
Permalink Submitted by Terrence Herr on Thu, 2009-11-05 18:21
Is the 2010 tax rate used when splitting the tax payments over 2 years? I was at a recent event put on by an annuity company who stated that the 2011 and 2012 tax rates would apply to the portion of tax paid in those years. This didn’t make sense to me, so I am looking for confirmation.
Permalink Submitted by Alan Spross on Thu, 2009-11-05 21:15
They are correct. The tax rates in the year the 1040 income is reported applies to that conversion income.
However, you can also opt out of the two year deferral and report the entire conversion on your 2010 return. In the event tax rates go up in 2011, you still have the recharacterization deadline of 10/17/2011 to undo all or part of the conversion and also to opt out of the two year deferral. By Oct, 2011 you should know if tax rates for 2011 have been increased or not, but you will not know for sure about 2012 given Congress’ propensity to pass tax law very late in the year.
Permalink Submitted by Terrence Herr on Tue, 2009-11-10 20:56
Thanks for the reply. Nice to know the facts.
Permalink Submitted by brooke wentner on Tue, 2013-04-16 23:13
I am thinking about selling my investment property for less than i bought it for. I have owned the property for 7 years. can i use the loss from this investment to offset the same amount of Roth conversion? If not, what kind of losses would enable me to offset the Roth conversion tax liability dollar for dollar? Thanks
Permalink Submitted by Alan - IRA critic on Wed, 2013-04-17 00:05
Your net capital losses claimed cannot exceed 3,000, and depreciation you claimed might result in a gain even if you sell it for less than you paid. Any loss in excess of 3,000 is carried forward. However, if you have an operating loss in the year of sale, that would reduce your taxable income as would any itemized deductions you might claim. In the end of your conversion adds too much taxable income, you can recharacterize all or part of the conversion.