TIRA basis after Roth Conversion of cash and securities

Submitted by unknown on Thu, 2014-01-09 19:18

Scenario 1: Individual makes non-deductible contribution to a TIRA and invests the majority of the money in stocks. Stocks lose value and ALL assets in TIRA are converted to a Roth IRA (5,000 ND contribution / 4,900 conversion of stock and cash). Is the TIRA basis carried forward to the next year 100 (line 14 on 8606) or is there a loss that’s realized as unrecovered basis and passed through as an itemized deduction? What goes on line 14 of the Form 8606 and therefore carried forward to the following year?

Scenario 2: Individual makes non-deductible contribution to a TIRA and 4900 is converted to a Roth IRA (5,000 ND contribution / 4,900 conversion of cash). Cash is converted and was not invested in stocks. Is the TIRA basis carried forward to the next year 100 (line 14 on 8606)?



Submitted by Alan - IRA critic on Thu, 2014-01-09 21:09

  • Scenario 1: Although the IRS has not issued guidance on this, they have stated that if the individual has closed all of their non Roth IRAs, they could use the $100 loss as a potential misc deduction subject to the 2% floor. It stands to reason that the individual could not take this deduction AND continue to use that basis. Form 8606 will have a line 14 figure in some cases and will not in other cases since if there are no ND contributions for that year and a FULL conversion, Part I and therefore line 14 are completely bypassed with the conversion reported in Part II. No line 14 means no basis to carryover to future years. Now if a ND contribution was made in the year as the conversion, then you have a line 14 and the possible choice of whether you want to continue your $100 basis or deduct it. I doubt that the IRS even cares which direction you take. If they did, they would clarify this situation in the 8606 Inst or Pub 590. Any IRS clarification might say if you are itemizing, you must apply the loss even if the 2% erases it, but then they would have to reflect that in the 8606 Inst. regarding leftover basis. 
  • Scen 2: For both situations the mix of stocks and cash is immaterial. Just amounts count, not the asset type. Here, there is a partial conversion and therefore Part I of Form 8606 is triggered along with line 14. Further, all TIRA accounts have not been closed so no misc deduction is possible. But the line 14 amount will be available to carry to future years.


Submitted by unknown on Thu, 2014-01-09 21:39

Is closing the account an important factor?  What if the account is left open, but all of the assets are converted leaving a zero balance in the account? 



Submitted by Alan - IRA critic on Thu, 2014-01-09 22:11

That is OK – the key if you want to use the itemized deduction is that on any Form 5498 issued by the IRA custodian there is no value shown for the year end fair market value.  The IRS has also not stated how long the value must remain at 0 for the deduction. You can probably make another contribution anytime in the following year and start over. Just do not make a new contribution before year end or the 5498 will show you still have a value and that might invite problems.



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