Backdoor Roth when market is down
I have a client that contributed $5,500 into his non-deductible IRA through out 2022, but by the end of the year when we converted the entire balance into his Roth IRA it was only worth $4,800. Can he some how write off the $700 in market losses within his non-deductible IRA? In 2021 his non-deductible IRA contributions made money so he had to pay taxes on the earning when it was converted into his Roth IRA. Why can’t it go the other way as well (at least up to the $3k allowed in market loss write-offs)? I know it’s still a good thing because now it gets to recover in the Roth IRA and he doesn’t pay taxes on the gain, but I’d like it if he could also write off those market losses too.
Permalink Submitted by Alan - IRA critic on Sat, 2023-01-28 00:42
He cannot, but will have 700 of TIRA basis remaining in his IRA for future use. That would offset that amount of future gains on the next ND contribution before it is converted, of 700 from a 401k might be able to be rolled into the IRA and then converted tax free. There used to be a misc itemized deduction allowed if all TIRA accounts were closed for less than the basis, but that deduction was suspended in 2018-2025. The 3000 cap loss carryover also does not apply because cap gains or losses do not apply to IRA accounts.
Permalink Submitted by Jared Houseman on Mon, 2023-01-30 15:20
So after his tax perparer completes his Form 8606 for 2022 you are saying that he should have $700 in basis for line 2 on his Form 8606 for 2023? Thanks!
Permalink Submitted by Alan - IRA critic on Mon, 2023-01-30 15:30
Yes.