Wait To Roth Convert An IRA Valued Below Cost Basis?
Every year from 2008 to 2012 an individual contributed $5,000. to his traditional nondeductible IRA and he plans to continue contributing in the future. The IRA’s current value is $24,200. He does not intend to change the IRA’s investment.
He wants to Roth convert this IRA but thinks he should wait till its value reaches his contributed $25,000. (cost basis). I do not see any advantage to waiting since any such increase in value would be the same whether in the traditional IRA or in a Roth IRA and would be tax-free in either case. And, if the value were to increase above the cost basis, there would be no tax due if the investment is in the Roth IRA whereas tax would be if the traditional IRA is then Roth converted.
Q. 1: Is there something I am missing re an advantage to deferring the Roth conversion?
Q. 2: If he Roth converts this now and if in the future when the value is still $24,200. he takes a distribution of this entire amount, can he deduct the $800. loss and and if so, as a capital loss or where in his Form 1040?
Permalink Submitted by Alan Spross on Mon, 2012-07-02 01:57
For purposes of your question, we need to assume that there are no other TIRA or Roth IRA accounts, just these two. Even with that, the answer can be very complicated.
1) No, just the aspect of how best to utilize the remaining $800 of basis not applied at the time of conversion.
2) The unused basis does not transfer to the Roth IRA when the conversion is 24,200. The Roth has it’s own basis of 24,200. The other $800 remains in the TIRA. Since the conversion closes your TIRA, you could take the $800 as a misc itemized deduction on Sch A subject to 2% of AGI. But many people cannot itemize in that particular year, or the 2% eliminates much of the $800 or perhaps AMT eliminates misc deductions. So what happens to the $800 then, regarding future application?
The Form 8606 instructions indicate that the next 8606 you would file in a year following total conversion picks up prior basis from line 14 of your prior 8606. However, if you converted your entire TIRA account, and did not make a current year contribution, there is no line 14 completed because Part I is not completed if you do a 100% conversion. It is reported only in Part II. Since there is no line 14, the remaining basis is lost. If you want to preserve the basis, simply convert all but $10 of your TIRA since now you don’t have a full conversion and Part I including line 14 is completed and your remaining basis lives on for future use.
OK, now suppose that you DID make your last 5,000 contribution in the year you converted. Now you DO complete Part I and your line 14 will show the remaining $800 for future use.
In summary, if you want to preserve the $800 for future use, either make a regular non deductible contribution in the year of the conversion OR leave a small amount behind by not making a total conversion.
Again, your Roth basis can only be the amount of your actual Roth contributions, so if you convert 24,200 then that is your Roth basis, not 25,000.
Permalink Submitted by fairira on Mon, 2012-07-02 18:54
Alan, thank you so much for your prompt and helpful reply. You answered my questions clearly and once again I am so impressed by your extensive knowledge.
Re other IRA accounts, there is no other TIRA. There is a pre-existing RIRA which would be used to “receive” the discussed conversion. I do not know what that RIRA’s current value or basis is though its value is probably more than its basis since it was established about 10 years ago when mutual fund prices were generally lower than currently.