converting ira with losses converting to roth ira

Submitted by Patrick P Bria on Tue, 2015-11-10 18:57

I have a regular IRA for years .It has substantial losses.If I convert to a Roth ira are there any tax advantages for my 2015 Federal tax return due to the losses or do I have to pay federal tax on the value of the portfolio,the depreciated investment assets(common stock).How is the cash portion treated on the conversion?Is it taxable?



Submitted by Alan - IRA critic on Tue, 2015-11-10 20:06

  • If you deducted all your TIRA contributions or rolled over pre tax dollars from a 401k, then any amount you converted is 100% taxable. However, if you had “basis” in your IRA from after tax contributions and all your non Roth IRAs had a balance less than your basis as reported on Form 8606, your conversion would be non taxable, and you would even qualify for a misc deduction for the difference.
  • More likely you might have a mixed situation. For example, you may have a TIRA that once held 100k, and your TIRA basis is 15,000. The IRA is now only worth 45,000 due to losses. Your basis of 15,000 is now 1/3 of your value and any conversion you executed would be 1/3 non taxable. There is no misc deduction in this example because your IRA was still worth more than your basis.  So, the question is do you have a basis in your TIRA (Form 8606)?


Submitted by John J Sullivan on Wed, 2015-12-02 18:20

Over a two year period, $6,000 was contributed to a non-deductible IRA for a total basis of $12,000. In the year following the last contribution, the IRA was converted to a Roth IRA. At the time of the conversion, the account value was $11,400 and was recorded on the tax return for the year of the conversion. Subsequently, the IRS sent notice that the transaction was taxable. Is there any reason to believe that this assertion is correct? To my way of thinking, after-tax dollars converted at a loss, compared to the basis, being taxed again adds insult to injury. Any thoughts?Thanks, John



Submitted by Alan - IRA critic on Wed, 2015-12-02 18:52

Sounds like the conversion took place in a year in which no non deductible contributions were made. Form 8606 should have been filed for each prior year when these contributions were made. Line 14 on the prior year 8606 should have shown the accumulated basis of 12k. In the conversion year, the entire TIRA balance was converted, and Form 8606 should again have been attached with only Part II completed. 11,400 would be entered on line 16, 12,000 on line 17 and 0 on line 18 and also there would be nothing on line 15b of Form 1040. An IRS request for taxes due is almost always the result of an incorrect 8606 being filed or in some cases NO 8606 being filed. 



Submitted by John J Sullivan on Thu, 2015-12-03 21:07

Thank you.



Submitted by David Mertz on Wed, 2015-12-02 19:30

  • Generally speaking, the IRS is taking issue with the amounts you reported on the Forms 8606 that you filed for the years for which you made nondeductible traditional IRA contributions or the Form 8606 for the year in which you did the Roth conversion.
  • Note that there is no such thing as a nondeductible IRA, only nondeductible contributions to IRAs.  Your Roth conversion of the account to which you made the $12,000 of contributions cannot be converted in isolation from other traditional, SEP or SIMPLE IRA accounts that you have.  On the Form 8606 for the year of the conversion, the amount on line 6 must be the total of  the year-end balances of all of such accounts.


Submitted by John J Sullivan on Thu, 2015-12-03 21:07

Duly noted, thank you.



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