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Author: andy2003 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 74759  
Subject: Can I use a capital loss to offset Roth tax? Date: 11/11/2003 3:57 PM
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I just took a long-term capital loss on some old tech stock, and I have approx. $9k in a traditional IRA that I'd like to convert to a Roth. I'm in the 27% tax bracket so my conversion taxes would be ~$2430. Can I use the capital loss to offset those taxes, or can capital losses only be used to offset capital gains?
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Author: yobria Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37769 of 74759
Subject: Re: Can I use a capital loss to offset Roth tax? Date: 11/11/2003 4:18 PM
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Good try, but no.

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Author: babyfrog Big red star, 1000 posts Old School Fool Home Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37770 of 74759
Subject: Re: Can I use a capital loss to offset Roth tax? Date: 11/11/2003 4:27 PM
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andy2003,

Your Roth IRA conversion income is considered 'ordinary income' for tax purposes. This page explains the concept on how conversion income is handled: http://www.irs.gov/formspubs/page/0,,id%3D103971,00.html

Your long term capital loss is considered a long term capital loss for tax purposes. The tax code allows you to deduct the long term capital loss against your capital gains first. Only after you 'run out' of capital gains can you deduct a remaining capital loss against ordinary income. And even then, you can only deduct a limited amount ($3,000, or $1,500 if Married Filing Separately if I remember correctly) of your capital loss against your ordinary income. This page explains the concept of capital loss matching: http://www.irs.gov/newsroom/article/0,,id=103509,00.html

Any excess capital losses can be carried over to future years, however, so you don't 'lose' the deduction, you just have to break it out over time.

That $9,000 in your traditional IRA, was the contribution money already taxed? Was your IRA a deductable or non-deductable Traditional IRA? If your IRA was non-deductable, then you have an already taxed basis value in your IRA, and the basis amount is not taxable at the rollover. In other words, if your Traditional IRA is a non-deductable Traditional IRA and you've already paid taxes on $5,000 of the money in the account (because that represents your non-deductable contribution), then you'd only owe conversion taxes on the $4000 in gains above your non-deductable contribution. If, on the other hand, you were able to deduct all of your contributions, then you have a $0 already taxed basis and would owe conversion taxes on all the converted money.

Best of luck to you,
-Chuck

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Author: andy2003 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37771 of 74759
Subject: Re: Can I use a capital loss to offset Roth tax? Date: 11/11/2003 4:50 PM
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Thanks for the info. The full $9k is from a 401k rollover, so none of it was ever taxed. I won't have any capital gains this year, so it sounds like I can just take 27% of the loss off the top of my income, and then the conversion amount is simply added on as additional income and then fully taxed.

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Author: BuildMWell Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37781 of 74759
Subject: Re: Can I use a capital loss to offset Roth tax? Date: 11/12/2003 12:48 PM
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The Capital loss will end up on Schedule D, Line 17 and $3000 of that will be brought forward to your Form 1040, line 13, as a loss. The remaining portion of the loss will be carried over and used next year in the same manner unless you happen to have a capital gain as an offset next year. If not, then you will have another carryover loss to use in 2005 at $3000 per year until the total loss has been used up.

Thus, the loss you have sustained on that tech stock will be used to offset the tax on the IRA conversion to the tune of $3000 ($1500 if you are married filing separately). It all happens on Form 1040 whereas a capital gain would be written off on Schedule D before any remainder is brought to Form 1040, line 13. In the end, you get the thing you wanted which was to use the capital loss to offset the tax on the conversion. Congratulations!





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Author: BuildMWell Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37783 of 74759
Subject: Re: Can I use a capital loss to offset Roth tax? Date: 11/12/2003 1:11 PM
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"...so it sounds like I can just take 27% of the loss off the top of my income..." Andy2003

If your capital loss was $11,111.11, the answer is yes. If the loss was anything else, the answer is no. Try it, 27% of $11,111.11 is $3000. You will take $3000 of the loss off of your income this tax year.

You will take $3000 of the capital loss off on line 13. You will show the $9000 Roth roll-over on line 15a. The difference of $6000 will be the net added to your taxable income from both transactions. If you are in the 27% bracket, you will owe $1620 in additional tax.

If your capital loss was more than $9000 but less than $12,000, you will get it all back in tax savings in three more tax years at $3000 each year.



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