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Here is a specific example that illustrates my question. I am getting conflicting answers outside of this board.

I leave an employer with a 401(k) balance of $20,000 in 1997. I roll it into a Standard IRA in the same year. In 2002, I decide to convert the IRA to a Roth IRA; however, my balance has fallen to $15,000 while in the Standard IRA.

I'll make an assumption that there were no after-tax contributions to the 401k. In other words, the basis in the 401k is zero. Further I'll assume that there are no other IRA accounts with non-deductible contributions involved.

The rollover from the 401k to the IRA was not a taxable event. So the basis in the IRA remains at zero.

When you convert to a Roth, you are taxed on the FMV of the account, unless there were after-tax contributions. Since I have assumed those away (and I hope that matches your facts), $15,000 is taxable as ordinary income in 2002.

You don't have a loss for tax purposes, since you've never paid tax on any of this money. The decline in value from $20k to $15k is immaterial in calculating the taxable amount of the Roth conversion.

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