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[[I've only had the IRA open for a year and a little bit, and have managed to actually lose money in it
during that time period (another problem altogether). Now, I know that if I converted an IRA that
was in the black, I would have to pay the capital gains and an early withdrawal penalty. The
question is, if I convert an IRA that is currently underwater, do I get any tax benefit?]]

Some assumptions are in order. We must assume that this is your ONLY IRA...and not necessarily one of many. We must also assume that your original IRA contribution was a non-deductible contribution. If those assumptions are true, you would have no current tax issues relative to the least as I understand the law.

If the IRA were a deductible IRA when it was made, you will still have to spread the FMV of the remaining balance of the IRA over the 4 year tax period and pay tax (but no penalty) on the conversion.

Hope this helps...
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