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>> Why take the $25 fee from the IRA unless you have to? Pay it separately so the money can stay within the IRA and continue to compound. Payment will have no impact on your tax filing other than to reduce your taxable income by $25 because the conversion income will be that much less if you pay the fee within the IRA. Hardly seems worth it to me.>>

NOW you tell me! :)

I set up non-deductable IRAs last Dec. for myself and my wife so that I could get a head start on our Roth IRAs, and in Jan. of this year converted them to Roths. I was unaware that it was possible to pay the conversion fees (actually a $25 termination fee for each of the traditional IRAs) OUTSIDE of the IRA. Since the conversion was made fairly quickly, I only have a few dollars of money earned within the accounts before the conversions. From what you've said above, it looks like these fees will offset the measly few bucks that we earned in these accounts, and so I will not need to report this money as gains. Is this true? If so, can I use the additional difference between the earned money and the fees paid to reduce my taxes?

ie, I guess I'm asking what happens if you report a net LOSS, and not gain, when making a Traditional/Roth IRA conversion. Is the loss (the difference between your non-deductable contributions and the net value after conversion) subtracted from your income, is it considered a capital loss (short term?) and thus can only offset capital gains if you're already above the $3000 capital loss threshold, or what? I hope not too many people will encounter this situation after the great bull market of the past few years, but then again there are lots of bad investments out there, and this situation must have been anticipated.

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