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I have a follow-on question for you and the rest of the board. Let me pose it as a scenario:

Suppose in year #1 I make a $5,000 non-deductible Traditional IRA contribution. I subsequently buy $5,000 of IVV. (iShares S&P 500 ETF) Then something happens to the market and my shares of IVV are now worth $4,000. Now I do a Roth IRA conversion and the value of my conversion is only $4,000.

Now in year #2 I make a similar $5,000 non-deductible Traditional IRA contribution. Again I invest in IVV and the market goes up instead. When I do the Roth IRA conversion, I convert $6,000.

Do I have a $1,000 taxable event?

As I understand this scenario after the conversion in year #1 the traditional IRA retains a $1,000 cost basis from the first contribution after $4,000 has been converted to the Roth IRA. After the $5,000 contribution in year #2, the traditional IRA now has a cost basis of $6,000. This should mean the conversion in year #2 is effectively tax-free.

So what's the correct answer? Did I have a taxable event in year #2 or not?

- Joel
PS: I think the correct answer is No.
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