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ptheland,

aj485 wrote, Why wouldn't converting just part of the IRA work?

To which you replied, It would work. But what is there to gain by converting when the non-deductible IRA is at a loss? All I see is added complexity for no benefit.

You now have to maintain two IRA accounts - a traditional and a Roth. Not converting leaves you with only the traditional (at least it does given these specific facts.)

You have to continue to track the basis in the traditional IRA AND remember that you've previously used part of that basis in a Roth conversion.


Wait a second! I thought that was exactly the point of this exercise. To keep tracking the cost basis into future years so you can effectively use your market losses instead of just throwing them in the waste bin.

As for remembering, your previous Form 8606 records your running cost basis - you just have to pull that tax return to "remember" how much it was. And that's assuming your broker doesn't remember for you.

As for maintaining accounts? The broker does that. And they do that anyway. The broker will leave my TIRA open for at least a year, even with a $0 balance. That's desirable because otherwise I wind up accumulating a long tail of closed TIRAs just so you have the tax and brokerage statements available for historical reasons. So if you close the account it would seem to create more things to track, not fewer.

Finally zeroing out the TIRA while it has a cost basis loses the cost basis. That's throwing away money. If you have a $100 loss, that could be like $24 of additional taxes you don't have to pay at some point in the future. You know ... like next year. If you don't bother rolling this forward, why do essentially the same thing for capital losses? I mean, you can only use $3,000 of capital losses year year right?

No. Wait. Actually you can use all of it - it's just that only $3,000 counts toward ordinary income. Here every dollar of cost basis you roll forward can potentially be used the next year. And that counts toward your taxes on ordinary income, not just capital gains.

And why keep the funds in the account and wait to convert? Really?! Instead of converting now? I would have thought that was obvious. The more money you leave in the account, the smaller any market increase has to be to use up your excess cost basis. So every non-deductible dollar you leave in that TIRA is effectively costing you in future taxes as your investments increase in value. This is true whether or not you have rolled over cost basis from some previous year.

For instance, let's say you put $1,000 (non-deductible) in a TIRA and the account goes down 10% before you convert. Next you decided to leave the funds in place and contribute another $1,000. Now let's say the market goes up 10% before you convert. That leaves an account balance of $2,090 and a taxable portion of $90. This is your advice. And with this scenario you owe taxes on $90. At a marginal rate of 24%, that's $21.60.

But if you converted all but $1 the previous year as aj485 was essentially recommending, that 10% increase leaves you with a balance of $1,101.10 and a cost basis of $1,101.00. The taxable portion is just 10 cents and taxes owed are 2 cents. That's an immediate tax savings of $21.58.

So tell me again, why should you just convert it all and not worry about preserving the cost basis?

- Joel
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