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"Sorry, your impression is incorrect. IRAs are like Vegas - what happens in the IRA (at least as far as cost basis and gains) stays in the IRA. Your taxable amount is the value of what you are converting when the conversion occurs. If you have any basis from non-deductible contributions in the IRA that was previously reported on a Form 8606, your entries on the Form 8606 will adjust the conversion amount appropriately.

AJ "

Hmm...I guess that makes sense. It certainly makes things easier. However, it also means that if a person converts early or midway through the year and there is a sizeable tax bill owed, then at the end of the year (like last December when the stock market took a nose dive) if there is a drop in the account and the account value is worth much less, then you would be paying taxes on an account that fell in value and should be paying less taxes on it.

I think there was an article about some change in the laws regarding conversions back to an ira in scenerios like the one above where people who had converted earlier in the year then wanted to reconvert back because the value of the acct fell but they had to pay taxes (like being in the bucket) on non-existent gains come end of year. The new changes somehow prevented the ability to reconvert or made it harder...or there was some deadline for it. Need to find that article again. That would be a good reason to wait until near the end of the year.
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