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I have no other traditional IRA. If I buy a traditional IRA for $1,000 and the market goes down and it's worth $800 when I convert it to a Roth IRA, then there's a loss of $200.

Next year, I buy another traditional IRA for $1,000 and the market goes up and it's worth $1,200 when I convert it to a Roth IRA. Does this $200 gain get offset by the $200 loss last year so there is no tax on this conversion?

Thank you, Ken
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No.
That's not how it works.
Money in a Roth is never taxed again (was already taxed). Money in a traditional IRA was never taxed so it is always taxed on withdrawal, distribution or conversion (except some edge cases).

No gains or losses are reported for taxation for either.

And you don't buy or sell an IRA of either type. You contribute to or distribute from them.
Terminology is important!
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Does it matter if it’s a non-deductible traditional IRA?

Thank you, Ken
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Providing these were tax-deductible TIRAs the taxable income on the first conversion was on $800 and the taxable income on the second conversion is $1,200. There is no taxable loss or gain to be reported.

Not certain what happens if the TIRAs are after-tax.
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My original post should have stated that it's a non-deductible traditional IRA that I was converting to a Roth IRA. Would the gains and losses be offsetting each other when I make the conversion?

Thank you, Ken
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My original post should have stated that it's a non-deductible traditional IRA that I was converting to a Roth IRA. Would the gains and losses be offsetting each other when I make the conversion?

Restating the assumption: The owner has no Traditional IRAs at the beginning of this exercise.

- Owner makes $1000 non-deductible contribution

- After contribution has decreased in value to $800, owner wants to convert to Roth IRA

- I would suggest converting less than the entire IRA, say, $700. That will allow the owner to maintain the non-deductible basis.

- This leaves the owner with a Traditional IRA of $100 that has a $300 basis

- Over the next year, the $100 gains $10, so there is now an IRA of $110 with a $300 basis

- Owner makes additional $1000 non-deductible contribution

- This gives owner an $1110 IRA with a basis of $1300

- When value reaches $1300, owner converts entire IRA to Roth IRA. No taxes will be owed because the amount converted is exactly offset by the basis.

AJ
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Let's go back to your original question, with the added info that these will be non-deductible contributions to a traditional IRA. I will also assume that these are your only traditional IRAs. This assumption makes a huge difference, so if that's a bad assumption, please say so.

If I [buy] [corrected to "contribute to"] a traditional IRA for $1,000 and the market goes down and it's worth $800 when I convert it to a Roth IRA, then there's a loss of $200.

That would be a miscellaneous itemized deduction. Because those are no longer allowed under current tax law, you would get no deduction.

Next year, I [buy] [corrected to "contribute to"] another traditional IRA for $1,000 and the market goes up and it's worth $1,200 when I convert it to a Roth IRA. Does this $200 gain get offset by the $200 loss last year so there is no tax on this conversion?

No. Each year stands on it's own unless there is some specific carryover provision in the law. Since there is no such provision for this particular case. You would pay tax on the $200 of gain at the time of conversion. This would be ordinary income, not a capital gain.

--Peter
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- After contribution has decreased in value to $800, owner wants to convert to Roth IRA

- I would suggest converting less than the entire IRA, say, $700. That will allow the owner to maintain the non-deductible basis.


I would advise against making the conversion at all. Change investments in the IRA as desired, but wait until the value of the IRA has recovered to the original $1000 basis before making the conversion.

Alternatively, wait until after the second $1000 contribution. Then convert the $800 at that point. You would have a $2000 basis with an $800 conversion, leaving $1200 of basis in the IRA. When the remaining traditional IRA has gained to $1200 of value, then convert the balance. The $1200 basis would offset the $1200 FMV and there would be no income to include on the tax return.

One more alternative - wait until the end of the scenario, then convert the entire IRA at that point. Ignoring what happens to the first investment while waiting for the second to increase in value, you'd have $800 + $1200 of value and $2000 of basis. Again, they'd offset and there would be no gain to include in income.

The big potential mistake in this situation is converting the first IRA when the value is less than the basis.

--Peter
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Thank you all for your responses. They were very helpful.

Ken
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I would advise against making the conversion at all. Change investments in the IRA as desired, but wait until the value of the IRA has recovered to the original $1000 basis before making the conversion.

Why wouldn't converting just part of the IRA work? The basis would still be maintained. I get why you wouldn't want to convert the entire IRA, because then you would lose the basis. But converting part of it should work, shouldn't it?

AJ
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Why wouldn't converting just part of the IRA work?

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.

--Peter
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If the person doesn't have any after tax contributions to an IRA wouldn't the simplest answer to convert the TIRA to a ROTH the next day? There would be minimal tax consequences.
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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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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.

I think you misunderstood me. My point is NOT to make a partial conversion when the IRA is worth less than it's basis. You are gaining nothing by converting.

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.

In reverse order, your broker CANNOT remember for you. You could have traditional IRA accounts at a different broker. Any one broker does not know what activity is happening in those other accounts. Also, your broker does not know whether your IRA contribution is deductible or non-deductible. They are not privy to that information. Yes, the information is on Form 8606. So how often do we see people here asking questions but who don't know if they've ever made a non-deductible contribution? Will you actually remember what year has the most recently filed 8606? Will you remember that you even made a non-deductible contribution?

Finally zeroing out the TIRA while it has a cost basis loses the cost basis.

Yes. I'm the one in the thread who definitively answered that question.

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.

Why wait long enough to accumulate a loss at all? If you're doing a backdoor Roth contribution, make the necessary conversion as soon as practical so there are no issues about gains or losses in the traditional IRA. But that's not the fact pattern we were given.

By leaving a small amount in the IRA ($100 vs. a $300 remaining basis in aj's example), you have to have your IRA triple in value to use up the remaining basis. By not converting, you merely need a 25% gain. (From $800 to $1000.) That's going to happen sooner and get all of the funds to their final destination (the Roth IRA) quicker.

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

Go back and read my post again. I never argued for that outcome.

--Peter
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ptheland,

I wrote, 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.

To which you replied, I think you misunderstood me. My point is NOT to make a partial conversion when the IRA is worth less than it's basis. You are gaining nothing by converting.

I'm fairly sure I didn't misunderstand you. Also I didn't realize this thread was about your point. I thought it was about Ken288's question about using and dealing with a loss in the IRA before doing a conversion. I disagree with what you seem to be advising him to do because I don't think the math supports it.

Also I'm thinking that you probably didn't understand my point. My point is I think you are wrong. And I think the math clearly supports my assertion. You could make an emotional or convenience argument, but I'm pretty sure that the math doesn't. I tried to illustrate that point with examples.

I showed that there is financial advantage to doing conversions early and often regardless of gains or losses. It doesn't matter if you are carrying a loss forward or you have a gain, financially you gain the most by converting as much as you can as soon as you can. (Or at least as soon as you can remember.) If your cost basis is more than your available balance, you maximize this loss by carrying it forward; but it's still most advantageous to convert as much of your balance as you can as soon as you can - which in this case means leaving something in the IRA so that the cost basis doesn't get wiped out. I'm pretty sure I explained why this is so.

I also wrote, 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.

To which you replied, In reverse order, your broker CANNOT remember for you. ...

I realize they can't track everything because they can't know about other accounts at other brokers. But some brokers do try. Vanguard might not, but Merrill certainly does. They ask about deductibility of contributions and they report it as part of the 1099-R when you do conversions. So even though you should be tracking it, some brokers may have the information you need - because they asked and recorded your answers when you made your contributions and they're assuming they have all of your IRAs.

And, Finally zeroing out the TIRA while it has a cost basis loses the cost basis.

To which you replied, Yes. I'm the one in the thread who definitively answered that question.

Well since you whined about it, I'm pretty sure aj485 actually mentioned that first in this thread. You probably mentioned first in a prior thread, but not here.

Also you took my statement out of context. There was much more to it than that. What you quoted was just an opening preamble to another point I was trying to make that I assume you didn't bother reading.

Also, 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.

To which you replied, Why wait long enough to accumulate a loss at all? If you're doing a backdoor Roth contribution, make the necessary conversion as soon as practical so there are no issues about gains or losses in the traditional IRA. But that's not the fact pattern we were given.

Because plans are something you do in the future and mistakes are something you do in the past? Also it's almost impossible to make a TIRA contribution and convert it the same day.

Did you read a different original post than me? In fact the fact pattern you were given started out as, I have no other traditional IRA. If I buy a traditional IRA for $1,000 and the market goes down and it's worth $800 when I convert it to a Roth IRA, then there's a loss of $200. ...

That looks a lot like the a fact pattern I was addressing. Were you conflating this thread with another one?

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

To which you replied, Go back and read my post again. I never argued for that outcome.

Well I guess I reached that conclusion from this exchange you had with aj485 where she wrote, Why wouldn't converting just part of the IRA work?

And 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.

That just seemed to me that you were advocating a convert-it-all approach. And even if you weren't, I also make an argument that waiting to use up the cost basis also makes no sense. My argument in either case stands. Convert everything early and often. If you have a net loss, the most mathematically sound thing to do is to convert most of the TIRA in order to preserve your cost basis so you can roll that loss into the next contribution period.

- Joel
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Let's just address this one point:

Well I guess I reached that conclusion from this exchange you had with aj485 where she wrote, Why wouldn't converting just part of the IRA work?

And 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.

That just seemed to me that you were advocating a convert-it-all approach.


That is not what I was saying. I was advocating making no conversion at all until the account regained it's losses. Once the traditional IRA recoups the losses, convert it all at that point and be done with all of the basis issues in one fell swoop.

If you do a partial conversion, you have to make sure that you find out and keep apprised of any low balance issues at your broker (things like added fees or forced account closure). If no additional funds are added in the future, it will take a lot longer (because of the smaller amount invested) to recoup the loss, forcing you to keep track of your remaining basis for a longer time. These are just a couple of the added complexities I was referring to.

--Peter
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