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Level 2

Backdoor Roth / Unrecoverable Basis

Hi all,

 

I recently made a 2020 tax year non-deductible contribution to my Traditional IRA, intending to then perform a rollover into a Roth IRA to perform the backdoor Roth (as I do annually).

 

However, the contribution was made just prior to the market losses due to COVID, so the $6k contribution is now sitting at about $5,300, still in the Trad IRA. I read in a few forums about an issue related to unrecoverable basis if you then rollover the (now lower) balance into the Roth, but am having trouble understanding this.

 

Just trying to decide if I should just perform the rollover now, or if there is some kind of tax issue related to this. Is there any kind of capital loss I can take / would lose by doing the rollover? Any help is appreciated. Thanks!

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Level 15

Backdoor Roth / Unrecoverable Basis

The unrecoverable basis would normally be treated as a miscellaneous deduction subject to the 2%-of-AGI floor.  However, the Tax Cuts and Jobs Act of 2017 suspended miscellaneous deductions subject to the 2%-of-AGI floor until 2026.

 

Since this deduction was only available if you had a zero balance in traditional IRAs at year end, you might consider or converting less than the full amount in the IRA to preserve the remaining basis until you can either apply it to a future traditional IRA distribution, say, after rolling money over from a 401(k) to a traditional IRA, or until you can claim the deduction in 2026 or later.

 

Investments in an IRA are not treated as capital investments.

 

When using the back-door strategy, it's best to keep the funds in an investment that cannot lose value and convert immediately.  That avoids the situation that you are now facing.