Can I, when converting an IRA, with taxable gains, to a ROTH, use losses from my taxable accounts to offset the tax liability?

[dward351]

I'm 71 and have not made any contributions in the IRA for years. The gains are equity positions held in the IRA.

[VolvoGirl]

No.  You don't get taxed on the gains or losses in IRA accounts.  You get taxed on the whole distribution as regular income tax (over your basis if any).  The basis is any non deductible contributions you made.  So when you convert to a ROTH the whole amount is taxable.  

If you have realized losses in your taxable accounts you can deduct up to 3,000 on your tax return after any gains.  The rest you have to carry over to next year.  So at least 3,000 will reduce your income and conversion.

[Opus 17]

The whole point of a traditional or Roth IRA is that nothing that happens inside the account matters, gains and losses don't count.  The only thing that counts is how much you take out.

[rjs]

Are you saying that you have capital losses in a taxable investment account, separate from your IRA? In order to use the losses in the taxable account you have to actually sell the investment that has the loss. You can't claim a loss from an investment that has declined in value, but that you still own.

When you convert a traditional IRA to a Roth IRA, the amount that you convert becomes taxable income. It is ordinary income, not a capital gain. The fact that the investments in your IRA have increased in value over the years makes no difference. The taxable income from the conversion is simply the total amount that you convert.

Why do you say that the IRA has taxable gains? As the others have said, gains in an IRA are not taxable as long as the money remains in the IRA. When you take money out of a traditional IRA, including to convert it to a Roth, all of the money that you take out is taxable income.

If you have capital losses from sales in your taxable account, those losses will first offset any taxable capital gains that you have. If the losses are more than the gains, up to $3,000 of the remaining losses will offset ordinary income, including the income from the Roth conversion. Any remaining loss will be carried over to the following year.

It's not a question of whether you can use the capital losses to offset the taxable income from the Roth conversion. You have no choice about how capital losses are used. They must be applied as specified in the tax law, and as I have described. TurboTax will do this automatically.

[Opus 17]

Or to put another way, the increased value of your IRA is NOT a capital gain, by operation of law (how IRAs work).  So the increased value of an IRA can't be offset with capital losses in non-IRA accounts.