Negative Gain Roth IRA conversion

[SR5060]

As many probably have this year, my non-deductible IRA contributions for the year have a negative unrealized gain right now. As far as I can tell, if I convert this account to a Roth IRA, the negative gain will effectively be lost rather than be treated as a deduction. is this correct? and if so, are there other ways I can manage the accounts to maximize the use of the losses? 

[Anonymous_]

@Mike9241 

[dmertz · Accepted solution]

Correct.  Prior to the Tax Cuts and Jobs Act of 2017 you could claim a deduction subject to the 2% of AGI floor for the unrecoverable basis, but the TCJA suspends until 2026 deductions subject to the 2% of AGI floor.

Since it's not clear that your basis remains for future use if you make a complete distribution of your entire traditional IRA balance, I suggest leaving a small balance in your traditional IRAs to ensure that the basis carries forward to be able to be applied to future traditional IRA distributions.

[SR5060]

Great thanks, so the basis in this case is not reduced proportionally to what is converted? But the net excess loss would be effectively carried forward fully through the account?

[dmertz]

"so the basis in this case is not reduced proportionally to what is converted"

If your basis is more than the amount that you have in traditional IRAs, the amount of basis that is applied to any traditional IRA distribution is equal to the distribution.  See the calculation on Form 8606 where line 10 in not permitted to be more than 1.000.

[fanfare]

your loss is just as likely to be gained back in a Roth IRA as in a traditional IRA.

Converting a smaller amount now means less tax.

@SR5060 

This assumes your IRAs are self-directed, which is the best path into the future.

[dmertz]

@fanfare , the traditional IRA contribution was nondeductible.  Retaining a small amount in the traditional IRA to preserve the basis will reduce the taxable amount of a future traditional IRA distribution.  The present  distribution (Roth conversion) will already be nontaxable because it consists entirely of basis.

[fanfare]

how can  any present conversion be non taxable if there is a balance remaining in a traditional IRA?

 by balance I refer to "small prior years basis balance "

to have a prior year basis remaining don't you have to have a real balance?

since it is all prorated how does the present conversion get to be tax free?

If conversion amount is 6,000 can you give an example of prior basis and Traditional IRA year end value that makes the present conversion non taxable and leaves a small basis in the Traditional IRA.?

I can't figure the amounts needed to give your final result.

@dmertz 

[dmertz]

I'm assuming that this is SR5060's only traditional IRA.  If the amount of the conversion  plus the amount remaining at year-end is less than the basis, the entire conversion will be from nontaxable basis.  The amount of basis that remains in the traditional IRA will still be greater than the year end balance, so some amount of basis will eventually be able to be applied to future deductible contributions, pre-tax funds rolled in from a qualified retirement plan or growth in the traditional IRA.  Even if there are none of these in the future, waiting until 2026 to make the final Roth conversion of the small amount will allow unrecoverable basis to be claimed as a miscellaneous deduction subject to the 2%-of-AGI floor and the standard deduction also reverts to half of its present amount.  Of course if the amount of unrecoverable basis is small, it's possible that there won't be enough to itemize and the unrecoverable basis will be lost anyway.

[fanfare]

" If the amount of the conversion  plus the amount remaining at year-end is less than the basis, the entire conversion will be from nontaxable basis.  "

OK I entered this.

It appears to me to be an unusual situation. 

@dmertz 

[SR5060]

The key is that the account is nondeductible, so any overall loss would cause the basis to be non taxable. Especially given that I don't have any deductible IRAs, only 401ks and roths

[dmertz]

To be clear, it's a misnomer to call any particular traditional IRA account a nondeductible IRA (even though Form 8606 is titled "Nondeductible IRAs").  What you have are nondeductible traditional IRA contributions."  Basis in nondeductible traditional IRA contributions do not reside in any particular one of your traditional IRAs (unless you have only one) but apply to your traditional IRAs in aggregate.  Multiple traditional IRAs of a particular participant are treated as a single IRA for the purpose of determining the taxable amount of a distribution (other than an HFD or QCD) from any one of the participant's IRAs.    In this case, though, the fact that you have only one traditional IRA account means that the basis can only be associated with that one traditional IRA.