Never convert Backdoor Roth, do I need to pay taxes for the gain. Have separate acct for Backdoor Roth. Do I pay taxes on gain when convert? Only have 401K and Roth.

[dmertz]

If the amount in your traditional IRAs exceeds your basis in nondeductible traditional IRA contributions as is apparently presently the case, some portion of your Roth conversion will be taxable.

Traditional IRAs are not segregated between earnings and other amounts.  Traditional IRAs simply contain some Fair Market Value (total balance) and some amount of nondeductible contributions.  Perhaps your balance happens to exceeds your basis by the amount of earnings in a particular IRA account, but that's not really relevant.  It doesn't matter how the amount that is in excess of your basis came to be in your IRAs, whether it be from investment gains or from deductible contributions.  The amount that is in excess of your basis is taxable when distributed (and not rolled over) or converted to Roth.

[hugmonica]

SIGH!  I understand now... sadly say "should've converted the same year we made contributions.  We didn't know.  Sometimes, Financial advisor are a sales only.  This is the lesson we pay price to learn.  Thanks again,  I'd like to comment how helpful I received from you people... but, couldn't find the area let me make comments.  Anyway, thanks a LOT.  

[hugmonica]

Now, I have another question... It seems I will be required to pay capital gain (dividends + price growth).  It's long term capital gain, right?  (it's over 1-1/2 years since my last contribution).  Can I use the long term carryover loss to offset my long term gain?  thanks...

[dmertz]

No.  Investments in an IRA are not subject to capital-gains treatment.  Taxable amount distributed from an IRA are taxed as ordinary income.

[hugmonica]

Thanks... So, can I use long term carry over loss to offset my ordinary income?

[macuser_22]

No.  Gains and losses within a IRA only increase or decrease the IRA value and are not reportable outside of the IRA.  (There was a provision that allowed a 2% of AGI itemized deduction of loss of IRA basis when all IRA accounts were liquidated and the total distribution was less that the unrecovered after-tax basis but Congress eliminated that for 2018-2025).

[hugmonica]

What I meant is I am going to convert IRA to Roth.  I know it will generate gain/ordinary income.  Can I use carryover loss to offset the conversion tax liability?

[dmertz]

After being applied against capital gains, $3,000 of capital losses (or all of you remaining capital losses, whichever is less) can be applied against ordinary income per year.  The remainder of your capital losses carries forward.

[hugmonica]

Thanks... say I have $50K carryover loss, my Nod Deductible IRA acct has $60K balance including $20K gain (net of contribution basis).  I plan to convert ALL $60K to Roth this year.  I assume I don't need to pay taxes on the basis of $60K (accumulated over years).   Can I apply $20K to offset $50K carryover loss ... without paying any taxes?...

[Critter]

NO .... you cannot net cap losses directly against ORDINARY income ... ALL distributions from the IRA are treated as ordinary income.  All you can do is net cap gains against any cap losses that you have and then you are limited to no more than $3000 of cap loss against ordinary income per tax year.  If you sell no stock this year but convert the $60K to a roth you will pay taxes at an ordinary income tax rate on $17K ( $20K - $3000) and the rest of the $47K loss is carried forward to the next tax year.

You have to stop thinking that any of the earnings in the IRA are capital anything even if you were invested in the stock market.  What happened inside an IRA has no bearing on the tax treatment of the distributions.  That is the deal with IRAs... they are called tax shelters for a reason ... you put ordinary income in it today and avoid ordinary income taxes on that contribution AND the earnings are sheltered from taxes as long as they stay in the IRA  HOWEVER once you take any distributions (after the basis is considered on the non deductible contributions) they are ALL taxed as ORDINARY income.

[macuser_22]

Are you saying that you have a Schedule D capital loss carryover from 2018 that will carry to 2019?  As dmertz said, first the capital loss carry over is applies to any new Schedule D gains and any reaming carryover will offset up to $3,000 of ordinary income.   Any remaining capital loss will carry to 2020.

(You do know that you must report and use the $3,000 ordinary income capital loss reduction every year after the capital loss occurred without skipping a year, don't you? - assuming that you had a tax liability each year to offset.

[hugmonica]

VThank you macuser_22!  Very GOOD explanation.  I understand now.. yes I have a LOT carry over loss and use $3000 to offset my ordinary income from brokerage account every year.   BTW, can I convert certain % of NonD to Roth of reduce taxes this year?  Convert certain % next year?  (anyway, we lost timing to convert in the same year.)  We are semi retire and want to reduce our taxes.  All I mentioned as above is our NonD issues.  

[macuser_22]

You can convert as little or as much each year that you want to.  It is often a good tax strategy to only convert as much each year that does not push you into a higher tax bracket because of the taxable amount of the conversion.

(I don't know if you are close to age 70 1/2, but keep in mind that at 70 1/2 you must start taking RMD's (Required Minimum Distribution) from Traditional IRA's and no part of a RMD can be rolled over of converted to a Roth so you would want to complete the Roth conversions prior to that age.)

[hugmonica]

Thanks... understood.  Yes, I am 65 this year and 5 years to go... My husband has 3 years to go.  But, based on my knowledge, IRS will NOT required him for RMD but can use my age to do RMD.  Do I understand correctly?  

[macuser_22]

No.  IRA's are *Individual* Retirement  Accounts.   Each IRA owner has their own RMD based on the owners age starting in the year that the IRA owner turned 70 1/2.   The spouses age has nothing to do with it.   (RMD's are not required for Roth IRAs).