Conversion of traditional IRA to Roth IRA

[Linda Mathey]

I have a client with a traditional IRA valued currently at $30,000 however his basis is $60,000+. He wants to convert the IRA to a Roth.

The rules on recognizing a loss on a traditional IRA require that all amounts in the IRA be distributed and if the total distributions are less than any unrecovered basis then a recognized loss is shown on Schedule A.

My question is this...since a Roth conversion would require him to pay tax on the distribution and since it would represent a distribution of all amounts in his IRA is he eligible to take a loss upon conversion or does he have to wait until all amounts in the Roth are distributed?

[kcjenkins]

[i edited your topic title for you.]

Here's a link to a good source of info on conversions of IRA to ROTH.

My link

[Don in Upstate NY]

I have a client with a traditional IRA valued currently at $30,000 however his basis is $60,000+.

Do you mean he paid $60,000 for the stocks currently in his IRA or do you mean that he did not take any tax deductions for the $60,000 and filed a Form 8606 every year instead?

[Linda Mathey]

[i edited your topic title for you.]

Here's a link to a good source of info on conversions of IRA to ROTH.

My link

KC,

Thanks for the link. It is a good article however it does not address my question.

If my client were to take the entire amount of his IRA out as a distribution with his basis being 200% of the FMV of the distribution two things would occur. First he would pay the tax on the FMV of the distribution and secondly he would be able to deduct a loss on Schedule A for the amount by which his distributions are less than his basis. This is because he totally liquidated his traditional IRA.

My question is if he converts his total traditional IRA to a Roth IRA and pays the tax on the FMV of the total distribution is he entitled to take an offsetting loss on Sch A since his distribution is less than his basis?

[Linda Mathey]

Do you mean he paid $60,000 for the stocks currently in his IRA or do you mean that he did not take any tax deductions for the $60,000 and filed a Form 8606 every year instead?

He contributed $60,000 in total to his IRA. The value of his account currently is $30,000 because the investments have lost $30,000. I am not sure if he filed an 8606 or not. I will check. If the contributions were non-deductible,am I correct in assuming he is entitled to the loss since he has basis in the losses? Assuming these were non-deductible contributions would the conversion to a Roth IRA trigger the losses?

[kcjenkins]

Assuming, as is most likely, that these were all deductible normal IRA contributions, he would pay tax on the $30,000 he takes out, and he would not be entitled to deduct the loss. If part was non-deductible, he could deduct that loss, since he took the total distribution, assuming this was his ONLY IRA. Remember, it's a total distribution from ALL IRAs, to qualify to deduct the loss.

[Lion EA]

If these were deductible normal IRA contributions, then he has zero basis and zero loss.

[Linda Mathey]

If these were deductible normal IRA contributions, then he has zero basis and zero loss.

Thanks everyone for your responses. His contributions were non-deductible so he gets the loss. It will help to some extent to mitigate the tax on the conversion.

[Linda Mathey]

Assuming, as is most likely, that these were all deductible normal IRA contributions, he would pay tax on the $30,000 he takes out, and he would not be entitled to deduct the loss. If part was non-deductible, he could deduct that loss, since he took the total distribution, assuming this was his ONLY IRA. Remember, it's a total distribution from ALL IRAs, to qualify to deduct the loss.

Thanks KC I appreciate your input. He confirmed it is his only IRA and he has filed 8606's each year.

[Joel]

If he has a basis of $60,000 this means he has put in nondeductible contributions over the years and files 8606 each year and the present value is $30,000 then if he cashes in the entire IRA nothing is taxable and $30,000 is deductible on Sch A. If he converts the $30,000 to a ROTH none of it will be taxable this year.

[jainen]

>> he has filed 8606's each year<<

I would want to take a look at some of those. I have an uncomfortable feeling about this scenario You mean he has been making non-deductible contributions for twenty years? Including the last twelve yars when Roth accounts were available for most taxpayers? By the way, why is he changing tax advisors at this time of a questionable conversion?

[Margaret CPA in OH]

Jainen, I just noticed that you are now a Guru! We've known it all along but I just noticed. Congratulations even though it must have happened a day or so ago.

[Linda Mathey]

>> he has filed 8606's each year<<

I would want to take a look at some of those. I have an uncomfortable feeling about this scenario You mean he has been making non-deductible contributions for twenty years? Including the last twelve yars when Roth accounts were available for most taxpayers? By the way, why is he changing tax advisors at this time of a questionable conversion?

I have reviewed the last two years tax returns and the 8606's are in line with what he is telling me. No idea why he did non-deductible vs Roth's. He retired and moved to be closer to family. I will ask how many years he has so I can make sure but I think he is legit.

Thanks for raising an excellent question though.

[kcjenkins]

Probably started making the non-deductible IRA contributions before the ROTH was available, and just continued doing it the same way without thinking about it. Or not realizing that there was a reason to change. Sure, his preparer should have explained it to him, but they may not have given it much thought, or they may have brought it up and he did not understand the differences and just decided to stay with what he was used to doing.

[Linda Mathey]

Probably started making the non-deductible IRA contributions before the ROTH was available, and just continued doing it the same way without thinking about it. Or not realizing that there was a reason to change. Sure, his preparer should have explained it to him, but they may not have given it much thought, or they may have brought it up and he did not understand the differences and just decided to stay with what he was used to doing.

I am sure that was what happened. Now it really doesn't matter since there not only are no earnings on the money, he has a loss.

Thanks everyone for your responses. It is nice to know that you are out there when I need another opinion!

[jainen]

>> it really doesn't matter <<

In my opinion, it matters very much! If kc's GUESS is right, well & good. But if it is wrong, maybe he pasted up a couple of year's worth of forms and came to see you when his last accountant told him he could not deduct the $30,000 loss within his IRA.

Okay, I confess I am a suspicious cynic--but I notice you still haven't explained why he is switching tax advisors right in the face of this unusual transaction, and in your most hurried week, no less.

[joanmcq]

Maybe he didn't qualify to contribute to a Roth due to income limitations? Just my 2 cents. When I worked for a firm that had really high income clients, had some that made nondeductible contributions every year, even when putting 2K each into an IRA was real chump change to these millionaires. I'm going to bet they are all converting this year!

If you doubt it, look at the 5498s & pull some transcripts.

[Linda Mathey]

>> it really doesn't matter <<

In my opinion, it matters very much! If kc's GUESS is right, well & good. But if it is wrong, maybe he pasted up a couple of year's worth of forms and came to see you when his last accountant told him he could not deduct the $30,000 loss within his IRA.

Okay, I confess I am a suspicious cynic--but I notice you still haven't explained why he is switching tax advisors right in the face of this unusual transaction, and in your most hurried week, no less.

Yes, you are suspicious. I believe in my earlier post I told you he retired in 2009 and moved from out of state to my area to be close to family. I already do one of his family members so that is how I ended up with him. I asked him how far back he kept his returns and he said he has over 25 years worth. He said he will bring them in if we need them to take a loss.