IRA Loss Deductible

[mactoolsix]

Client (single) with about 175,000 AGI - (thus not eligible for Roth contribution)

Has prior Traditional IRA basis of 11,800 & 200 (2 IRA's - all non-deductible contributions, no earnings)

Contributes 5,000 non-deductible to first IRA = total basis both IRAs = 17,000

Total value of both IRAs = 6,000

Makes a total conversion (6,000) of both IRAs to a Roth - the loss of 11,000 does not transfer to Sch.A - I'm assuming due it being a conversion.

However, if he converted one IRA (5,800) to a Roth, and took an early distribution of the other IRA (200) non-taxable & no early withdrawal penalty, as it is all non-deductible contributions, the loss of 11,000 now carries over to the Sch. A (2% misc). He has other 2% misc deductions, so that a large part of the 11,000 loss becomes deductible.

This doesn't seem correct, however I have rechecked the entries & the 8606 - looks right.

Thanks,
Mike

[Snaggletooth]

Correct

I think this is absolutely correct, and the strategy is to take them OUT of the conventional IRA before investing in the Roth.

However, if they want to rollover into the Roth, I do believe their higher basis would become Roth basis, and at such time as
the value reaches the point where the loss is recovered, the imbedded loss would be deducted from what is considered to be
Roth "earnings." If they rollover, they lose the deductibility of their losses on Sch A for the year of change.

[mactoolsix]

I think this is absolutely correct, and the strategy is to take them OUT of the conventional IRA before investing in the Roth.

However, if they want to rollover into the Roth, I do believe their higher basis would become Roth basis, and at such time as
the value reaches the point where the loss is recovered, the imbedded loss would be deducted from what is considered to be
Roth "earnings." If they rollover, they lose the deductibility of their losses on Sch A for the year of change.

Snags - Thanks for you confirmation

Per Pub 590, the basis in the Roth account is the $$ contributed - thus the basis would be 5,800 (the actual $$ converted) and the loss is not recognized. Working through the 8606 line 17 shows 5,800.

I was just unsure about the 11,000 loss suddenly being deductible just because of a 200 distribution.

Mike

[mactoolsix]

However, if he converted one IRA (5,800) to a Roth, and took an early distribution of the other IRA (200) non-taxable & no early withdrawal penalty, as it is all non-deductible contributions, the loss of 11,000 now carries over to the Sch. A (2% misc). He has other 2% misc deductions, so that a large part of the 11,000 loss becomes deductible.

This doesn't seem correct, however I have rechecked the entries & the 8606 - looks right.

Thanks,
Mike

I think the crutch is that when the conversion is done from the first IRA ($5,800) to the Roth, it closes that account which would wipe out all losses related to IRA #1. Then when the distribution of $200 is done from IRA #2, only a loss related to IRA #2 would be deductible.

Anyone agree, or disagree?

Thanks, Mike

[Roland Slugg]

A loss in an IRA is allowed (as a 2% miscellaneous itemized deduction) only when a taxpayer removes all funds from his traditional IRA. Since your client has done that, his loss of $11k ($17k basis less $6k FMV) is allowable in the year in which he removes the last funds from his traditional IRA. The starting basis of his Roth IRA is $6k.

[mactoolsix]

A loss in an IRA is allowed (as a 2% miscellaneous itemized deduction) only when a taxpayer removes all funds from his traditional IRA. Since your client has done that, his loss of $11k ($17k basis less $6k FMV) is allowable in the year in which he removes the last funds from his traditional IRA. The starting basis of his Roth IRA is $6k.

Thus the whether it was a distribution or a conversion is immaterial?

In the example I gave, he could simply convert the entire amount of all IRA accounts and take the 2% loss deduction. Using Lacerte, it does not automatically do the Sch. A loss unless there has also been a distribution. There is an adjustment entry - which evidently in this case I would need to use.

Thanks to all!!!
Mike

[Roland Slugg]

Nope. A conversion from a traditional IRA to a Roth IRA IS considered to be a distribution. It is a taxable event, the only difference being that the taxable amount ... in your client's case none ... is not subject to the 10% early distribution penalty for taxpayers under 59½. The key requirement is that the taxpayer's entire traditional IRA must be distributed, and this includes any SEP or SIMPLE IRAs he may have.

I don't use Lacerte, so I don't know why you're having difficulty getting it to flow properly. Maybe Lacerte is treating it as a rollover instead of a taxable distribution. Good luck getting it to work.