Let’s say I contributed $5,000 into a non-deductible IRA each of the past 3 years. This is the only IRA I have. So my basis is $15,000. Right now, the value of the IRA is $12,000. If I convert this IRA to a ROTH IRA, what happens to the $3,000 of basis not used?
If I put a new $5,000 into a non-deductible IRA this year, can I say I have a $8,000 basis?
Thank you, Ken
Let’s say I contributed $5,000 into a non-deductible IRA each of the past 3 years.
Presumably, you filed a Form 8606 to document the non-deductible contribution for each of those 3 years. If not, now would be the time to do so.
This is the only IRA I have.
This is important. The answers would be different if you have any T-IRAs with pre-tax money, including contributions, rollovers and/or earnings.
So my basis is $15,000. Right now, the value of the IRA is $12,000. If I convert this IRA to a ROTH IRA, what happens to the $3,000 of basis not used?
Before the TCJA, you would have been able to deduct this loss as a miscellaneous deduction by closing out the IRA through the Roth conversion. As with all miscellaneous deductions, it would have been subject to the 2% of your AGI floor (so your AGI would have to be less than $150k for a $3k loss) and your total Schedule A deductions would need to be more than your standard deduction in order for you to get a tax benefit.
However, since the TCJA did away with miscellaneous deductions (at least until 2026), you don’t get the benefit of a miscellaneous deduction from the loss by closing out your IRA.
If I put a new $5,000 into a non-deductible IRA this year, can I say I have a $8,000 basis?
I will suggest that there would be a better trail if you make the 2022 non-deductible contribution before you do any conversion to Roth accounts during 2022. But in going through the Form 8606 https://www.irs.gov/pub/irs-pdf/f8606.pdf the amounts asked for are on an annual basis. So my take on it is that by making your 2022 contribution, you would preserve the $3,000 basis from the prior years, giving you an $8,000 basis in your non-deductible IRA.
AJ
AJ:
Say I do make another $5,000 non-deductible contribution in 2022. Then my cost basis would be $20,000. The value would be 17,000. Now, I convert the IRA to a Roth IRA. Does this mean I will have $3,000 cost basis for future use?
Thank you, Ken.
A thought: If you are eligible for pre-tax contributions to a 401K or other retirement account, rolling over $3,000 to you IRA would increase the value without increasing the cost basis.
Say I do make another $5,000 non-deductible contribution in 2022. Then my cost basis would be $20,000. The value would be 17,000. Now, I convert the IRA to a Roth IRA. Does this mean I will have $3,000 cost basis for future use?
Backing up everything one year, so the current Form 8606 can be used to figure your basis for 2021: Entering your numbers into Form 8606 https://www.irs.gov/pub/irs-pdf/f8606.pdf I get $3,000 on line 14 which says This is your total basis in traditional IRAs for 2021 and earlier years If you assume the instructions https://www.irs.gov/pub/irs-pdf/i8606.pdf for Form 8606 will remain the same for 2022, then the instructions for line 2 tell you to enter the amount from line 14 of your last 8606 as your total basis in Traditional IRAs. That seems to indicate that the $3k would carry over. That said, given that prior TCJA, you were able to deduct your loss if you did a total distribution of the account, it’s not clear to me that there isn’t a ‘total distribution’ clause that would prevent the $3,000 from carrying over.
To be sure that you preserve the $3k basis, you could leave, say, $1000 in the Traditional non-deductible IRA, so you would have a basis of $4000 Then, as vkg suggested, you could roll just enough funds from another pre-tax account (like a 401(k)) into the IRA to absorb the remaining basis (so $3000 in the example you provided), and then do a conversion of the entire IRA.
AJ
To be sure that you preserve the $3k basis, you could leave, say, $1000 in the Traditional non-deductible IRA, so you would have a basis of $4000 Then, as vkg suggested, you could roll just enough funds from another pre-tax account (like a 401(k)) into the IRA to absorb the remaining basis (so $3000 in the example you provided), and then do a conversion of the entire IRA.
AJ’s analysis is correct. In order to preserve the basis, you must make sure that your TIRA balance is not $0 at year end. If the balance is $0 on 12/31, the “lost” basis becomes a miscellaneous itemized deduction subject to all the rules governing these deductions. Again, as AJ laid out, under current tax law, these deductions are not allowed until 2026 when we revert back to the pre-TCJA rules.
As an aside, the IRA basis rules are one of those areas where the status at year-end is important and the sequence of events within the year irrelevant.
Ira