Tradition to Roth IRA Conversion with Capital Loss

[Guest xyzabc123]

This year I converted my traditional IRA to a Roth IRA. This happened early November when the market was very low and I made contributions when the market was very high (97 - 00) I had a capital loss in the conversion. Both the traditional and Roth IRA were the same fund. Can I claim this loss on my taxes?

[John G]

No. At least not the way you are probably thinking.

Barry Picker previously addressed the question of losses on 12-12-2000 on this message board and gave the following extract:

From Publication 590:

"Recognizing Losses on IRA Investments

If you have a loss on your traditional IRA investment, you can recognize the loss on your income tax return, but only when all the amounts in all your traditional IRA accounts have been distributed to you and the total distributions are less than your unrecovered basis, if any. Your basis is the total amount of the nondeductible contributions in your traditional IRAs. You claim the loss as a miscellaneous itemized deduction, subject to the 2% limit, on Schedule A, Form 1040." {this should apply to Roth and regular IRAs}

Note the key elements: you must withdraw ALL of your IRAs and even then you have the Schedule A restriction. AND you also have that 10% penalty for early withdrawal. You lose the tax shelter, incur a penalty and are limited in that loss you can write off. I just don't think many people will find this second approach attractive. If you think this might make sense, run it by a knowledgeable accountant or tax specialist.

You do not state the magnitudes of the losses. Hopefully, you can re-focus on making good investments and move forward from here. We all have paid the real world tuition to learn about investing.