Traditional IRA that lost value, then converted.

[Guest Ken L]

Here is the set-up. Taxpayer has had a traditional IRA for several years,

making non-deductible contributions for approximately 10 years (therefore a total of $20,000 has been contributed.) The monies were invested in a high-risk fund, consequently the remaining balance is about $3,000. He directs the bank that handles the IRA to transfer the funds to a ROTH managed by one of the big investment firms.

I have a suspicion that he has blown the opportunity to claim the $17,000 loss

by this direct transfer. I am of the opinion, that the only way to preserve the loss is to take physical possession of the $3,000, and even wait out the 60

day period. Then, open a Roth as usual.

Anyone have any comments? I cannot find anything specific when the Traditional IRA has lost so much and then gets converted.

Thanks.

Ken.

[Guest danmar]

You can't claim a loss of any sort on investment loss w/in an IRA. IRA and Qualified Plan investments (except, in a way, for some Empolyer securities in an ESOP) are not subject to capital gains and loss rules. A Roth conversion was the best possible thing to do in this situation.

[John G]

Mr X is out of luck since "tax loss" is a meaningless concept with IRAs.

I think the bigger question is why did he make this investment. It sounds as if everything was bet on a long shot. It is not easy for a balanced portfolio to loose 85% in a bull market like we have been experiencing. Mr X has paid a very steep tuition, but has he learned anything? If he had put his funds in balanced mutual fund that averaged 10% per year he should have seen his nest egg grow to about $32K.

But you say he now has instead about 1/10th that amount. He shouldn't have a tax question. He should focus on his investment choice problem! Yikes. Sounds more like gambling and the racetrack, not investing.

Conversion to a Roth might be attractive if you felt the investment would rebound, but I don't think Mr X should trust his judgement on that possibility.

[Guest Mary Ann]

If the contributions to the IRA had been deductible, it is true that there would be no loss allowed if the value of the IRA went down. HOWEVER, since the original question indicated that all IRA contributions were nondeductible then a loss IS allowed.

Publication 590:

"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 traditionall IRAs. You claim the loss as a miscellaneous itemized deduction, subject to the 2% limit, on Schedule A, Form 1040."

I believe the $17,000 loss should have been claimed in the same year of the Roth conversion since the amount coming from the traditional IRA is considered a distribution and taxed accordingly. In this case there is no tax on the $3,000 because of the original $20,000 basis.