Taxes on back-door Roth that lost value?

[Philliefan33]

The dollar amounts in my scenario are not large enough to lose sleep over, but I still want to figure out how to do this.

We have been in the income range where Roth IRAs are not allowed/contributions to TIRAs have to be after taxes. I've contributed (non-deductible) for a few years, a total of 18K. This account is the only TIRA that I own. All other retirement money is in Roth or 401K accounts. I always planned to do a back-door Roth with this account, but our tax returns were already pretty complicated the past two years and I just didn't feel like having to fill out another form. I want to do the conversion this year.

This year, I received my share of a class-action suit regarding a pension buyout twenty years ago: $150. I had the $150 transferred directly to the TIRA, it was considered a rollover and was not taxed.

As I understand it, if I do a Roth conversion and the value of the TIRA is $18,150, I will owe taxes only on the $150. If the value is more, due to investment growth, I pay taxes on "X-18K". But what if the value of my account is less than 18K? With the recent volatility in the market, this is a possibility. Do I owe taxes on the $150 regardless of the overall value of the account?

 

[Senator]

I am not 100% sure, but I think it's just a non-taxable transaction.

If that is the case, only backdoor a partial amount. Or wait. A tIRA that has no gains is just as good as a Roth...

 

[kaneohe]

Senator is correct about it being nontaxable. To convince yourself, fill out F8606 http://www.irs.gov/pub/irs-prior/f8606--2014.pdf which you should have been doing to document your basis (not taxable part of TIRA). Lines 2,3,5 are
basically your basis. Any decrease in values is taken into account in steps 6 and/or step 8. (and step 9). The ratio of basis to "total value" is taken account in line 10 with a 1.000 max .......the 1.000 ratio means all is basis and non-taxable.......as you determine in line 11. The taxable amount is in line 15 but
should be 0 if values go down enough.

Senator also has a good idea about the conversion if values go down......if you convert the whole thing and then close the account you may lose part of your basis which could shelter part of future conversions........so convert an amount so that you don't lose any of that amount if possible and consider keeping the account open keeping in mind any minimum requirements the broker may have to avoid penalties/fees.

 

[pb4uski]

Your IRA provider should be able to tell you whether the conversion would be a taxable event and if so how much the taxable income will be based on the value on a specified date.

 

[kaneohe]

Your IRA provider should be able to tell you whether the conversion would be a taxable event and if so how much the taxable income will be based on the value on a specified date.

pb4uski.........since only the taxpayer knows whether contributions were deducted or not and therefore the basis, it is unlikely that the IRA custodian could be of any help here.........unless you give them that info.

 

[Philliefan33]

Good point about losing basis. That won't matter if I don't make any more TIRA contributions, but I don't know where our taxable income is going to fall this year and subsequent years. I'm no longer brining in a salary but DH just keeps getting contracting gigs that he enjoys.

I have a few more months to play with some numbers. It might make sense to do the conversion when the value is not much higher than the basis to minimize taxes, then let the money grow under the Roth umbrella. I'm only 50 so this money won't be touched for at least ten years.

 

[ronocnikral]

if you convert this year and file for an extension (Oct 15th), you'll have almost a year to see how it plays out and can leave the conversion in place or "undo" if it is not favorable to you (or whatever it is you are trying to do).