Roth Conversion of stock ETF at a loss vs conversion of cash

[JRB]

I mistakenly bought equity ETF (VTI and VXF) within traditional IRA instead of within taxable account which currently has an unrealized loss, but if I plan to perform a Roth conversion this year would it be better to convert those shares at a loss (since I plan to purchase the same ETFs within the Roth) or move money from cash holding within the traditional IRA?

Since my plan was to purchase equity ETFs within taxable account and use the traditional IRA bucket to hold bond allocation (BSV), I was going to wait until the ETF price came close to my purchase price before selling. Do I need to worry about that if I plan to purchase same holdings just within a taxable account, meaning would it be the same if I sold at a loss in the traditional IRA, then bought back within taxable account at that same lower price?

[GasFIRE]

If you plan to routinely do a BDR every year, the only asset a tIRA should ever hold is cash which should then be converted to Roth. If your intention is to hold bonds like BSV in a pre-tax account, that would be your 401k/403b type accounts, the tIRA is only a placeholder for funds on the way to Roth.

Having said that, there is no reason keep VTI/VXF in your tIRA. Cash out and convert the proceeds to Roth. Selling at a loss does not create any wash sale implications if you buy it back in your taxable account since you haven't had a deductible loss. Rather, the "loss" becomes the remaining basis on Form 8606. If you contributed $6K to your tIRA then immediately converted to Roth, your basis would be $0. But if as you did, sustained an investment loss of say $500, you would convert the remaining $5.5K and have a remaining basis of $500 on your Form 8606.

[JRB]

If you plan to routinely do a BDR every year, the only asset a tIRA should ever hold is cash which should then be converted to Roth. If your intention is to hold bonds like BSV in a pre-tax account, that would be your 401k/403b type accounts, the tIRA is only a placeholder for funds on the way to Roth.

Having said that, there is no reason keep VTI/VXF in your tIRA. Cash out and convert the proceeds to Roth. Selling at a loss does not create any wash sale implications if you buy it back in your taxable account since you haven't had a deductible loss. Rather, the "loss" becomes the remaining basis on Form 8606. If you contributed $6K to your tIRA then immediately converted to Roth, your basis would be $0. But if as you did, sustained an investment loss of say $500, you would convert the remaining $5.5K and have a remaining basis of $500 on your Form 8606.

I follow what you're saying and apologize for not clarifying on my initial post that I'm referring to my parents accounts which I'm helping streamline for them. BDR is N/A. They have way something like $1M in the bank, $200K in tIRA, and no Roth IRA. They are living entirely on pension and social security and we don't reckon they have any need to use their tIRA anytime in the next 5 years, if ever.

[Tim]

So the contributions were pretax?
Sell the shares and fix your mistake.
The tIRA is all taxable upon withdrawal or conversion.
$200K in tIRA that will not create and RMD tax bomb. Why convert and pay taxes now?

[JRB]

So the contributions were pretax?
Sell the shares and fix your mistake.
The tIRA is all taxable upon withdrawal or conversion.
$200K in tIRA that will not create and RMD tax bomb. Why convert and pay taxes now?

yes, pretax contribution made years ago as 'rents are well into retirement now. Never planned to convert all as tax bomb, but only did $20K this year with plan to do serial conversions over next few years instead.

[Tim]

yes, pretax contribution made years ago as 'rents are well into retirement now. Never planned to convert all as tax bomb, but only did $20K this year with plan to do serial conversions over next few years instead.

https://www.aarp.org/work/retirement-planning/required-minimum-distribution-calculator.html?KNC-DSO-COR-Core-Retirement-NonBrand-Exact-35094-GOOG-RETIREMENT-MinimumDistributionCalculator-Exact-NonBrand&gclid=EAIaIQobChMIpu2Ft4iA_QIVDxXUAR30hw4cEAAYASAAEgIQDfD_BwE&gclsrc=aw.ds

The problem is your $20k conversion compares to the maximum RMD of say $14k which would be about at age 94.

You are accelerating taxes , not smoothing taxes with the conversions.

[spiritrider]

I mistakenly bought equity ETF (VTI and VXF) within traditional IRA instead of within taxable account which currently has an unrealized loss, but if I plan to perform a Roth conversion this year would it be better to convert those shares at a loss (since I plan to purchase the same ETFs within the Roth) or move money from cash holding within the traditional IRA?

Transactions within tax-advantaged accounts have no tax impact and are not even tracked. With all things being equal, there would be no difference between an in-kind Roth conversion and a sell, conversion and re-buy.

However, it is unlikely the sell and re-buy price will be the same. It could be to your benefit or detriment. To resist the urge to time the sale and re-purchase. I would suggest you do an in-kind conversion.