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Backdoor Roth account lost value before conversion

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  • jfoxcpacfp
    1. You lost basis. The TIRA basis is zero (i.e. you cannot recover this $3 in the future).
    2. Recommend never investing the nondeductible TIRA before conversion (I HATE Wealthfront and its ilk)
    3. Also recommend not closing out the TIRA. Just leave it open with $0 in it so you d/n/h to open a new account annually.
    Factoid - You can deduct a capital loss on a Roth liquidation, as long as you liquidate all Roths in the same year. I learned this b/c I did it in the early days as a total novice (I was a CPA but clueless about investing and investment accounts and was in the pick-a-stock period of my early life. Scary that there are many many out there today who fall in that category). So I got a $1,300 LTCL and was thrilled to use it. Just shows how far I’ve come 🤣. Makes me feel OLD.

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  • gabrielochoa77
    Thanks for the explanation! So it's fine if I leave line 14 the way it is? Do I need to worry about next years back door Roth?

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  • GasFIRE
    The explanation is correct. When doing a BDR it’s best to leave the TIRA in cash then convert to Roth ASAP. Wealthfront is a roboadvisor type account so TIRA was probably invested based on your risk profile which lost $3 before conversion. This doesn’t happen in standard brokerage accounts if left in cash (Fidelity, Schwab, ETrade, TDA, etc.).

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  • Backdoor Roth account lost value before conversion

    I contributed $6000 to a traditional IRA with Wealthfront and then converted it to a Roth IRA within the same year. The conversion took a day or two but by the time it all went through the tIRA was worth $5,997. This $5,997 was then moved into the Roth IRA and the tIRA was closed with $0 in it. My 1099R says I received a distribution of $5997. I used FreeTaxUSA to do my taxes and followed as a guide. However, on line 14 of from 8606 it says that the total basis in my traditional IRAs for 2020 and earlier years is $3. Is this correct? It seems to me that the program assumes that I left $3 in my traditional IRA account but really that amount was simply lost as the account just decreased in value before I could convert the account.

    This is the response I got from FreeTaxUSA about the subject:

    When the contribution of $6,000 was made the total is considered nondeductible. This amount will remain the nondeductible amount regardless of how much is converted to a Roth account.

    This means that when a conversion takes place the full $6,000 is used in the calculation even if the value of the IRA went down. So even though the full amount was converted and the traditional IRA basis is 0, the $3 of nondeductible contribution that was converted is included on line 14 of the 8606 form and is still available to convert as a nondeductible contribution in future years.

    For example, if you make make an additional nondeductible contribution next year of $6,000 and you convert $6,005 to a Roth IRA, only $2 would be taxable since $3 of the nondeductible contribution was not converted the year before.