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Because we were over the income limit, my wife and I contributed post-tax dollars to our regular IRAs over the past five years. We would like to do a backdoor Roth IRA conversion while the market is down. Because each account value is below its cost basis, we should not owe any taxes. Further, the cost basis for each account is about $1000 below its market value.

Will this backdoor Roth IRA conversion generate $2000 in tax losses for us in 2020?

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    No, but it will leave $1000 of basis (after-tax amount) in each of your Traditional IRAs, so that if you make further deductible contributions to your Traditional IRA in the future, $1000 of it will still be considered after-tax and proportionally non-taxable when you withdraw or convert it. – user102008 Apr 11 at 1:31
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If your current Traditional IRA contains a mix of tax-deductible (and hence untaxed) contributions, post-tax non-deductible contributions and perhaps untaxed gains on both types of contributions, then any money that you choose to roll over into a Roth IRA is a mix of taxable money (money that you have not paid tax on) and nontaxable money (the non-deductible contributions) regardless of which of your IRA accounts you withdraw the money from. That is, "But I took the money only from the IRA account in which I have been putting all my post-tax contributions" doesn't help at all; as far as the IRS is concerned, you have one Traditional IRA which might be invested in many different accounts and mutual funds and with different IRA custodians etc and you are withdrawing money from your Traditional IRA, not from a specific investment within that IRA. Also, you don't have a tax loss at all; it is all ordinary income.

The backdoor Roth IRA conversion works best if you have no (or very little) untaxed money in your Traditional IRA; best if the only untaxed money is the earnings from your most recent nondeductible Traditional IRA contribution.

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  • I am glad that I asked! I also have a traditional IRA rolled over from a 401K. Therefore, the average basis of these two traditional IRA accounts is not less than the market value of the post-tax traditional IRA that I had planned to convert to a Roth IRA. Although tax rates are low, this is not the year that I want a tax bill that is $X,XXX larger. Thanks! – Richard Herron Apr 11 at 20:13
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This would work, if you could pick which money to convert - but you can't.

The IRS rules are that all money in all your IRAs are considered one big pot, and it is always merged together for tax consideration. That means, if you do any conversion, you convert always a proportional mixtures of your pre- and post-tax contributions, no matter how old they are, or in which specific IRA account they are sitting.
In other words, it wouldn't help you to have two separate accounts, one only with pre-tax and the other one only with post-tax money - it is still lumped together for taxing.

It could still be a good idea to do taxable conversions while the value is low, so you might consider converting a certain chunk or all of the mixture now, and pay the taxes while the amount is low. Of course, paying a lower percentage of taxes once you are retired might beat paying higher taxes on a lower value (while the market is down) - there is no definite way to predict which one is better.

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There are no capital gains taxes within tax-advantaged accounts. If you sell something at a gain you don't owe capital gains taxes, and if you sell at a loss you don't get a deduction (with one exception).

The only way you can get a deduction is if you withdraw all of your Traditional IRA funds in all your Traditional IRA accounts and follow these other rules. Do this before retirement age and you still owe the 10% tax penalty. You would not be eligible for this anyway since you're rolling over the money to a Roth.

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