Question: John, age 52, has a traditional IRA worth $100,000. His basis in the IRA is $0 (that is, all contributions were tax deductible). Also, in 2022 he incurred a large capital loss in other non-IRA accounts from a poor investment, which resulted in a $100,000 capital loss carryover to 2023. John’s neighbor, Jay, suggested he convert his IRA to a Roth IRA before the end of this year so John can offset the entire $100,000 in income that would normally be recognized in the conversion with the capital losses carried forward from 2022. Is Jay correct?
Answer: No. The Roth IRA conversion represents ordinary income [§408(d)(1), IRS Pub 590-B] while capital losses are only deductible against gains from capital assets [§1211(b)]. If there are no capital gains to offset the capital loss carryforward, the taxpayer is allowed a deduction of $3,000 ($1,500 if married filing separately) against other income [§1211(b)(1) and (2)], but the remainder of the capital losses will be carried forward to 2024 and beyond. The Roth conversion will be fully includable as income. Assuming no other capital gains, $3,000 will be allowed as a capital loss deduction and $97,000 of the capital loss will be carried forward to 2024.
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Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.