IRA to Roth IRA conversion in kind | Ed Slott and Company, LLC

IRA to Roth IRA conversion in kind

A TIRA contains stock that has a short term capital loss. If the stock is converted to a Roth IRA, does the short term capital loss have any significance in the Roth? It's the only stock in the TIRA with a capital loss (others have gains) so seems like the
best candidate to convert in 2020.

  • Gains or losses on retirement account investments are not reported. If an in kind conversion is done, the taxable amount is based on the market of the stock at the time of distribution less any IRA basis tracked on Form 8606 from having made non deductible contributions. The market value of the stock when converted is also added to any Roth conversion basis. Gains or losses on individual securities in the Roth IRA continue to be immaterial. Sch D does not apply to IRA distributions or sales of securities within an IRA of any type.
  • Therefore, if you are going to convert in kind, you should select the security that you expect to have the best gains for the time you hold it because you would prefer your best gainers to be in the Roth where earnings will eventually be tax free. While gains are always better than losses, it is far better to have your gains in the Roth and losses in the TIRA, since TIRA losses will reduce RMDs and the tax bill due to the IRS on TIRA distributions.

If I think the stock with losses will increase in value in the next ten years, wouldn't it be better to have it in the Roth IRA?   Let's assume it increases linearly over ten years to net a gain. At year ten, in the Roth IRA, cashing out of the stock for distribution will be free of income tax. By year ten, in the TIRA, it will have increased the base amount for calculating the RMD, and thus increased income taxes in each of the ten years.  

Yes, whatever security you think will grow the most after the conversion should be converted. What it did before the conversion is immaterial. Of course, since you can buy and sell within an IRA without any tax consequences, you are not locked into any of your present holdings. Any you expect to underperform should be sold and reinvested in something else. However, if for some reason you think a particular holding will do very well in the future, that's the one you want in your Roth IRA.

 

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