Many taxpayers are trying to figure out ways to avoid paying the tax penalty for converting a traditional IRA into a Roth IRA. Here’s one common question, “Can I use a capital loss carry forward from Schedule D to offset the tax penalty involved in making a conversion to a Roth IRA?
The answer is simple here – you cannot apply any capital loss carryforward to the penalty assessed in converting to a Roth IRA.
Capital losses can only offset capital gains.
On another note, if you do not have any capital gains to offset the capital loss carryforward, you still can deduct $3,000 in losses each year on your individual return. This is done on Schedule D and will go to the front of your form 1040 on line 13. $3,000 is the maximum capital loss deduction you can take each year absent any capital gains. If you have not taken this $3,000 offset in prior years, you may amend those returns and obtain a refund.
Below are some additional answers to some common tax questions taxpayers are asking about the Roth IRA conversion.
When Are The Taxes Due?
Taxes on 2010 Roth IRA conversions are due over a 2 yr period or 2011 & 2012 but after 2010, they are due on the same year as the conversion.
Should I Convert Everything in my Traditional IRA to a Roth IRA?
While certain investments maybe the most tax advantageous today, tax laws change, and its best to give yourself choices if the time comes when you need the cash. In this specific instance, you may not want to convert everything into a Roth IRA because although there is tax-free appreciation, it is possible for tax laws to change.
What About My Spouse’s Retirement Plan?
If you just got married, you need to review your spouse’s retirement plan and see if there are any restrictions on the contributions/deductions to IRAs. Make sure you diversify your tax risk as well.
Can Anyone Convert from a Traditional to a Roth IRA, Even the Rich?
Yes, even if you don’t qualify to fund a traditional IRA on a pre-tax basis, you can still fund a traditional IRA on a after-tax basis, thus giving you the ability to convert to a Roth IRA. While your contribution is after-tax, remember, your appreciation is tax-free.
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