Many people have made non-deductible contributions to traditional IRAs, for tax-deferred buildup. After the recent market crash, those IRAs probably have lost value. If you are in that situation, what can you do?
Terminate your account. Suppose you made $25,000 worth of non-deductible contributions to your traditional IRA. The account is now worth only $14,000. If you close your IRA, you’ll have an $11,000 loss: the $25,000 you contributed minus the $14,000 you receive.
To claim such a loss, you must close all your traditional IRAs. Your loss will be the difference between the amount of your non-deductible IRA contributions and the amount you get back. That loss will be a miscellaneous itemized deductions, deductible to the extent that all your miscellaneous deductions exceed 2 percent of your adjusted gross income (AGI).
Convert your account. Because of the tax treatment, such a loss might provide scant tax savings. In that case, you can convert that traditional IRA to a Roth IRA. After five years and age 59 1/2, all of your withdrawals will be tax-free.
In 2009, you can’t implement a Roth IRA conversion with AGI over $100,000, on a single or joint return. If you’re over the limit, wait until next year, when there will be no income limits on Roth IRA conversions.
