Mutual Fund loss and Roth IRA conversion

Forum|Forum|1 year ago
September 24, 2024
1 reply
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was thinking of some tax loss harvesting. A mutual fund has a loss. I’m planning on rolling over my 401k and converting some to a Roth IRA. Since the Roth conversion generates income, can that income be offset by the mutual fund (not in a retirement account) loss?

not real numbers, but just for simplicity - say the mutual fund lost $5000, and the 401k converted to Roth IRA was $15000…..would I just be taxed on $10000?

Best answer by VolvoGirl

Ok- so just to be sure I understand….i can deduct more of the mutual fund loss if it isn’t offsetting a Roth conversion gain because the gain from a conversion is seen differently than a gain from a regular mutual fund sale.

not sure of the terminology, but they sound like they are treated differently.

Not sure I understand you. You can take more of the loss if you have other regular account sales that have a gain.

The Roth conversion is not a gain or loss, it is just a distribution and taxed as ordinary income tax. In retirement accounts like 401K and IRA you don’t consider buys or sells, gains or losses.

You do not report sales, interest, dividends,gains, losses or any transactions inside the IRA or 401K accounts. You only report distributions, Rollovers, Transfers, conversions that you get a 1099R for. That's one of the benefits of using an IRA or 401K Account. It grows tax deferred. Then when you take it out you pay ordinary income tax on it. But you don't get the lower capital gains tax on it.

If you have a loss you will just have less income to take out of it, so less tax to pay.

VolvoGirl

Employee

Not exactly, not directly. The ROTH conversion is taxable.

If you have a net loss on investment sales you can deduct up to 3,000 against your other income. The rest of the loss you have to carryover to the next year. So for a 5,000 loss you could subtract 3,000 from your AGI and carryover 2,000.

Tracer-xAuthor

Employee

Thanks so much. Would it make any difference if I applied the loss to a regular mutual fund’s gain? Or is it only $3000 in loss per year no matter how much loss there is

and does it matter if it is a capital or income loss?

VolvoGirl

Employee

Yes you can apply it to any regular gains. So you can use more of it. You get to first offset the loss against any gains you have each year so that can use more of it up. Then after applying the loss to the current gains if there is still a loss, you can take a max loss of 3,000 per year.