HouseStark wrote:I'm not going to assert that logic pervades the workings of the tax system, but it makes sense to me that the basis would be lost when the IRA is zeroed out. The basis would seem to be tied to the existing Traditional IRA balance before distribution and when all TIRA balances were zeroed out through the conversion distribution the basis also goes. As Alan S. points out it is possible for the loss to be claimed from a Sched A misc itemized deduction. Whether or not that deduction is of any benefit due to the 2% floor is another matter, but since there is a potential benefit I can see how that would lead to the basis not carrying over. There are other cases of potentially beneficial tax attributes that simply go away or cannot be utilized. This would seem to be one of them, absent some specific indications to the contrary, which I would be interested to hear.
While there is no clear guidance from the IRS with respect to temporary -0- balances in an IRA, the instructions for Form 8606 (page 6) specifically indicate that the line 14 figure from the most recent 8606 is to be entered on line 2 of the current 8606. Therefore, preserving a line 14 entry is key to preserving any prior unrecovered basis. If Part I of Form 8606 is not required because the full balance of the TIRA is converted and there is no current year non deductible contribution, then there is NO line 14 and the unrecovered basis is lost according the the 8606 Instructions.
Even if you were aggressive in this situation and entered a negative figure on line 18, carrying this over to line 15b would create an ordinary loss for an IRA distribution, and this is totally inconsistent with treatment accorded to closing any form of retirement account. Therefore, if you don't have a line 14, any unrecovered basis is most certainly erased.
Creating a line 14 entry is fairly simple. You can make any small amount of a non deductible TIRA contribution for the current year, OR your conversion can leave behind $10 in the TIRA making the conversion a partial instead of a full conversion. If you don't have a line 14 figure on your latest 8606, your unrecovered basis is erased unless you were able to challenge the 8606 Instructions.http://www.irs.gov/pub/irs-pdf/i8606.pdf