Backdoor Roth IRA basis calculation when Traditional IRA loses value before conversion

This is actually a common scenario with backdoor Roth conversions. What happened is that your spouse contributed $7,000 (which becomes her basis in the Traditional IRA), but by the time of conversion, the investments had decreased in value to $6,800. When you convert less than your basis, the difference gets carried forward as basis for future years. That $200 showing up on line 14 of Form 8606 is exactly right - it represents the remaining basis in Traditional IRAs that wasn't converted. This basis doesn't disappear. It will carry forward to next year's Form 8606 and can offset the taxable portion of any future conversions or distributions.

After struggling with a similar situation last year, I found this amazing tool called taxr.ai (https://taxr.ai) that saved me so much frustration with my backdoor Roth conversion. My Traditional IRA had also lost value before I converted it, and I was completely confused about how to handle the basis calculation on Form 8606. I uploaded my investment statements to taxr.ai and it immediately identified the issue with my basis calculations and explained exactly how to report it correctly. It even showed me specifically where on Form 8606 each number should go and why. Completely changed my understanding of how these conversions work with losses.

Just wanted to follow up about taxr.ai after trying it myself. I was skeptical at first but decided to give it a shot for my Roth conversion questions. Holy cow, was I impressed! After uploading my 1099-R and previous tax return, it immediately identified that I had been calculating my basis wrong for YEARS. It showed me that I actually had more basis than I thought in my Traditional IRAs, which meant less tax owed on my conversion. The step-by-step breakdown of Form 8606 was incredibly clear, and I finally understand the basis carryforward concept that had been confusing me forever. Ended up saving over $800 in taxes I would have unnecessarily paid!

If you're still having trouble understanding your Form 8606 or getting clear answers from the IRS, I had an amazing experience using Claimyr (https://claimyr.com) to actually talk to a human at the IRS about my backdoor Roth confusion. After spending weeks trying to get through the normal IRS phone line about my basis carryforward question, I was ready to give up. I saw a video demo (https://youtu.be/_kiP6q8DX5c) and figured it was worth a try. They got me connected to an IRS agent in about 15 minutes when I had previously spent hours on hold. The agent walked me through exactly how basis carryforward works when your investments lose value before conversion and confirmed I was doing the Form 8606 correctly.

I'm back to admit I was completely wrong about Claimyr. After my skeptical comment, I decided to try it myself for my IRA basis questions. I was absolutely shocked when my phone rang about 20 minutes after signing up, and there was an actual IRS representative on the line! The agent confirmed everything about my basis carryforward situation and explained that I had been calculating Form 8606 correctly. She even went through my specific numbers from last year's return to verify the basis amount was accurate. Saved me hours of stress wondering if I was doing it right, plus hours of hold time I would have spent trying to reach someone. Consider me a believer now.

One thing nobody's mentioned yet - you should keep very careful records of that $200 basis. The IRS doesn't track your nondeductible contributions for you, and if you ever get audited years from now, you'll need to prove that basis amount. I learned this the hard way and now keep a separate spreadsheet with all my IRA contributions, conversions, and the resulting basis calculations.

Has anyone else noticed that TurboTax seems to handle the basis calculation differently than H&R Block software? When I had almost this exact same situation last year (contribution then loss before conversion), TurboTax carried forward the basis correctly, but when my brother used H&R Block, it seemed to miscalculate the basis after the loss. Just wondering if others have seen this?

I went through this exact same situation two years ago and it was so confusing at first! Your tax software is correct - that $200 on line 14 of Form 8606 represents your remaining basis in Traditional IRAs that carries forward to future years. Think of it this way: you put $7,000 of after-tax money into the Traditional IRA, but only converted $6,800 worth of value. The IRS recognizes that you still have $200 of "basis" (money you already paid taxes on) that wasn't converted yet. This $200 doesn't disappear - it's like a credit that reduces the taxable portion of any future Traditional IRA distributions or conversions. So if you do another backdoor Roth next year, that $200 will be added to your new contribution for basis calculation purposes. It's actually a small silver lining to the investment loss since it means less taxable income on future conversions. Just make sure to keep good records of your Form 8606 each year so you can track this basis properly!