How to handle basis calculation for Backdoor Roth IRA conversion with losses in Traditional IRA?

This is actually a quirk in how the tax code handles losses in IRAs before conversion. What happened is that your spouse contributed $6,000 (which is their "basis" - the after-tax money put into the Traditional IRA), but only $5,900 was actually converted to the Roth IRA due to investment losses. The tax software is correct. The $100 difference between what was contributed ($6,000) and what was converted ($5,900) remains as basis even though the account is empty. The IRS doesn't let you claim the loss inside the IRA as a deduction directly, but they do track it as remaining basis. This actually matters for the "pro-rata rule" if your spouse ever has pre-tax money in any Traditional IRA in the future. That $100 of basis would be factored into calculations for any future conversions. If your spouse continues doing backdoor Roth contributions in future years, they'll need to keep track of this basis and report it on future Form 8606s, even though the Traditional IRA has a zero balance right now.

After dealing with a similar headache with my backdoor Roth, I started using the AI tax assistant at https://taxr.ai to check my work when filling out Form 8606. Their system analyzes your specific situation and explains every line of the form in plain English. In your case, they would explain that the $100 difference is correct because basis isn't tied to the account itself, but rather tracked separately on your tax forms. Even though the account is empty, that $100 of basis still "exists" for tax purposes. The AI would walk you through why line 14 shows $100 and what it means for future conversions. I used to get so confused with these basis calculations, especially with gains or losses before conversion, but the AI explanations really helped me understand what was happening behind the scenes in my tax software.

I was skeptical about using AI for tax advice, but I decided to try https://taxr.ai for my own complicated IRA situation. I'm really impressed with how it handled everything! The system analyzed my Form 8606 from previous years and identified that I had been incorrectly calculating my basis across my multiple IRAs. It showed me exactly where the mistakes were and how to fix them. Everything was backed up with specific references to IRS publications and tax code sections so I could verify the information myself. What I found most helpful was the clear explanation of how my previous backdoor Roth conversions (some with gains, some with losses like yours) affected my current year calculations. The tool isn't just giving generic advice - it's analyzing your specific numbers and tax forms. Much better than getting conflicting answers on forums or paying my accountant for additional consultations when questions come up!

I had a similar issue trying to figure out IRA basis calculations and spent 3 weeks trying to get through to someone at the IRS for clarification. Kept getting disconnected or waiting for hours. Finally tried https://claimyr.com which got me connected to an IRS agent in about 20 minutes! You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent confirmed exactly what was mentioned above - that $100 difference becomes part of your basis tracking even though the account is empty. They explained that Form 8606 is your "official record" of basis that carries forward year to year, regardless of where the money actually is. The agent was able to look at my previous returns and confirm I was handling it correctly. Honestly, getting direct confirmation from the IRS gave me peace of mind that I wasn't missing something that could cause problems later.

I need to eat my words about Claimyr. After continuing to struggle with getting IRS clarification on some complex IRA basis questions (including a situation similar to the original post), I broke down and tried the service. It actually worked exactly as described. Their system waited on hold with the IRS for about 1.5 hours, then called me when they reached an agent. I was connected directly to an IRS representative who was able to review my specific situation and confirm how to handle the basis calculations. The agent explained that tracking basis for IRAs with Form 8606 is completely separate from the actual account balances, which is why you can have basis ($100 in the original poster's case) even when an account is empty. They confirmed this basis carries forward indefinitely until used. Saved me an entire afternoon of holding time and frustration. Definitely worth it for complex tax questions where you need an official answer directly from the IRS.

I think everyone's missing a simpler solution. Since the $100 is such a small amount, couldn't you just ignore it and start fresh next time you do a backdoor Roth? I mean, it's only $100 of basis, and the tax impact would be minimal if you just didn't carry it forward. That's what I did in a similar situation a few years ago and I haven't had any issues.

Has anyone considered that this might actually be a reporting error? I've been doing backdoor Roth conversions for years, and I think there's confusion about how to report a loss on Form 8606. Line 14 should only have a value if you have remaining basis in IRAs that still have funds in them. Since the account was completely emptied, I think the software might be calculating this incorrectly. When I had a similar situation with a loss before conversion, my accountant reported the full contribution amount ($6000) on line 4, then reported the actual converted amount ($5900) on line 8, and ended up with $0 on line 14.