Allocation · 2025 and 2026

Roth Conversion After an Investment Loss: What Happens to Unused Basis?

Published by Moss Ladder · Updated November 2, 2026 · Editorial policy

Executive summary

A contribution can create documented IRA basis even when the investments later fall in value. If the amount converted is smaller than available basis, the ordinary tax-free ratio cannot exceed 100%, and unrecovered basis can remain after the conversion. This guide distinguishes an investment loss, unused tax basis and a deduction, then follows the records needed to carry the unused amount into a later year without counting it twice.

Educational guidance for ordinary scenarios. Check the official form's year and filing branches and obtain advice for your actual records.

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Keep market value and basis in different columns

Market value describes what the IRA assets are worth at a particular time. Basis describes the owner's supported after-tax amount that has not already been recovered under the tax rules. Investment gains and losses change value; they do not automatically rewrite the historic nondeductible contribution amount. A $7,000 eligible nondeductible contribution that falls to $6,500 does not become a $6,500 contribution just because that is the amount available to convert. Preserve both numbers and their dates.

Start by confirming that the original contribution was permitted and actually nondeductible. A returned excess contribution, a recharacterization or a contribution that was deducted on a return is a different case. Also identify other applicable IRAs and annual distributions. The example below assumes a single ordinary IRA pool with no special adjustments. A loss in the account selected for conversion does not isolate that account from other traditional IRA assets owned by the same taxpayer.

Understand why the ordinary ratio is capped

The ordinary allocation compares available basis with the relevant annual pool. When basis is larger than that pool, an uncapped division could produce a percentage above 100%. That would incorrectly allocate more tax-free conversion than the amount actually converted. Form 8606's ordinary allocation therefore caps the ratio at one. The cap prevents an impossible negative taxable conversion; it does not erase all remaining basis or turn the difference into a separate cash refund.

For an invented 2025 case, assume $7,000 current nondeductible contribution, a $6,500 conversion, zero applicable December 31 IRA value and no other distribution, late contribution or outstanding rollover. Available basis is $7,000 and the pool is $6,500. The uncapped division is greater than one, but the modeled ratio is 1.000. All $6,500 converted is tax free, taxable conversion is zero, and $500 basis remains. Keep the official filing branches distinct from the explanatory allocation table.

A $7,000 nondeductible contribution converted after falling to $6,500

This invented example assumes one taxpayer, documented basis, eligible ordinary transactions, no special repayment and no tax withholding. Dollar amounts are planning values. Use the official form's filing branches; a displayed line is not automatically a required entry on a filed return. The 2026 examples apply published 2026 contribution limits with the 2025 allocation structure.

A $7,000 nondeductible contribution converted after falling to $6,500
Form 8606 line	Modeled amount
1	$7,000.00
2	$0.00
3	$7,000.00
4	$0.00
5	$7,000.00
6	$0.00
7	$0.00
8	$6,500.00
9	$6,500.00
10	1.000
11	$6,500.00
12	$0.00
13	$6,500.00
14	$500.00
16	$6,500.00
17	$6,500.00
18	$0.00
15a	$0.00
15b	$0.00
15c	$0.00

Do not convert unused basis into a deduction by assumption

The $500 remaining in the example is a basis carryforward in the ordinary Form 8606 model. It is not an instruction to claim a $500 income-tax deduction, subtract $500 from wages or treat the brokerage loss as a capital loss on Schedule D. IRA investment losses and taxable-account investment losses do not share the same reporting workflow. A planning display showing remaining basis does not establish any separate deduction under current law.

Keep a workpaper explaining the difference: $7,000 documented basis, $6,500 recovered through the conversion and $500 unrecovered. If all applicable IRAs were emptied, do not infer that the basis record may now be discarded. If an unusual account liquidation, historic loss claim or special transaction affects the year, obtain case-specific review before treating the ordinary model as definitive. The website tracks allocation under stated assumptions; it does not determine every consequence of closing an account or losing money inside it.

Check whether another IRA changes the outcome

Suppose the same $6,500 conversion occurs but an older traditional IRA holds $13,500 at December 31. With $7,000 available basis and no other adjustments, the annual pool becomes $20,000. The tax-free proportion is now 35%, rather than a capped 100%. The conversion uses $2,275 basis, includes $4,225 taxable income and leaves $4,725 basis. A loss in the conversion account did not prevent a taxable result because other pretax assets remained in the owner's pool.

Use a complete inventory before drawing conclusions from the conversion confirmation. Include applicable traditional SEP and SIMPLE IRA values and review unfinished rollovers. Keep the year-end date consistent across custodians. A current account screen showing zero can be misleading if the assets were transferred elsewhere before year end. The comparison between the clean-loss case and the mixed-IRA case is a way to audit missing facts, not an argument that either transaction is suitable for a particular taxpayer.

The same loss case with another $13,500 in applicable IRAs

The same loss case with another $13,500 in applicable IRAs
Form 8606 line	Modeled amount
1	$7,000.00
2	$0.00
3	$7,000.00
4	$0.00
5	$7,000.00
6	$13,500.00
7	$0.00
8	$6,500.00
9	$20,000.00
10	0.350000
11	$2,275.00
12	$0.00
13	$2,275.00
14	$4,725.00
16	$6,500.00
17	$2,275.00
18	$4,225.00
15a	$0.00
15b	$0.00
15c	$0.00

Carry the supported remainder into later records

Reconcile ending basis to the next year's opening basis before adding another nondeductible contribution. In the clean $6,500 conversion example, the supported remainder is $500. It should not be entered again as a new $500 contribution, and the original $7,000 should not be carried forward as though none was recovered. Preserve the prior Form 8606, the contribution evidence and the conversion confirmation so a later reviewer can explain why basis exists even if that earlier IRA account was emptied.

A later year's allocation depends on that later year's complete facts. As an illustration of the mechanism, $500 prior basis plus a separate eligible $7,000 nondeductible contribution would create $7,500 combined basis before timing or other adjustments. A later conversion would then use the applicable annual pool, not the old year's ratio. This is a bookkeeping illustration rather than a completed future return. The current website's 2026 form output remains a projection using the 2025 allocation structure.

Reconcile the custodian forms without rewriting history

A custodian's Form 1099-R can report the distribution associated with the conversion without knowing the owner's aggregate lifetime basis. Form 5498 and account statements provide different pieces of the evidence. If a brokerage document shows a gross distribution of $6,500, do not change the historical nondeductible contribution from $7,000 to make the documents look identical. The difference may be the investment loss that explains the retained basis, not an error in either transaction amount.

Build a short reconciliation with four rows: original permitted contribution, deduction treatment, amount actually converted and supported basis remaining. Add any other IRA values or annual distributions as separate rows rather than burying them in a net number. If the amounts disagree with a filed return, identify the filing year and obtain correction guidance. A clear explanation of why the contribution and conversion differ is more useful than forcing every document to display the same amount.

Use scenario testing to expose the assumption that matters

To investigate this situation in the calculator, first enter the complete documented basis and the amount converted. Then add the actual year-end IRA inventory. Keep other distributions, late contributions and outstanding rollovers at zero only when the records support zero. Compare the clean-loss case with the mixed-IRA case while changing one input at a time. The displayed results refresh after Calculate, so check that the pending-change notice is gone before recording or exporting a scenario.

Write down the question that the test resolved: whether the ratio was capped, whether another IRA changed the pool, or how much basis remained. Do not describe a lower estimate as proof that a transaction is exempt from tax. Retain the assumptions alongside the numbers and discuss missing history or special circumstances with a qualified preparer. The useful result is an explainable basis reconciliation that survives the next year, rather than a screenshot of a temporarily favorable percentage.

About the publisher: Moss Ladder

Moss Ladder owns and publishes RothProRata.com, an independent educational website about IRA basis, Roth conversions and Form 8606. The guides connect official sources with invented examples, document checklists and browser-local planning tools.

AI-assisted tools help prepare explanations and software. Numerical allocation examples state their assumptions and are checked with automated calculations. These engineering checks do not constitute independent CPA or Enrolled Agent review, and no professional tax credential is claimed.

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Source year and transaction type matter. Citations support the explanation; they do not imply government endorsement.