Planning for individual NOLs: converting to a Roth IRA

In tax years when an individual incurs negative taxable income, he or she faces the possibility of permanently losing the tax benefits of nonbusiness deductions, to the extent that such deductions exceed nonbusiness income. This may present an opportunity to convert a traditional IRA to a Roth IRA, thus capturing the benefits that would otherwise be permanently lost. In computing taxable income for a tax year, a taxpayer can deduct, under Sec. 172(a), an amount equal to the aggregate of the net operating loss (NOL) carryovers and carry-backs to the tax year. This is known as the "NOL deduction." Subject to Sec. 408A(c)(3)(B) restrictions, a traditional IRA may be converted to a Roth IRA via a qualified rollover contribution. Taxpayers need also to consider the alternative minimum tax (AMT) and state and local income tax implications.