Author Topic: Is it worth it to recharacterize my 2015 IRA contribution?  (Read 3475 times)

Dollar Slice

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Is it worth it to recharacterize my 2015 IRA contribution?
« on: February 03, 2016, 08:24:36 AM »
I put $5500 into my Vanguard Roth IRA last year, but as I understand it I could still recharacterize it as a tIRA. I'm in the 25% tax bracket for federal but live in a high-tax area (NYC) so my overall marginal tax rate is pretty high (35.1%, I think?) when you include local and state.

Is recharacterizing pretty simple to do? I feel like this is something I should do but I have no experience with it so maybe I'm missing something.

Axecleaver

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Re: Is it worth it to recharacterize my 2015 IRA contribution?
« Reply #1 on: February 03, 2016, 08:47:52 AM »
It's worth it. Should take about 10 minutes. At 35% marginal rate, you would save 5500 * .35  = $1925 tax savings.

That's an hourly rate of nearly $12,000.

ooeei

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Re: Is it worth it to recharacterize my 2015 IRA contribution?
« Reply #2 on: February 03, 2016, 08:57:31 AM »
If I may tag on to this question.  I'm married with a house and no kids, income last year combined was ~160,000. 

Wife and I contributed fully to Roth IRA's . . . but we are getting up there in terms of tax bracket as well.  Is it worth it for us to re-characterize and make them traditional while we are earning this much?

You need to check to make sure you're eligible for deducting TIRA contributions from your taxes.  I think you're over the limit, but I'm not sure.

2Birds1Stone

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Re: Is it worth it to recharacterize my 2015 IRA contribution?
« Reply #3 on: February 03, 2016, 09:02:21 AM »
Phase out for married starts at 98,000 and ends at 108,000

Unless you maxed out 401ks, HSA's, etc I think you are over the limit.

Jack

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Re: Is it worth it to recharacterize my 2015 IRA contribution?
« Reply #4 on: February 03, 2016, 09:10:47 AM »
Here's a general rule of thumb: Mustachians generally are in a lower tax bracket in retirement, because a high savings rate naturally implies that your income is much higher than your spending. Or said another way, Roth only makes sense if you're planning to drastically inflate your lifestyle in FIRE.

Therefore, traditional IRAs are almost always better, with two exceptions. The first is if your income is too high to qualify. The second is if your income is low enough that non-refundable tax credits (e.g. the Saver's Credit) would be "wasted" because your taxable income hits $0 before they get subtracted. In the latter case, what you want to do is "tune" your taxable income (by switching some of your IRA contributions to Roth) so that it exactly equals the Saver's Credit.

terran

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Re: Is it worth it to recharacterize my 2015 IRA contribution?
« Reply #5 on: February 03, 2016, 09:19:02 AM »
It's pretty easy (call vanguard and ask them to do it, add a statement to your tex return explaining what you did) and it's worth it, but as 2Birds1Stone said if you have a retirement plan at work unless your modified AGI is below $61k for single or $98k for married you can't deduct a traditional IRA contribution: https://www.irs.gov/Retirement-Plans/2015-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-Covered-by-a-Retirement-Plan-at-Work

Here is information on calculating your AGI and MAGI: https://turbotax.intuit.com/tax-tools/tax-tips/IRS-Tax-Return/What-Is-the-Difference-Between-AGI-and-MAGI-on-Your-Taxes-/INF22699.html

CheapskateWife

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Re: Is it worth it to recharacterize my 2015 IRA contribution?
« Reply #6 on: February 03, 2016, 09:23:55 AM »
Hey Dollar Slice,

I didn't figure out that we were too high on the MAGI to get the tax benefit until I ran my numbers in TurboTax.  We then called up Vanguard and had them recharacterize both our contributions from tIRA to ROTH...it took all of 2 minutes.  This is the opposite of what you want to do but just as easy.


dandarc

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Re: Is it worth it to recharacterize my 2015 IRA contribution?
« Reply #7 on: February 03, 2016, 09:27:01 AM »
Hey Dollar Slice,

I didn't figure out that we were too high on the MAGI to get the tax benefit until I ran my numbers in TurboTax.  We then called up Vanguard and had them recharacterize both our contributions from tIRA to ROTH...it took all of 2 minutes.  This is the opposite of what you want to do but just as easy.
+1 to this - do your taxes first and find out how much is deductible.  Then recharacterize all or a portion so that any deductible amount goes to Traditional, and anything else goes to Roth.

Dollar Slice

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Re: Is it worth it to recharacterize my 2015 IRA contribution?
« Reply #8 on: February 03, 2016, 10:35:58 AM »
I don't have a retirement plan at work, so there's no worries about being eligible for the full deduction, as far as I understand the way that works.

In re: my tax rates in retirement - it's hard to say... I will most likely have a bunch of money through inheritance eventually. But from reading I've done since joining MMM I think you need to compare marginal rates now with average rates in retirement. And I think it would be pretty tough for me to get to a 35% average tax rate unless tax rates change a lot between now and then. I also have about 60% of my retirement savings in Roth so that won't count towards my taxable income in retirement, which will also reduce future tax rates.

Thanks for the comments :-)  I will give Vanguard a call.

Samsam

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Re: Is it worth it to recharacterize my 2015 IRA contribution?
« Reply #9 on: February 03, 2016, 01:00:39 PM »
Wow I have to thank everyone here.  I also contributed to a roth ira for myself and my wife this year.  After reading this thread I went into turbo tax to recharacterize it from roth to traditional to see if my MAGI was low enough for the deduction.  It shows I will get an extra 2k or so back.  Next step is to call vanguard!

dandarc

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Re: Is it worth it to recharacterize my 2015 IRA contribution?
« Reply #10 on: February 03, 2016, 01:05:30 PM »
Wow I have to thank everyone here.  I also contributed to a roth ira for myself and my wife this year.  After reading this thread I went into turbo tax to recharacterize it from roth to traditional to see if my MAGI was low enough for the deduction.  It shows I will get an extra 2k or so back.  Next step is to call vanguard!
One nice thing about Turbo Tax is that it will tell you the deductible amount at the end of the IRA section.  Particularly useful if you land in the phase-out range - do a trial-run with a full traditional contribution, see how much is deductible, and then recharacterize that amount.  And of course, ultimately report what you actually did with the recharacterization.

Dollar Slice

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Re: Is it worth it to recharacterize my 2015 IRA contribution?
« Reply #11 on: February 03, 2016, 02:43:08 PM »
A tip, FWIW: they can only do this over the phone if you call during trading hours. So, don't be like me and waste 20 minutes on hold at 4:15PM only to be told they can't help you until tomorrow. :-P

Merrie

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Re: Is it worth it to recharacterize my 2015 IRA contribution?
« Reply #12 on: February 04, 2016, 08:14:55 AM »
I also wanted to note, the phase-out range is different depending on your marital status and whether each of you has a retirement plan at work. It is calculated for each individual, not for a couple, and the members of a couple can have different situations.

For example, I have a retirement plan at work but my stay-at-home-dad husband does not. So the phaseout limit for him for a tIRA is much higher than for me ($183000-193000 is the phaseout range for him).

Also for a married couple, if one of you is eligible to contribute, the other one is as well, even if one doesn't have earned income or doesn't make $5500. My husband makes $20 a week at a part-time job, but we can still contribute for him, and could even if his income was 0. Our income puts us right in the middle of the phase-out range for me, so we funded his first and for mine will fund whatever amount ends up being deductible.

Alternately we could fund my IRA and recharacterize anything that didn't end up being deductible as Roth. We don't have the extra $ to do that but it's a viable option for others in this situation.
« Last Edit: February 04, 2016, 08:17:53 AM by Merrie »

Samsam

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Re: Is it worth it to recharacterize my 2015 IRA contribution?
« Reply #13 on: February 04, 2016, 08:51:24 AM »
Wow I have to thank everyone here.  I also contributed to a roth ira for myself and my wife this year.  After reading this thread I went into turbo tax to recharacterize it from roth to traditional to see if my MAGI was low enough for the deduction.  It shows I will get an extra 2k or so back.  Next step is to call vanguard!
One nice thing about Turbo Tax is that it will tell you the deductible amount at the end of the IRA section.  Particularly useful if you land in the phase-out range - do a trial-run with a full traditional contribution, see how much is deductible, and then recharacterize that amount.  And of course, ultimately report what you actually did with the recharacterization.

Yes! I was pleasantly surprised.

dcozad999

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Re: Is it worth it to recharacterize my 2015 IRA contribution?
« Reply #14 on: February 04, 2016, 09:46:29 AM »
Can you do this with your 401k as well?  My employer offers a Roth and Traditional 401k. For most of the last year (and previous years) I was putting money in the Roth. After really reading up on it here and other sites, I realized it was better for me to do the traditional and switched over in Oct/Nov. Would I be able to take last years contributions to the Roth 401k and move them to the traditional 401k?

dandarc

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Re: Is it worth it to recharacterize my 2015 IRA contribution?
« Reply #15 on: February 04, 2016, 10:01:47 AM »
Can you do this with your 401k as well?  My employer offers a Roth and Traditional 401k. For most of the last year (and previous years) I was putting money in the Roth. After really reading up on it here and other sites, I realized it was better for me to do the traditional and switched over in Oct/Nov. Would I be able to take last years contributions to the Roth 401k and move them to the traditional 401k?
I don't think so.  In a 401K you con do an in-plan rollover from traditional to Roth, but not the other way around.

Dollar Slice

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Re: Is it worth it to recharacterize my 2015 IRA contribution?
« Reply #16 on: February 04, 2016, 10:23:27 AM »
It's worth it. Should take about 10 minutes.

Done. Only took 8 minutes! Looking forward to that refund check.

Hot tip: Look for the market to shoot upwards in the next 24 hours while my money is briefly out of the market. I'm one of those investors whose money appears to be made out of lead, as soon as the weight is removed from an investment it will soar up like a helium balloon ;-)

terran

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Re: Is it worth it to recharacterize my 2015 IRA contribution?
« Reply #17 on: February 04, 2016, 10:26:21 AM »
Hot tip: Look for the market to shoot upwards in the next 24 hours while my money is briefly out of the market. I'm one of those investors whose money appears to be made out of lead, as soon as the weight is removed from an investment it will soar up like a helium balloon ;-)

I could very well be wrong, but I was under the impression that Vanguard would make the transfer "in kind" such that you wouldn't actually be out of the market, you'd just have you investments transferred between accounts.

Dollar Slice

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Re: Is it worth it to recharacterize my 2015 IRA contribution?
« Reply #18 on: February 04, 2016, 10:32:23 AM »
Oh, that would definitely be better! The guy on the phone didn't specifically say so I just assumed it would be sold and the cash transferred, but that would make more sense since the value would be different at the end of the day when they could sell the index fund.