The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: ender on September 20, 2014, 07:56:17 AM
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This year, my income is going to be just under the limits for deducting an IRA (http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/2014--IRA-Contribution-and-Deduction-Limits---Effect-of-Modified-AGI-on-Deductible-Contributions-If-You-ARE-Covered-by-a-Retirement-Plan-at-Work). I will have, after 401k/HSA deductions from my income likely between 55-60k in modified AGI which is just under the 60k full deduction limit.
I put $5500 into my Roth IRA in January of this year. I've a mix currently of traditional/Roth/taxable investments right now.
Because I hopefully am going to have a family in the next few years I am pretty strongly considering recharacterizing this into a traditional IRA for a few reasons. With my income and discussions with the SO, if we end up with a few kids our marginal federal rate is going to be pretty low (unless I get ridiculous raises in that time period). It's likely in the next years we are going to have available space in either IRAs/401ks, too.
Recharacterizing would result in about a 30% tax savings, so about $1500.
Am I missing something or is this just a no-brainer? If I call Vanguard will they be able to separate the deductible part from my Roth IRA (I have contributed for several years now) into a traditional IRA?
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Yes, I would absolutely recharacterize the contributions. I've done it twice with Vanguard. It is a very easy process that can be handled over the phone. They will transfer however much you want (in your case, the full $5500), plus the gains/losses on that amount. It will be as if you originally put that money into a TIRA at the beginning of the year.
Sweet, I think I will do this then. I didn't realize it would be that easy, too.
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"Recharacterizing would result in about a 30% tax savings, so about $1500".
Correction: It is a tax deferral, not a savings.
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"Recharacterizing would result in about a 30% tax savings, so about $1500".
Correction: It is a tax deferral, not a savings.
Good point.
In my case it's more of a "loan" of the tax deferral as the money is far more useful to me in my younger years than my later years, when I'm hopefully in a place where I've basically FIREd :)