Author Topic: Recharacterization to Roth IRA with 4 extra cents  (Read 630 times)

bop

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Recharacterization to Roth IRA with 4 extra cents
« on: September 20, 2018, 06:10:29 AM »
In January 2017, I contributed the maximum ($6500) to a traditional IRA for the 2017 tax year.  (I'm over 50, so can contribute $6500.)  This month (September 2018), I finally got around to doing my 2017 taxes, and noticed that my marginal tax rate is low (10%).  So I called my investment company (Vanguard) to recharacterize my traditional IRA contribution to a Roth IRA.  Vanguard did so, but apparently because of fractions of shares, moved $6500.04 over; in other words, 4 cents extra.  (I have plenty of other money in my traditional IRA account from previous 401(k) rollovers.)  I don't really care about the 4 cents, but I want to make sure I won't have to pay a penalty (large or small) to the IRS for an excess contribution.

Am I liable for a penalty?  Do I have to do something to avoid one?  Do I have to do anything special on my 2017 or 2018 tax returns?  Thanks. 

terran

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Re: Recharacterization to Roth IRA with 4 extra cents
« Reply #1 on: September 20, 2018, 06:21:07 AM »
It sounds like you did a conversion taxable in 2018, not a recharacterization effecting 2017 (unless you were invested in a money market fund or something with little/no overall return). A recharacterization is meant to make it as if you had originally contributed to the 2nd type of account, so both your original $6500 and the earnings on that $6500 since you contributed should have been moved.


bop

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Re: Recharacterization to Roth IRA with 4 extra cents
« Reply #2 on: September 20, 2018, 06:54:00 AM »
Hmm, good point.  When I called Vanguard, I specifically asked for a recharacterization of my 2017 contribution.  The fund is a stock market fund (VTSAX).  Now when I look at the transaction type on my Vanguard account, it says "Conversion".  Not sure what to do at this point.  Maybe I should call Vanguard again.   

BTDretire

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Re: Recharacterization to Roth IRA with 4 extra cents
« Reply #3 on: September 20, 2018, 07:53:52 AM »
From IRS website:

Can I recharacterize a rollover or conversion to a Roth IRA?

Effective January 1, 2018, pursuant to the Tax Cuts and Jobs Act (Pub. L. No. 115-97), a conversion from a traditional IRA, SEP or SIMPLE to a Roth IRA cannot be recharacterized. The new law also prohibits recharacterizing amounts rolled over to a Roth IRA from other retirement plans, such as 401(k) or 403(b) plans.

https://www.irs.gov/retirement-plans/ira-faqs-recharacterization-of-ira-contributions

terran

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Re: Recharacterization to Roth IRA with 4 extra cents
« Reply #4 on: September 20, 2018, 07:54:52 AM »
I would call them again. It may be "strange" to do a recharacterization at this time of year since the deadline is your tax filing deadline -- but this includes extensions, which presumably you filed, so they they may have assumed you meant a conversion, but that's on them so they should fix it.

terran

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Re: Recharacterization to Roth IRA with 4 extra cents
« Reply #5 on: September 20, 2018, 07:56:03 AM »
From IRS website:

Can I recharacterize a rollover or conversion to a Roth IRA?

Effective January 1, 2018, pursuant to the Tax Cuts and Jobs Act (Pub. L. No. 115-97), a conversion from a traditional IRA, SEP or SIMPLE to a Roth IRA cannot be recharacterized. The new law also prohibits recharacterizing amounts rolled over to a Roth IRA from other retirement plans, such as 401(k) or 403(b) plans.

https://www.irs.gov/retirement-plans/ira-faqs-recharacterization-of-ira-contributions

A conversion can't be recharacterized, but a contribution can, which is what the OP was trying to do. It sounds like Vanguard screwed up.

neo von retorch

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Re: Recharacterization to Roth IRA with 4 extra cents
« Reply #6 on: September 20, 2018, 07:58:31 AM »
From IRS website:

Can I recharacterize a rollover or conversion to a Roth IRA?

Effective January 1, 2018, pursuant to the Tax Cuts and Jobs Act (Pub. L. No. 115-97), a conversion from a traditional IRA, SEP or SIMPLE to a Roth IRA cannot be recharacterized. The new law also prohibits recharacterizing amounts rolled over to a Roth IRA from other retirement plans, such as 401(k) or 403(b) plans.

https://www.irs.gov/retirement-plans/ira-faqs-recharacterization-of-ira-contributions

I think the above is interesting, but should not apply to contributions since they are neither rollovers or conversions. Now, once it is converted to a Roth IRA, which seems to have happened, it will not be able to be recharacterized.

bop

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Re: Recharacterization to Roth IRA with 4 extra cents
« Reply #7 on: September 20, 2018, 08:05:06 AM »
Thanks, folks.  Yes, I filed for an extension on my 2017 taxes, so I don't have to submit my return until October 15.  I don't really mind if there was a conversion from traditional to Roth in 2018, since I was planning to do some of that anyway this year (to reduce RMDs when I'm over 70).  I'll call Vanguard to make sure I indeed get a recharacterization of my 2017 contribution.     

Livingthedream55

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Re: Recharacterization to Roth IRA with 4 extra cents
« Reply #8 on: October 01, 2018, 01:46:39 PM »
From IRS website:

Can I recharacterize a rollover or conversion to a Roth IRA?

Effective January 1, 2018, pursuant to the Tax Cuts and Jobs Act (Pub. L. No. 115-97), a conversion from a traditional IRA, SEP or SIMPLE to a Roth IRA cannot be recharacterized. The new law also prohibits recharacterizing amounts rolled over to a Roth IRA from other retirement plans, such as 401(k) or 403(b) plans.

https://www.irs.gov/retirement-plans/ira-faqs-recharacterization-of-ira-contributions

A conversion can't be recharacterized, but a contribution can, which is what the OP was trying to do. It sounds like Vanguard screwed up.

+1 This happened to me and Vanguard did screw up - they had to pull the tape recording of my request and they messed up. They did fix it but it took weeks of my checking in by phone biweekly before it all got resolved (and got everything in writing).

dandarc

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Re: Recharacterization to Roth IRA with 4 extra cents
« Reply #9 on: October 01, 2018, 02:03:40 PM »
Agree - they did the wrong thing. Recharacterization amount would likely be more different from the amount you requested than 4 cents - seems like the market has gone up quite a bit since January 2017.

erutio

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Re: Recharacterization to Roth IRA with 4 extra cents
« Reply #10 on: October 01, 2018, 03:06:04 PM »
Regardless of how Vanguard messed up, the $6500.04 rounds to $6500 for tax purposes.

dandarc

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Re: Recharacterization to Roth IRA with 4 extra cents
« Reply #11 on: October 01, 2018, 03:14:04 PM »
Regardless of how Vanguard messed up, the $6500.04 rounds to $6500 for tax purposes.
Yes, but, a recharacterization is supposed to include earnings - market is up ~30% since the contribution was made. So either OP needs to be OK with this being treated as a conversion or needs to get Vanguard to fix it.

seattlecyclone

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Re: Recharacterization to Roth IRA with 4 extra cents
« Reply #12 on: October 01, 2018, 04:39:46 PM »
Regardless of how Vanguard messed up, the $6500.04 rounds to $6500 for tax purposes.

I wonder how far you can take this. Like...suppose you contribute an extra $8 to your IRA. There's supposed to be a 6% tax on this, but 6% of $8 is only 48, which rounds down to $0. Is there any risk at all of incurring some sort of wrath from the IRS if you contribute an extra $8 on purpose and let it ride every year, paying the $0 penalty tax?

terran

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Re: Recharacterization to Roth IRA with 4 extra cents
« Reply #13 on: October 01, 2018, 04:56:50 PM »
Regardless of how Vanguard messed up, the $6500.04 rounds to $6500 for tax purposes.

I wonder how far you can take this. Like...suppose you contribute an extra $8 to your IRA. There's supposed to be a 6% tax on this, but 6% of $8 is only 48, which rounds down to $0. Is there any risk at all of incurring some sort of wrath from the IRS if you contribute an extra $8 on purpose and let it ride every year, paying the $0 penalty tax?

Hah. Isn't the 6% penalty every year until the excess is removed? So you'd only be able to do this once because the next year you'd have $16 subject to penalties if you did it again.

I set our withholding this year to make sure it rounds up instead of down.

seattlecyclone

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Re: Recharacterization to Roth IRA with 4 extra cents
« Reply #14 on: October 02, 2018, 11:06:08 AM »
Regardless of how Vanguard messed up, the $6500.04 rounds to $6500 for tax purposes.

I wonder how far you can take this. Like...suppose you contribute an extra $8 to your IRA. There's supposed to be a 6% tax on this, but 6% of $8 is only 48, which rounds down to $0. Is there any risk at all of incurring some sort of wrath from the IRS if you contribute an extra $8 on purpose and let it ride every year, paying the $0 penalty tax?

Hah. Isn't the 6% penalty every year until the excess is removed? So you'd only be able to do this once because the next year you'd have $16 subject to penalties if you did it again.

I set our withholding this year to make sure it rounds up instead of down.

Right, this would be a one time thing, and you'd have to keep filing a form every year that says "yes I still have an extra $8 in my IRA, here's my extra $0 of tax." You could probably do the same thing with an HSA, for a whopping $16 of extra tax-sheltered funds! Just wondering if there's anything the IRS could or would do other than shake their fist at you.