Author Topic: Roth/Traditional Dilemma! Re-characterize?  (Read 1702 times)

Crazydude

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Roth/Traditional Dilemma! Re-characterize?
« on: February 20, 2016, 10:57:01 AM »
Just finished my taxes with Turbo Tax, I owe roughly $2,000 to the IRS. This is because I have self-employment income, which fluctuates, and I went from working full-time to student full-time so my estimate of what I'd owe was off.

I maxed out my ROTH contributions for myself and my wife at $11,000 last year. However if I "re-characterize" (I think this can be done) those from the Roth to a traditional IRA (which I already have opened), it'll cut my tax bill from $2,000 to at least $1,000.

I'm strongly considering doing this, however I like the idea of the later-on tax benefits of the Roth, so I'm just curious to hear people's opinions.

As a side note, it's not an issue for me to foot this bill.

Thanks!

Crazydude

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Re: Roth/Traditional Dilemma! Re-characterize?
« Reply #1 on: February 20, 2016, 11:36:38 AM »
After searching the forums I found a couple threads talking about this already. I'm now leaning towards NOT re-characterizing simply because 1. I can pay the bill without issue, and 2. In the long-term, I think the X dollars I have in the Roth will end up producing more than $2k in tax free income, so I can wait.

terran

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Re: Roth/Traditional Dilemma! Re-characterize?
« Reply #2 on: February 20, 2016, 11:41:23 AM »
How close are you to the savers tax credit limits? If a bit of recharacterization will get you there it could be a very high marginal tax savings rate. https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Savings-Contributions-Savers-Credit

Crazydude

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Re: Roth/Traditional Dilemma! Re-characterize?
« Reply #3 on: February 20, 2016, 11:47:46 AM »
How close are you to the savers tax credit limits? If a bit of recharacterization will get you there it could be a very high marginal tax savings rate. https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Savings-Contributions-Savers-Credit

Hmm I didn't know about this credit. AGI is above 80k though so not really close. Next year I may be though. I'll have to keep that in mind.

MDM

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Re: Roth/Traditional Dilemma! Re-characterize?
« Reply #4 on: February 20, 2016, 03:23:06 PM »
After searching the forums I found a couple threads talking about this already. I'm now leaning towards NOT re-characterizing simply because 1. I can pay the bill without issue, and 2. In the long-term, I think the X dollars I have in the Roth will end up producing more than $2k in tax free income, so I can wait.
Roth is probably ok for you.  What isn't clear is the "X dollars I have in the Roth will end up producing more than $2k in tax free income" reason.

You want to compare your current marginal rate (15% federal plus whatever state) to the marginal rate you expect to pay when you withdraw these funds.  There is a decent chance you will pay the same 15% federal plus whatever state (or higher, if SS taxability comes into play).  In that case Roth will be better.