Taxed on non deductible tIRA earnings

[dhlogic]

Just wanted to see if someone could explain this situation to me.

Earlier in 2017 I made a traditional IRA contribution for 2017 of $5,500 buying VTSMX.

Some months later due to unexpected increase in pay, I realized that my modified AGI would be more than $72,000 and I would be making a non deductible contribution. So I am interested in having the money in a Roth IRA instead as I like the benefits over a non deductible traditional IRA.

If I end up having a MAGI less than $118,000 this year, which is very likely, I could have made a full $5,500 contribution to the Roth IRA straight away.

Looking at IRS form 8606 used for the conversion, it seems like any earnings above the $5,500 contribution will be taxed when doing this. Since there will have been several months since initial contribution and the conversion, the market has gone up giving me a gain of ~$500.

I guess people like me in this situation are punished for not choosing the right type of IRA at the beginning of the year? I was already taxed on the money when I earned it and will receive no benefit from a traditional IRA deduction. The earnings on this contribution shouldn't be relevant because I would have been eligible to make a Roth contribution instead and the same ~$500 earnings would remain untaxed. Unless there is something I am overlooking, I guess there's nothing that can be done?

[dandarc]

What you want to do here is called a "recharacterization".  You have until your tax filing deadline (4/15/2018 or 10/15/2018 with extension for 2017 contributions) to do this.

It will be just as if you made a Roth contribution in the first place.  For me, it has been a 5 minute phone call with Vanguard to get this done.

Terminology matters - this is not a conversion.

[dhlogic]

Ah got it.

I didn't know that you couldn't recharacterize through the web interface and you had to do it via phone/mail.

You CAN do a conversion through the website though.

Thank you.