Author Topic: Help needed with 2017 and 2018 IRAs  (Read 1499 times)

Nikii

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Help needed with 2017 and 2018 IRAs
« on: December 18, 2017, 10:10:34 AM »
Hi all, I think I may have messed up my IRAs for 2017 and needed help understanding how could I rectify it.

For 2017, I maxed out the ROTH IRA for both me and my husband in early January. However, with the promotions and bonuses accounted for, we are not eligible for ROTH contributions for 2017. How do I go about rectifying this? Not sure if I can do a backdoor ROTH for this year

For 2018, we would like to do a backdoor ROTH, but not sure how to do this considering the changes needed for the previous year, Please advise. Thank you!

Cleared as filed

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Re: Help needed with 2017 and 2018 IRAs
« Reply #1 on: December 18, 2017, 10:39:16 AM »
Do either of you have Traditional IRAs already?

If you do not: you can recharacterize the 2017 Roth contributions as 2017 non-deductible Traditional IRA contributions, and then immediately convert that new Traditional IRA back to a Roth. You will only have to pay normal income tax rates on whatever gains you've earned on your $11K contributions since early January. So if your $11K of contributions have grown to $13K by the time you do the conversion, you'll have to pay income tax on $2K. (You don't have to pay income tax on the basis because they were non-deductible contributions.)

If you do already have Traditional IRAs, you should still recharacterize your 2017 Roth contributions so that you don't get penalized for making Roth contributions you weren't eligible for, but the hiccup is that your Traditional IRA basis will now be partially deductible and partially non-deductible. That ratio is what will be used to figure the tax owed on the Roth IRA conversion. For example: let's say your Traditional IRA has previously been all deductible contributions, and it started 2017 with a balance of $10K. Your Roth contributions of $11K have grown to $13K since early January, and you recharacterize those contributions as non-deductible Traditional IRA contributions. Now you have a total of $23K in your Traditional IRA, but only $11K (or about 48%) represents non-deductible basis. That means if you do a Roth conversion, 52% of however much you convert will be taxed as ordinary income. If you converted the whole thing, it would mean paying income taxes on an additional $12K, which you'd probably want to avoid at your marginal rates.

The same logic applies in 2018. If you didn't have Traditional IRAs before, you can do the backdoor Roth by making your $11K worth of non-deductible contributions, and then immediately converting them to Roth. Since you're converting immediately (rather than waiting almost 12 months after contributing), your gains should be minimal and you'll owe almost no extra income taxes.

Nikii

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Re: Help needed with 2017 and 2018 IRAs
« Reply #2 on: December 18, 2017, 12:18:03 PM »
Thank you Cleared as Filed!

I have a Trad IRA from 2015 with about 7k in it and my husband does not have a trad IRA account. So, I am assuming I should call Vanguard to re-characterize. Can I do this process now or do I do this around tax filing? Also, how long do I need to wait before I can move from Trad IRA to backdoor ROTH once it is re-characterized.

Also, will the Vanguard tax forms be updated once I complete this process?

Thanks again!



MDM

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Re: Help needed with 2017 and 2018 IRAs
« Reply #3 on: December 18, 2017, 05:27:47 PM »

Nikii

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