Author Topic: I accidentally put money in a roth IRA account at Vanguard.  (Read 1427 times)

degrom7

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I accidentally put money in a roth IRA account at Vanguard.
« on: October 01, 2018, 06:44:03 PM »
Hi! I opened an account with Vanguard and deposited $5,500 to a Roth account last week. I did the same thing for my wife. The money is just sitting in the federal market fund and I haven't bought any index funds with it. $1.44 interest was added by Vanguard. I know I can recharacterize it back in a traditional IRA. But in the future, when I do Roth laddering, will I be able to transfer the money back into a roth? I read about converting from traditional to roth is fine but the new law prohibits reverting it back to traditional. Wondering if it's the same thing if it's the other way around.

Should I just leave it alone?

MDM

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Re: I accidentally put money in a roth IRA account at Vanguard.
« Reply #1 on: October 01, 2018, 07:23:31 PM »
I know I can recharacterize it back in a traditional IRA. But in the future, when I do Roth laddering, will I be able to transfer the money back into a roth?
Yes.

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I read about converting from traditional to roth is fine but the new law prohibits reverting it back to traditional. Wondering if it's the same thing if it's the other way around.
The new law continues to allow recharacterization of contributions but disallows recharacterization of conversions.

You may still convert a recharacterized contribution when it comes time for t->R conversions.

terran

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Re: I accidentally put money in a roth IRA account at Vanguard.
« Reply #2 on: October 01, 2018, 07:45:47 PM »
Make sure you're very clear about what you want when you call Vanguard: a recharacterization NOT a conversion. Theres a thread going on where where Vanguard mixed that up on someone else, and another poster said it happened to them and it took a lot of badgering for Vanguard to fix it.

degrom7

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Re: I accidentally put money in a roth IRA account at Vanguard.
« Reply #3 on: October 01, 2018, 08:01:48 PM »
I know I can recharacterize it back in a traditional IRA. But in the future, when I do Roth laddering, will I be able to transfer the money back into a roth?
Yes.

Quote
I read about converting from traditional to roth is fine but the new law prohibits reverting it back to traditional. Wondering if it's the same thing if it's the other way around.
The new law continues to allow recharacterization of contributions but disallows recharacterization of conversions.

You may still convert a recharacterized contribution when it comes time for t->R conversions.

Sorry I'm a bit confused. I might've just used recharacterization and conversion interchagably. Not sure what the difference is." So the $5,500 I added is my "contribution" and I can Recharacterized that. roth to trad to roth in the future.

degrom7

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Re: I accidentally put money in a roth IRA account at Vanguard.
« Reply #4 on: October 01, 2018, 08:03:02 PM »
Make sure you're very clear about what you want when you call Vanguard: a recharacterization NOT a conversion. Theres a thread going on where where Vanguard mixed that up on someone else, and another poster said it happened to them and it took a lot of badgering for Vanguard to fix it.

So what I want is a "recharacterization" right?

terran

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Re: I accidentally put money in a roth IRA account at Vanguard.
« Reply #5 on: October 01, 2018, 08:28:14 PM »
Make sure you're very clear about what you want when you call Vanguard: a recharacterization NOT a conversion. Theres a thread going on where where Vanguard mixed that up on someone else, and another poster said it happened to them and it took a lot of badgering for Vanguard to fix it.

So what I want is a "recharacterization" right?

Yes. I recharacterization makes it as if you had originally contributed to the account type you recharacterize to (traditional) instead of what you actually contributed to and recharacterize from (Roth). It's accomplished by moving the amount you contributed, plus any gains on that amount from one account to another. It must be completed by the tax filing deadline of the year for which you made the contribution. You won't pay tax either recharacterizing from traditional to Roth or Roth to traditional because you won't have yet taken a deduction and you're just making it as if you originally contributed to one type of account or another. You'll know they did a recharacterization if it's for the amount you asked for plus/minus any gains/losses there have been on that amount since you contributed.

A conversion moves money from traditional to Roth. If you took a tax deduction when you first contributed to traditional you'll pay tax on this conversion. Sometimes you didn't pay tax on the contribution, so you won't pay tax on the conversion except to the extent that there have been gains and/or you also have some amount in the account that you did take a deduction for (this is part of what's colloquially called a backdoor Roth contribution). A conversion can happen at any time and can be for any amount. You'll know they did a conversion if it's for the amount you asked for.

degrom7

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Re: I accidentally put money in a roth IRA account at Vanguard.
« Reply #6 on: October 01, 2018, 08:32:24 PM »
Thanks! Vanguard said I have a wait a few days to do this. Can I just purchase some VTSAX first before recharacterizing?

terran

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Re: I accidentally put money in a roth IRA account at Vanguard.
« Reply #7 on: October 01, 2018, 08:38:16 PM »
Sure. It won't be taxable, either way, so it doesn't matter if there are gains or losses.

You might be under the limit for VTSAX ($10k I think) so you might need to buy the investor class version (VTSMX) or the ETF version (VTI)

terran

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Re: I accidentally put money in a roth IRA account at Vanguard.
« Reply #8 on: October 01, 2018, 08:43:56 PM »
When you file your taxes you'll need to add a statement like this:

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Taxpayer {degrom7} contributed $5500 to a Roth IRA on {contribution date} for the 2018 contribution year. On {recharacteriztion date} all $5500 of the contribution was recharacterized by transferring {total amount moved} to a traditional IRA in a trustee-to-trustee transfer. The traditional IRA contribution of $5500 was deducted on form 1040.

And for your wife:

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Spouse {degrom7's wife} contributed $5500 to a Roth IRA on {contribution date} for the 2018 contribution year. On {recharacteriztion date} all $5500 of the contribution was recharacterized by transferring {total amount moved} to a traditional IRA in a trustee-to-trustee transfer. The traditional IRA contribution of $5500 was deducted on form 1040.

Flip those if your wife is the primary on your return (taxpayer is the primary, spouse is the secondary).
« Last Edit: October 01, 2018, 08:45:42 PM by terran »

degrom7

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Re: I accidentally put money in a roth IRA account at Vanguard.
« Reply #9 on: October 01, 2018, 08:47:19 PM »
Thanks for the helpful tip! How would this process work if I use TurboTax?

terran

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Re: I accidentally put money in a roth IRA account at Vanguard.
« Reply #10 on: October 01, 2018, 08:52:57 PM »
You can try this: https://ttlc.intuit.com/questions/3856149-ira-recharacterization-no-1099-r

If that doesn't work, add it as a regular traditional IRA contribution (nothing about Roth) and try to find a place to add a statement to your return.

MDM

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Re: I accidentally put money in a roth IRA account at Vanguard.
« Reply #11 on: October 01, 2018, 09:05:17 PM »

degrom7

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Re: I accidentally put money in a roth IRA account at Vanguard.
« Reply #12 on: October 02, 2018, 08:00:26 PM »
Thanks! I'll be sure to come back to this thread when it comes time to file taxes.

shelbyautumn

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Re: I accidentally put money in a roth IRA account at Vanguard.
« Reply #13 on: October 02, 2018, 09:50:37 PM »
Thanks for the helpful tip! How would this process work if I use TurboTax?

We recharacterized an IRA last year (I don't remember details - my husband did it) and the forms we got from betterment to put into TurboTax worked fine. I did use their help section to walk me through what I was doing, but I didn't need to add any special statements.

carolina822

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Re: I accidentally put money in a roth IRA account at Vanguard.
« Reply #14 on: October 03, 2018, 03:31:16 AM »
I'd highly encourage adding the statement even if the software doesn't prompt you to. I've had at least five clients this year get letters from the IRS about rollovers/recharacterizations that were reported correctly but were still flagged and needed further documentation sent. Which isn't a big deal to do, but might as well (try to) save a step. (I'm not convinced anyone actually looks at those attached statements, but at least you know you did things right on your end.)