Author Topic: Re-characterizing Roth IRA?  (Read 4707 times)

MustachianWays

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Re-characterizing Roth IRA?
« on: April 17, 2014, 07:25:19 PM »
Does anyone have experience re-characterizing a Roth contribution to a Traditional IRA? Back in December 2013 I contributed $5500 to a Roth IRA not realizing it would be more advantageous to be contributing to a tax-deferred account! I have until October to re-characterize the contribution and get nice additional refund check from Uncle Sam. But before I re-file my taxes, does anyone have any experience or advice on doing this? Pitfalls to avoid? Any reason why I shouldn't re-characterize?

As a separate question: I will be bumping up against the phase-out for deductibility on Traditional IRA contributions for 2014 and conceivably will surpass it 2015. Does it ever make sense to contribute to a non-deductible IRA as opposed to just contributing to a Roth after you surpass the income limits?

Thanks for any guidance you can provide.

Grateful Stache

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Re: Re-characterizing Roth IRA?
« Reply #1 on: April 17, 2014, 07:42:50 PM »
I re-characterized mine last month. It took 20 minutes on the phone with Vanguard.

Now that it's past April 15th I'm not sure if you can re-characterize for 2013, but that's between you and Uncle Sam.

Cheers and best of luck.

MustachianWays

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Re: Re-characterizing Roth IRA?
« Reply #2 on: April 17, 2014, 07:44:43 PM »
I re-characterized mine last month. It took 20 minutes on the phone with Vanguard.

Now that it's past April 15th I'm not sure if you can re-characterize for 2013, but that's between you and Uncle Sam.

Cheers and best of luck.

I actually spoke with a Vanguard rep yesterday and they told me I had until October to re-characterize. But to get the credit for the deduction on my taxes I'll have to refile.

Grateful Stache

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Re: Re-characterizing Roth IRA?
« Reply #3 on: April 18, 2014, 04:57:50 AM »
The actual re-characterization was a simple process. I say go for it!
« Last Edit: April 18, 2014, 05:05:16 AM by Grateful Stache »

ender

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Re: Re-characterizing Roth IRA?
« Reply #4 on: April 18, 2014, 07:53:54 AM »
I'm glad you posted this!

For 2013 I don't really have reason to re-characterize a Roth IRA due to AGI limits but for my 2014 taxes, I very well might as I have increased 401k deductions significantly. But I already put $5,500 into a Roth IRA on Jan2 of this year but... if I end up below the 60k AGI figure (which I probably will this year, depends on overtime/bonus/etc) I will recharacterize it into a traditional IRA and save myself nearly $2k on taxes for 2014! Since I'm in the 25% federal and something like 6% state bracket.

Chiron

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Re: Re-characterizing Roth IRA?
« Reply #5 on: April 18, 2014, 07:55:54 AM »
As a separate question: I will be bumping up against the phase-out for deductibility on Traditional IRA contributions for 2014 and conceivably will surpass it 2015. Does it ever make sense to contribute to a non-deductible IRA as opposed to just contributing to a Roth after you surpass the income limits?

You'll want to do the backdoor Roth at that point - to do that you have to contribute to a traditional and the convert.

MustachianWays

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Re: Re-characterizing Roth IRA?
« Reply #6 on: April 18, 2014, 08:27:10 AM »
As a separate question: I will be bumping up against the phase-out for deductibility on Traditional IRA contributions for 2014 and conceivably will surpass it 2015. Does it ever make sense to contribute to a non-deductible IRA as opposed to just contributing to a Roth after you surpass the income limits?

You'll want to do the backdoor Roth at that point - to do that you have to contribute to a traditional and the convert.

Can you expand on this a little? I'm not quite understanding. For 2014 if my AGI is above $59,000, the deductibility starts to get phased out until $69,000, when you get no deduction. Let's say my AGI for 2014 is $70,000. That's higher than deductibility for a traditional IRA but not so much that my contribution to a Roth becomes limited ($114,000). What would be the benefit of contributing to a Traditional IRA at that level of AGI? You get no tax benefit now or in the future. Is that not correct?

El Limon

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Re: Re-characterizing Roth IRA?
« Reply #7 on: April 20, 2014, 09:51:43 AM »
My opinion is that Roth contributions are always more tax advantaged in the long term. Yes, you will get a boosted refund this year (short-term), but consider it a loan because you ARE going to pay that back when you start withdrawing as an old dude. Furthermore, it is very likely that US tax rates will higher when you are an old dude. But, if I was 23, I'd be taking it now too if i needed money to build my foundation: investing in my education and skills and a strong emergency fund.         

ender

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Re: Re-characterizing Roth IRA?
« Reply #8 on: April 20, 2014, 10:31:16 AM »
Furthermore, it is very likely that US tax rates will higher when you are an old dude.

I used to think this was a compelling reason to blindly sign up for Roth retirement accounts.... until I realized the most significant effects of tax policy are going to hit income ranges I do not ever expect to hit in retirement.

If you look at taxes in 1980, the marginal rate of 26% (they didn't have 25% then) started at $12,900 for singles. This is about $36k in todays dollars... which is exactly what the 25% bracket current is for singles currently.

Now if you are planning on retiring with income well into the current 25% bracket range I suspect tax policy will affect you more significantly. But by and large significant tax changes have affected those earning considerably more than most Mustachians intending to retire early will draw in retirement.

Because of this, non-Roth plans are overwhelmingly beneficial to Mustachians - who will choose to save/invest all the tax savings to fully capture the difference.

El Limon

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Re: Re-characterizing Roth IRA?
« Reply #9 on: April 21, 2014, 06:54:42 AM »



Because of this, non-Roth plans are overwhelmingly beneficial to Mustachians - who will choose to save/invest all the tax savings to fully capture the difference.
[/quote]

I'm new to the forum, so I never considered the early retirement factor. I switched over from the boglehead forum where everyone wants to retire a multi-millionaire. However, I will still argue for the ROTH. Your today's income tax savings should come from maxing your 401K, 403b, or 459 which is triple what you'll get from the 5500 in an IRA.

Now, it really doesn't matter if your planning on retiring in the low brackets, and in a tax friendly state.     

smalllife

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Re: Re-characterizing Roth IRA?
« Reply #10 on: April 21, 2014, 06:59:04 AM »
I've had this debate with myself, but since I use the Roth IRA contributions as a shit-hit-the-fan emergency fund and I'm not in a super high tax bracket it always comes back to Roth.

madage

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Re: Re-characterizing Roth IRA?
« Reply #11 on: April 21, 2014, 09:31:33 AM »
As a separate question: I will be bumping up against the phase-out for deductibility on Traditional IRA contributions for 2014 and conceivably will surpass it 2015. Does it ever make sense to contribute to a non-deductible IRA as opposed to just contributing to a Roth after you surpass the income limits?

You'll want to do the backdoor Roth at that point - to do that you have to contribute to a traditional and the convert.

Can you expand on this a little? I'm not quite understanding. For 2014 if my AGI is above $59,000, the deductibility starts to get phased out until $69,000, when you get no deduction. Let's say my AGI for 2014 is $70,000. That's higher than deductibility for a traditional IRA but not so much that my contribution to a Roth becomes limited ($114,000). What would be the benefit of contributing to a Traditional IRA at that level of AGI? You get no tax benefit now or in the future. Is that not correct?

Chiron is wrong, or misunderstood, or something. You don't need to do a backdoor Roth. There's no benefit for you to contribute to a non-deductible IRA. You can and should contribute to a Roth IRA directly. Tax-advantaged money is always better than non-tax-advantaged money.