Author Topic: Screwed up my roth contribution, need advice.  (Read 4937 times)

gimp

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Screwed up my roth contribution, need advice.
« on: April 01, 2015, 03:16:21 PM »
Embarrassing...

I contributed the max earlier this year ($5500) into my roth IRA (which already had one year's contributions plus growth) a few months ago.

Now I realize that I will most likely be over the roth ira income limit this year.

What I would like to do is - if I understand correctly - convert this year's contributions into a traditional IRA, then sometime later, back into roth. That'll likely make me pay some taxes - so be it, not worried.

How should I proceed? Can I call up vanguard and do this? Can I do it through their website? What do I need to know, and take into account?

I've been reading some stuff but a lot of it doesn't apply to me, some is just confusing. I'd love an article describing precisely what I'm trying to do (roth -> trad -> roth to get around income limits) with the procedure and costs involved.

Eric

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Re: Screwed up my roth contribution, need advice.
« Reply #1 on: April 01, 2015, 03:42:47 PM »
The maximum amount you can contribute to an IRA is $5500.  It doesn't matter if it's a Roth or Traditional.  All IRA contributions combined need to be $5500 or less per (tax) year.  Why do you think you can get around this limit by just re-classifying the contribution type?

GreenPen

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Re: Screwed up my roth contribution, need advice.
« Reply #2 on: April 01, 2015, 03:43:48 PM »
You should tell Vanguard that want to "recharacterize" your IRA contribution from Roth to traditional. This should be easy to do. The paperwork becomes a bit more difficult if your Roth account had existing funds in it, since you will need to calculate what percentage of the appreciation should also be recharacterized.

netskyblue

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Re: Screwed up my roth contribution, need advice.
« Reply #3 on: April 01, 2015, 04:13:40 PM »
The maximum amount you can contribute to an IRA is $5500.  It doesn't matter if it's a Roth or Traditional.  All IRA contributions combined need to be $5500 or less per (tax) year.  Why do you think you can get around this limit by just re-classifying the contribution type?

He's not trying to contribute more than $5500.  I'm assuming at the beginning of the year, he expected his AGI to be under $129k (if single) or $191k (if married).  He's now thinking his income will be above that, thus making him ineligible to contribute to a ROTH-type IRA.

OP - How much over do you expect to be, and can you shelter more dollars (in an HSA or something) to avoid going over?

Eric

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Re: Screwed up my roth contribution, need advice.
« Reply #4 on: April 01, 2015, 04:57:19 PM »
Ahh, sorry gimp.  I misread.  Thanks NSB.

gimp

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Re: Screwed up my roth contribution, need advice.
« Reply #5 on: April 01, 2015, 05:15:24 PM »
I'll most likely end up at the higher end of the phase-out limit or above it. Nothing else I can do to get below it; already maxed 401k, hsa...

I'll call vanguard to figure out how to recharacterize.

And of course, I have just a bit over the $10k requirement for VTSAX, so when I recharacterize that I'll be under $10k, so I'll probably end up having to trade all of it for vtsmx and then back after some time.

As far as I understand it, once I go roth -> traditional I am all good for income limits, and then I can do traditional back into roth after 30 days and still be all good for income limits. I hope that's correct.

Cwadda

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Re: Screwed up my roth contribution, need advice.
« Reply #6 on: April 01, 2015, 05:53:05 PM »
Did you max for 2014 as well? You might've already done so, but you'd be able to recharacterize some of that into 2014 before April 15th.

Vanguard is great on customer service so I doubt it'll be too difficult for whatever you end up doing.

gimp

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Re: Screwed up my roth contribution, need advice.
« Reply #7 on: April 01, 2015, 06:09:36 PM »
I sure did!

Yah I will call em.

GreenPen

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Re: Screwed up my roth contribution, need advice.
« Reply #8 on: April 01, 2015, 09:29:04 PM »
As far as I understand it, once I go roth -> traditional I am all good for income limits, and then I can do traditional back into roth after 30 days and still be all good for income limits. I hope that's correct.

I have no clue on the 30 day thing... but I'm curious about why you are in a rush to convert from traditional to Roth (rather than waiting until after FIRE). Do you need this money in the next five years?

dandarc

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Re: Screwed up my roth contribution, need advice.
« Reply #9 on: April 01, 2015, 09:55:47 PM »
As far as I understand it, once I go roth -> traditional I am all good for income limits, and then I can do traditional back into roth after 30 days and still be all good for income limits. I hope that's correct.

I have no clue on the 30 day thing... but I'm curious about why you are in a rush to convert from traditional to Roth (rather than waiting until after FIRE). Do you need this money in the next five years?
If gimp's over the income limit for Roth contributions, likely the contribution to traditional is not tax deductible (was mentioned 401K is maxed out so gimp is covered by a workplace plan).  Therefore this is a slightly more-complicated backdoor Roth IRA.

1.  Recharacterize to traditional -> in a normal backdoor Roth, you just contribute to the traditional.
2.  Convert to Roth at a later time, preferably before much tax is incurred.

Call Vanguard - it is ridiculously easy to work with them over the phone on these types of things.  One thing to keep in mind - if you have any other traditional IRA amounts out there, it makes the "convert to Roth" step less effective.  If you do have traditional IRAs laying around, even at other brokers, it would be good to see if you can roll them into your 401K before doing the conversion to Roth.

supomglol

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Re: Screwed up my roth contribution, need advice.
« Reply #10 on: April 02, 2015, 01:37:32 PM »
I had the exact same problem, I contributed $3000 to open a Roth-IRA from Vanguard in Q2 of 2014.  My tax accountant informed me a couple of days ago of the issue making too much in 2014, I thought it was going to be a complete pain in the ass to resolve it. 

I called vanguard, told the first guy who answered the phone "I want to reclassify an IRA contribution"  He immediately got me on the phone with another guy who knew exactly what I wanted to do and why I was doing it.  Less than 5 minutes later he was asking for my confirmation of the change prior to him clicking submit.  Extremely painless and apparently more common than I thought. 

Total call time: (including hold) 11 minutes.

gimp

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Re: Screwed up my roth contribution, need advice.
« Reply #11 on: April 02, 2015, 05:35:55 PM »
Thanks guys.

Thankfully no traditional anywhere, so that will make life easier.

gimp

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Re: Screwed up my roth contribution, need advice.
« Reply #12 on: April 20, 2016, 01:54:13 PM »
Just to necro this for anyone who may find it on google -

Everything stated above was correct. I recharacterized my roth contributions as traditional contributions, then a month later converted (not recharacterized, converted) back to roth. Took only a few minutes on the phone with vanguard.

MDM

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Re: Screwed up my roth contribution, need advice.
« Reply #13 on: April 20, 2016, 04:10:56 PM »
Always good when a plan comes together - well done!