Author Topic: Should I recharacterize 2013 ROTH contributions?  (Read 3572 times)

Gone Fishing

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Should I recharacterize 2013 ROTH contributions?
« on: October 01, 2014, 12:40:37 PM »
I didn't know about the ROTH ladder/pipeline until this summer sometime, so up until this point I had been pushing all of my contributions into my ROTH IRA paying Fed taxes at 15% and state at 6% or so.  From what I can tell, I have about two weeks left to go back and recharacterize the contributions, amend my 2013 returns and pick up around $2000 in taxes paid, then just rollover my contributions into the ROTH once I pull the ER trigger when I will be in a lower bracket.  Are there any obvious issues with this plan that I am missing?

Pooperman

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Re: Should I recharacterize 2013 ROTH contributions?
« Reply #1 on: October 01, 2014, 12:52:31 PM »
You will be in a lower bracket than 15%? Generally it is assumed with ROTH pipeline that you will be in the 15% bracket. Sounds like you live in my state. I asked exactly this question about a week or two ago. The answer was basically: no. The long answer was more along the lines of recharacterize just enough to keep you in the 15% bracket. If you are already in the 15% bracket, then having it all as ROTH makes the most sense. If you tIRA, you will have to pay taxes on everything later. You would pay 5% compounding more taxes in the long run beyond inflation. If you were in the 25% bracket, putting it in a tIRA makes a lot more sense along tax lines.

Gone Fishing

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Re: Should I recharacterize 2013 ROTH contributions?
« Reply #2 on: October 01, 2014, 01:11:13 PM »
Thanks Pooper, but I don't see how I could possibly have much income in the 15% bracket once retired.  Here's my math (2014 limits):

Standard Deduction:         $12,400
Personal Exemptions(4):  $15,800
Child Tax Credit (2):         $18,150 sheltered at 10%
                                        $1,233 sheltered at 15%
Total:                              $47,583 with no taxes

There may even be some earned income tax credit to throw in there as well.

Am I looking at this wrong? 
« Last Edit: October 01, 2014, 01:31:16 PM by So Close »

Cheddar Stacker

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Re: Should I recharacterize 2013 ROTH contributions?
« Reply #3 on: October 01, 2014, 01:41:20 PM »
I'm not certain it's still possible. If it's possible, I would consider the following based on your last reply which looks pretty accurate as far as tax free space for conversion:

1) How long will you be able to claim the kids as exemptions?
2) How long will they be eligible for the child tax credit?
3) How much will you need to move out of T.IRA and how long is your time frame to do so?

I would map it out like this based on current tax law:
Year 1 - 10 move $47,500
Year 11-14 move $30,000
Year 15-18 move $21,000
Year 19-24 move $30,000
Year 25-30 move $22,000

Deductions and exemptions will be indexed for inflation. Tax laws will change. You might earn some other taxable income. Your kids will move out. Before they move out, you might be able to claim college tuition credits. You will have no idea how much the T.IRA will grow before you move it to R.IRA. Move your holdings that have declined in value that you expect to increase in value. If the market tanks in any given year, consider moving $80K and paying tax on half of it at an effective rate of 14% just to ensure you can clean out the T.IRA before RMD's kick in.

I know that's not what you were asking for, but since you're so close to FIRE I thought I'd outline my rough plan in the hopes it could help you think through all this.

Gone Fishing

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Re: Should I recharacterize 2013 ROTH contributions?
« Reply #4 on: October 01, 2014, 03:21:02 PM »
Thanks Cheddar, I did need go a little further out with my tax projections.  This is pretty much what I am thinking:

Years 1-4 (2 Child tax credits):Use taxable investments/wife's part time income for living expenses.  Fund Roth (using taxable investments) as allowed by her earned income. Roll as much as I can from TIRA to RIRA within my tax free space without messing up ACA subsidies.  Most of my capital gains should be taxed at 0% (as long as this holds out).

Years 5-7 (1 Child tax credit): Pretty much the same just won't have as much tax free space.

Years 7-15 Tax free space will be pretty compressed at this point, but at some point during this time frame, all TIRA should be rolled into the Roth, and hopefully long term cap gain remain at 0% as taxable accounts will be consumed/ used to fund Roth if wages continue. 

Years 15+ Once taxable investments are all used/contributed to Roth, I'll turn to Roth contributions to fund living expenses.  If contributions are used prior to 59.5(doubt it), I'll start a 72(t).
« Last Edit: October 01, 2014, 05:18:23 PM by So Close »

Gone Fishing

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Re: Should I recharacterize 2013 ROTH contributions?
« Reply #5 on: October 07, 2014, 02:02:12 PM »
Just got off the phone with my CPA.  He seemed to think the tax return amendments would be quite troublesome and didn't want to do them.  He wouldn't even give me a cost estimate until after he did them.  I guess he was afraid he would have too much time in them? He said he would basically have to redo the entire return to add an IRA deduction.  WTF? He also said I was welcome to call another CPA in town (there are only a few).  WTF?  Is it that much of a PITA?

Cheddar Stacker

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Re: Should I recharacterize 2013 ROTH contributions?
« Reply #6 on: October 07, 2014, 03:51:26 PM »
Your cpa is very busy right now. No, its not hard, he. Just doesn't want to deal with it right now. Might be time to find another one.

Gone Fishing

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Re: Should I recharacterize 2013 ROTH contributions?
« Reply #7 on: October 10, 2014, 08:39:09 AM »
I was able to get hold of another CPA that was happy to confirm my eligibility to recharacterize and amend.  I started at the beginning, told him about my pending FIRE, and explained my strategy.  Once he understood, he agreed that the recharacterization would probably work out in my favor.  Turns out the amendment will be simple enough, so I will probably do it myself. I will just need to go back and deduct the IRA contribution.  Called Vanguard and pulled the trigger this morning.  I will update this thread 10-15 years from now and let everyone know how things worked out!   
« Last Edit: October 10, 2014, 08:54:33 AM by So Close »

Cheddar Stacker

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Re: Should I recharacterize 2013 ROTH contributions?
« Reply #8 on: October 10, 2014, 08:45:55 AM »
I will updated this thread 10-15 years from now and let everyone know how things worked out!   

Could you narrow down that range a bit. I already have something scheduled 11-14 years from now and I don't want to miss the update. ; )

Nice work taking control yourself. Amending a return is not a big deal, good luck with it.

teen persuasion

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Re: Should I recharacterize 2013 ROTH contributions?
« Reply #9 on: October 10, 2014, 08:55:56 AM »
Thanks Pooper, but I don't see how I could possibly have much income in the 15% bracket once retired.  Here's my math (2014 limits):

Standard Deduction:         $12,400
Personal Exemptions(4):  $15,800
Child Tax Credit (2):         $18,150 sheltered at 10%
                                        $1,233 sheltered at 15%
Total:                              $47,583 with no taxes

There may even be some earned income tax credit to throw in there as well.

Am I looking at this wrong?

Just wanted to mention - EITC has an investment income cap of ~$3300.  If your investment income is higher, you are ineligible.  But if DW has earned income, you might be eligible for the retirement savers credit if you fund Roths.  Put at least $2k in one for each, and AGI in right range, up to $2k tax credit.

Gone Fishing

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Re: Should I recharacterize 2013 ROTH contributions?
« Reply #10 on: November 04, 2015, 09:10:10 AM »
Just wanted to update this topic. I didn't get my amended 2013 returns sent in until sometime in May of this year (yes, I was procrastinating).  Got my adjusted federal refund sometime in August, and my state refund last week.  Took me a little time to get it all figured out, but should be well worth it!