Author Topic: Advice Needed: IRA contribution recharacterization  (Read 2986 times)

WillPen

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Advice Needed: IRA contribution recharacterization
« on: June 23, 2014, 08:01:35 PM »
Hi everyone,

I have some questions for the group.

In 2013 I rolled over some old 401ks for my wife and I into traditional IRAs with Vanguard. Then, I made normal contributions with money that had already been taxed to each of our accounts. I did this for one year (2013). I was thinking that we would be able to deduct this money come tax time, but it turns out I was wrong. Our gross income was too high. As a result our IRAs are now a hodge podge of taxed money and untaxed money.

As a result, whenever we start taking our required minimum distributions in our golden years, we could be paying taxes on whatever % that $5,500 grows to be. And incorrectly so.

I have three options here
1) Keep track of the $5,500 until our IRAs run out or we pass through the pearly gates and inform the IRA that a certain % of that balance is in fact not taxable
2) Say "Screw it" and tell ourselves that the $5,500 will likely be a small percentage of the greater balance that the IRS assesses whenever we reach 59 1/2
3) Recharacterize the IRA contribrtion with Vanguard as a Roth IRA contribution (we also each have one of those). Vanguard figures out how much the $5,500 is worth now, moves it to the Roth IRA, and supposedly makes the situation like it never happened at all. All I have to do is file an amendment with the IRS.

I'm thinking #3 is at least worth a shot.

Has anyone ever done this? Assuming I can, what do I need to do to file an amendment? What forms do I need?

I have an accountant I can work with but I might have to end up paying him. I'd prefer to do it all on my own if possible, which is what I need assistance on.

Any help would be GREATLY appreciated. Part of taking personal responsibility for our finances means making a mistake or two. Just remember if your adjusted gross income is over a certain amount you can't deduct a contribution to a tax deferred account with money that has already been taxed!

Thanks everybody --

Will

WillPen

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Re: Advice Needed: IRA contribution recharacterization
« Reply #1 on: June 24, 2014, 08:58:32 AM »
This seems to be the most reliable information that I have found: http://www.bogleheads.org/wiki/IRA_recharacterization

nordlead

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Re: Advice Needed: IRA contribution recharacterization
« Reply #2 on: June 24, 2014, 10:05:12 AM »
I recharacterized a Roth IRA contribution to a tIRA contribution back in March to reduce my income so I could claim an extra tax credit. All I did was call Vanguard and tell them what I wanted to do. They set everything up for me, I logged in to my account and clicked a few buttons, and then they finished the process.

Based on reading the IRS forms for IRA distributions, I was only required to write a memo to the IRS detailing what happened for 2013. Vanguard should be able to point you to the right forms and instructions (that is where I got the information).

You have until Oct 15 to recharacterize 2013 contributions, so you have tons of time to figure it out.

Grateful Stache

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Re: Advice Needed: IRA contribution recharacterization
« Reply #3 on: June 24, 2014, 10:52:20 AM »
Yes, re-characterization is a fairly simple process. I did it in the spring, and it took 15 minutes on the phone with Vanguard.

However, from what I am reading, there will be tax implications. Traditional IRA/401k is pre-tax, and a Roth is post-tax. You will likely have to pay tax on the conversion. 
« Last Edit: June 24, 2014, 10:55:16 AM by Grateful Stache »

WillPen

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Re: Advice Needed: IRA contribution recharacterization
« Reply #4 on: June 24, 2014, 01:40:39 PM »
Vanguard made it sound like they could do it all for me, too. I was just concerned about what, if anything, I needed to report to the IRS.

Grateful Stache -- I don't think this is a case. The contribution that I wanted to recharacterize is from post-tax money. I have already paid taxes on it, and I am thinking it will be better to recharacterize it to a Roth IRA contribution instead of a tIRA contribution. I hope I'm right though :)

Grateful Stache

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Re: Advice Needed: IRA contribution recharacterization
« Reply #5 on: June 24, 2014, 03:26:51 PM »
There's always option #2!

overfloat

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Re: Advice Needed: IRA contribution recharacterization
« Reply #6 on: June 28, 2014, 07:46:47 PM »
As I understand it, you cannot choose the lot that gets rolled over - if you have post tax and pre tax amounts in a traditional IRA, the amount you roll over will be taxed on a pro-rata basis. So if your traditional IRA account has 10,000 pre tax and 5000 post tax and you choose to roll over 5000 into a Roth, you will get taxed on 3333 of it.


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