The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: BucketBike on February 11, 2018, 11:45:22 AM
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Hi folks! If anyone is more knowledgable about this than I am, I would really appreciate some help. I've been trying to figure it out by googling, but just keep finding Roth vs. Traditional articles.
Anyway, I thought I was going to max out a Roth IRA this year but then decided to max a Traditional instead. I have $500 sitting in a Roth account through Vanguard that is not invested in anything. If I withdraw this and put it in my bank account, can I then put it back into my Traditional IRA for the same year? Or is that not possible?
Thank you!
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You have to recharacterize the 500. At most brokerages, you will end up with 2 (or more!) Traditional accounts. Some allow consolidation of similar accounts. Others don't.
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Thank you Financial.Velociraptor!
Sounds like I need to give Vanguard a phone call.
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If you contributed to the Roth for the 2017 tax year, as Financial.Velociraptor said, you can recharacterize it to traditional any time up to your tax filing deadline by calling your IRA administrator. You'll need to attach a statement to your tax return explaining what you did, and you'll be able to deduct that $500 from your income (assuming you're within the income limits to do so).
If the contribution was for a previous tax year you should just leave it where it is as you can't now get it into a traditional IRA.
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terran, that was very informative.
It was for the 2017 tax year, but I already filed taxes this year. Is it too much of a hassle to recharacterize it after filing taxes? To be honest, I don't really care about deducting the $500 from my taxes, I just want to be able to invest it into VTSAX which has a $10,000 minimum. I don't plan on putting $10,000 into a Roth IRA anytime soon.
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You can recharacterize after filing taxes, as long as it is still before the tax filing deadline.
I'd recommend amending your taxes and deducting the additional $500, but that's just because I like to keep things neat and organized and straightforward. I don't think anything bad will happen to you if you don't, though.
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That's excellent news, Secondcor521! Thanks!
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Is the $500 a contribution or is any part of it gains?
All the talk of recharacterization sounds overly complicated. You are supposed to be able to withdraw contributions at anytime, it's your money that has already been taxed. A quick Goolge search says:
"You can withdraw contributions you made to your Roth IRA anytime, tax- and penalty-free. However, you may have to pay taxes and penalties on earnings in your Roth IRA. Withdrawals from a Roth IRA you've had less than five years."
I would think after you take it out you could do whatever you want with it, is it not that simple?? Or is the recharacterization so you can get back the taxes you paid on the Roth contribution? Guessing so, maybe I answered my own question LOL.
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I just noticed that OP said that s/he maxed the traditional IRA and then has $500 in a Roth.
I should point out for clarity that one can only contribute $5,500 (more if you're over 50) per tax year total between both the Roth and the traditional IRA, and you can only recharacterize contributions for the current tax year(s).
So I'm not sure of the actual situation, but:
1. If the OP contributed $5,000 or less to the traditional and $500 to the Roth for 2017, s/he can still recharacterize the $500 from Roth to the traditional. I recommend submitting amended tax returns to federal and state to show the additional $500 deduction and saving maybe $50-$100 in taxes, more if the OP qualifies for the Retirement Savings Tax Credit.
2. If the OP contributed more than $5000 to the traditional and the $500 to the Roth for 2017, s/he has overcontributed and will owe a 6% penalty on the excess each year the excess remains in the IRA(s). S/he should remove anything over $5,500 ASAP. This is unlikely since it sounds like both the IRAs are at Vanguard, and they keep track of the contribution limits for you.
3. If the $500 in the Roth was contributed for tax year 2016 or earlier, it can no longer be recharacterized. It could be withdrawn, as Rob_bob notes, but any gains would either need to be left in the account (which sounds like it might be very small), or if withdrawn would face both income taxes and a 10% penalty for early withdrawal.
OP, how much did you actually contribute to your IRAs and for which tax years did you make the contribution(s)?
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secondcor521, sorry for the confusion. I contributed $5,000 to my traditional and $500 to my roth. I didn't know there was a penalty to overcontributing. I've been learning a lot from you! :)
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No worries. Then my original suggestions stand.