Changing (reducing) your IRA contribution for the tax year

[tskzes]

Hey all,

I pulled some shenanigans where I put the bulk of my pay directly into an IRA, and then additionally put 4K into a vanguard IRA (as a state employee I was told I have my employer match 403B, an additional ~17,500$ 403B and I can also have the standard ~5K IRA contribution per year in a separate account) which made my AGI quite low (14,000$ for the year) and I see I got the maximum refund possible (effectively paid no federal taxes).

The overall gist is I made 30K$
diverted 12K$ of my pay pre tax to IRA through my employer
and put 4K into vanguard IRA


Now that I got my W2 and have the data to plug into my tax software I am seeing that I only really needed to put 1K$ into an a traditional IRA (the vanguard account) to max out my tax benefit. I would much rather held onto my money or put it into a ROTH ira if I wasn't getting a tax benefit for it.

What are the rules about reversing a contribution to an IRA fund? What options do I have to not waste my contribution to an IRA? I am having trouble finding information online about it.

Thanks in advance for any advice.

[BarkyardBQ]

It sounds like you have over contributed to your IRA's which is 5500 MAX for the year...

You can contribute 17500 to the 403b for 2014
and 5500 to either Traditional or Roth IRA.

If you made any of the contributions in 2015, you could change the overage to be 2015 contributions with Vanguard and your problem is solved. Otherwise, I'm not sure how you go about taking it out.

[tskzes]

It sounds like you have over contributed to your IRA's which is 5500 MAX for the year...

You can contribute 17500 to the 403b for 2014
and 5500 to either Traditional or Roth IRA.

I only contributed 4k outside of employers 403B so I don't think that is an issue.

I contributed the 4k in 2014.

[skyrefuge]

Your first sentence is why we're confused. I think you meant to say:

"I put the bulk of my pay directly into an IRA my 403(b), and then additionally put 4K into a vanguard IRA"

Anyway, the search term you are looking for is "recharacterization". This is something Vanguard can easily do, though you might want to speak with them first. They have a form at https://personal.vanguard.com/pdf/s220.pdf

Example 2 at Investopedia almost describes your exact situation.

It needs to be done before the 2014 filing deadline.

If I were you, I might recharacterize the entire $4k amount to a Roth IRA. Not just because that avoids having to deal with the earnings as described at Investopedia, but because the amount that you'll be taxed on that $1k is extremely low. To answer "should I contribute to a Traditional or Roth IRA", you shouldn't ask "will it reduce my taxes today?", you should ask "is the tax I pay today lower than it will be when I withdraw the money in retirement?"

And are you sure you'll even be taxed at all? It seems you should be eligible for $2k worth of the Savers Credit, reducing your taxes to 0 even if you don't deduct any IRA money.

[tskzes]

Your first sentence is why we're confused. I think you meant to say:

"I put the bulk of my pay directly into an IRA my 403(b), and then additionally put 4K into a vanguard IRA"

Anyway, the search term you are looking for is "recharacterization". This is something Vanguard can easily do, though you might want to speak with them first. They have a form at https://personal.vanguard.com/pdf/s220.pdf

Example 2 at Investopedia almost describes your exact situation.

It needs to be done before the 2014 filing deadline.

If I were you, I might recharacterize the entire $4k amount to a Roth IRA. Not just because that avoids having to deal with the earnings as described at Investopedia, but because the amount that you'll be taxed on that $1k is extremely low. To answer "should I contribute to a Traditional or Roth IRA", you shouldn't ask "will it reduce my taxes today?", you should ask "is the tax I pay today lower than it will be when I withdraw the money in retirement?"

And are you sure you'll even be taxed at all? It seems you should be eligible for $2k worth of the Savers Credit, reducing your taxes to 0 even if you don't deduct any IRA money.

ah yes.

Thanks,  that was exactly what I was looking for.

I will have to test different scenarios but the reason why I think I would want to keep that 1k$ in the IRA is that it puts me in the lowest AGI bracket for the savers tax credit so it actually gives me a big boost on my return.