Author Topic: Correcting an IRA Mistake Before End of Year  (Read 3092 times)

Pooperman

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Correcting an IRA Mistake Before End of Year
« on: September 18, 2014, 05:49:49 PM »
So while a bit new to investing earlier this year (I've since grown wiser), I invested in a Roth IRA when I should have invested in a Traditional IRA given my income for the year (about 35k). The money I put in ($1850) is now $1900 if I were to take it out today to put in the correct place. Correct me if I'm wrong but I believe I can take out my contribution and put that into a traditional IRA without any troubles. The question for me lies on what happens with the $50 I have since gained. If you can point me to the answer to this that would be great!

not_a_trex

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Re: Correcting an IRA Mistake Before End of Year
« Reply #1 on: September 18, 2014, 10:17:36 PM »
I don't know how to do this. You'll probably have to ask your account broker about the process and what happens to that extra $50.

Out of curiosity, why do you want to do this? Most people are more concerned about converting from a T.IRA to a Roth IRA. Is the $300 dollars you save now worthwhile to have to convert again in 30 years through a loophole that may or may not exist in the future?

Joel

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Re: Correcting an IRA Mistake Before End of Year
« Reply #2 on: September 18, 2014, 10:37:23 PM »
At you income level, a Roth IRA is actually probably preferred. Your marginal tax rate is 15% at most. That's low, and it will likely be higher in the future. I don't think it's necessary to recharacterize your Roth IRA contributions...

Pooperman

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Re: Correcting an IRA Mistake Before End of Year
« Reply #3 on: September 19, 2014, 07:06:46 AM »
At you income level, a Roth IRA is actually probably preferred. Your marginal tax rate is 15% at most. That's low, and it will likely be higher in the future. I don't think it's necessary to recharacterize your Roth IRA contributions...

I get a reduction in taxes twice if I use Traditional over ROTH (Fed and State). Full disclosure on my situation: I live in NJ, work in NY. I expect to stay in the 15% bracket for the next few years using max retirement accounts, etc. Not sure what the effect of the Traditional IRA is when I will likely earn about 65k next year. I've read that it is 'partial' but I have no idea what that really means. I intend to use my bonus for this year (6k) to prepay next year's Traditional. It's going to be close next year as to whether or not I can even use Traditional for tax benefits depending on salary increases, increases in the limit of the partial, and my bonus. ROTH will always be an option for me, my salary max for my career path is about 120k in today's dollars. It is unlikely I'll work long enough to make that much (I don't intend to anyways).

So I did a bit more research but it still isn't clear. I can recharacterize the ROTH contribution directly as a Traditional contribution instead, which will convert the $1900 into a Traditional contribution of $1850 as that is what I originally put in. I've also read that I can withdraw my ROTH contributions at any time (but not the profits). Would this allow me to take out the $1850 I put in, create a Traditional IRA with a contribution of $1850 while my ROTH's contribution would go to $0 (with the $50 gain as a share of some decent ETF)?

Joel

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Re: Correcting an IRA Mistake Before End of Year
« Reply #4 on: September 19, 2014, 10:03:55 AM »
What's your marginal tax rate then? (With the state rate included)

If you are in the 15% federal tax bracket, and expect your income to get up to 70k next year. You will be in the 25% federal tax bracket next year.  With that said, I would keep the month in the traditional IRA this year. Next year, I would focus on increasing your 401k contributions to keep you out of the 25% tax bracket. When in the 15% tax bracket, that is when I contribute to my Roth IRA.

I also live in a high-state tax state (California)...

Pooperman

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Re: Correcting an IRA Mistake Before End of Year
« Reply #5 on: September 19, 2014, 10:11:31 AM »
My income is low from now being unemployed for 5 months this year. I am ineligible for 401k until next month. I will be able to max HSA, 401k and Traditional IRA provided i get the max benefits of the Traditional. State marginal is 6.45% for income above $20,550. New York mirrors federal in terms of deductions with a few extras that I am not eligible for.

Joel

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Re: Correcting an IRA Mistake Before End of Year
« Reply #6 on: September 19, 2014, 10:13:00 AM »
My income is low from now being unemployed for 5 months this year. I am ineligible for 401k until next month. I will be able to max HSA, 401k and Traditional IRA provided i get the max benefits of the Traditional. State marginal is 6.45% for income above $20,550. New York mirrors federal in terms of deductions with a few extras that I am not eligible for.

That's why I'm saying this year it's best to put the money in a Roth IRA, and next year to put the money in your 401k/Traditional IRA...

dandarc

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Re: Correcting an IRA Mistake Before End of Year
« Reply #7 on: September 19, 2014, 10:22:24 AM »
To answer your original question - you can recharacterize your contribution up until your tax-filing deadline (April 15, or October 15 with an extension of the following year).

http://www.investopedia.com/articles/retirement/03/092403.asp

Pretty straightforward computation on how to handle the earnings as far as I can tell, and your custodian may do the math for you regardless.

Whether Traditional or Roth is better for you is your decision - just be sure to figure your taxes correctly when making said decision.