Re-characterize 2014 Trad IRA to Roth

[katstache92]

Hi All,

I worked through my taxes last weekend, but have not filed them yet, and discovered that of my $5,500 traditional IRA contribution for 2014 I can only claim $410.  I put this money away in March 2014 in a new account along with a rolled over 401k, pension, and 2013 traditional IRA contributions.  I was in the process of starting a new job as well.  I also hadn't found MMM yet and made some choices that were obviously not stellar.

I just talked to my guy at the bank and he said I can re-characterize the $5,090 into a Roth IRA.  By doing this, within the same bank, I can avoid the 1% fee to switch away from Fidelity, however there will be a $50 charge each November until the balance reaches $25,000 which would be at least $150 or $200 in fees.

Also, if I move the money internally within the bank to a Roth and then later move the money to a different bank I will have to pay a fee to close the account of $75-$95.  So re-characterizing it internally and dealing with it after taxes are done is not a great option either.

An alternate option is to open a Roth somewhere else and have that bank/website/other option (??) pull the money and do the re characterization.  However, this option will come with a 1% fee since I will be pulling the money from Fidelity before the 5 years are up.  The "deal" was you only had to pay 1% in fees to get into this mutual fund but then you had to leave the money there for 5 years.  Clearly, there's been a bump in the road (making too much money, darn!) and the original plan to leave the money has changed.  I would only plan on moving the $5,090 and leaving the rest of the money where it is (although moving it to some kind of index fund in the near future once this dust has settled.)

So I am trying to figure out what my best option is, based on the current situation.  I am not wise in the ways of investments yet, but I am trying to learn more.  I am assuming just leaving the money where it is and paying taxes on it twice is a bad idea.  What does the MMM community recommend as far as a place to open a Roth?  Are there certain websites/banks/other options that will help me deal with the re-characterization in time before taxes are due?  Any advice would be greatly appreciated!  Let me know if I left anything out, I tried to include everything I could think of at the time.

Thank you!

[jmusic]

1.  If you recharacterize $5090 to Roth that will change your $410 deduction (your actual deduction will then be a lot less).  You might as well recharacterize the entire amount.

2.  Holy fee city!!  I did a recharacterization (from rIRA to tIRA) with USAA and didn't pay a dime to do it.  Maybe just do a recharacterization straight to Vanguard?

[jmusic]

Also, for future reference, if you increase your 401K contributions, this has the added benefit of helping you qualify for tIRA deduction.  The phaseout starts at an AGI of ~$61K.  Disregard if you're already maxing your 401K. 

[beltim]

1.  If you recharacterize $5090 to Roth that will change your $410 deduction (your actual deduction will then be a lot less).  You might as well recharacterize the entire amount.

This is inaccurate.  The OP said that only $410 is deductible.  That doesn't change regardless of excess contributions or contributions to Roth IRAs.

[katstache92]

1.  If you recharacterize $5090 to Roth that will change your $410 deduction (your actual deduction will then be a lot less).  You might as well recharacterize the entire amount.

This is inaccurate.  The OP said that only $410 is deductible.  That doesn't change regardless of excess contributions or contributions to Roth IRAs.

Correct, the $410 is what I can claim of the $5,500 and I'll plan on leaving that as is, unless there is a reason not to.

Also, for future reference, if you increase your 401K contributions, this has the added benefit of helping you qualify for tIRA deduction.  The phaseout starts at an AGI of ~$61K.  Disregard if you're already maxing your 401K.

This is a good point, right now I'm not maxing things out.  At that time I really had no direction/goal and figured the 10% I was contributing was good enough.  You live, you read MMM, you learn.  I am planning on maxing out this year.

2.  Holy fee city!!  I did a recharacterization (from rIRA to tIRA) with USAA and didn't pay a dime to do it.  Maybe just do a recharacterization straight to Vanguard?

I am kind of done dealing with this bank, right now I guess I'm leaning towards moving it and losing the 1%.  It would be good to get something started with Vanguard other than my 401k.

It seems like Vanguard is the favorite around here.  Has everyone had a good customer experience with them?

[beeste]

So far you haven't actually received any tax benefit. That means you can roll it over into a Roth, and only pay taxes on the earnings... which I would do into a Vanguard account to avoid future fees. However this above statement is only true if you have no more traditional IRA wealth. It's more complicated if you do.

Also, you could withdraw the entirety of your account balance. If you do this, since it is the current tax year you and you haven't taken a deduction, you only will pay a withdrawal penalty on your earnings, which are presumably small. Say you started with 5500, have 6000, you pay a 50 penalty and the 450 is additional ordinary income. Then you fund a Roth with that 5500, and put your 450 - taxes into some other savings... after you pay Fidelity the breakup fee. I assume you can directly pay into a Roth because you said you have a 401K option which means your IRA max deduction is much less than the max to directly contribute to a Roth.

I similarly am paying a breakup fee to Etrade to transfer my Roth to Vanguard, but I consider it acceptable because I'll be able to buy Vanguard ETFs commission free going forward, and currently pay ETrade 10 bucks each time I buy and sell to rebalance. Honestly, you'll pay less if you leave Fidelity now and start using Vanguard ETFs and Funds.

Note, I am not a legal expert, more of an amateur... but I think what I said is correct. Just double check before you do it.

[jmusic]

1.  If you recharacterize $5090 to Roth that will change your $410 deduction (your actual deduction will then be a lot less).  You might as well recharacterize the entire amount.

This is inaccurate.  The OP said that only $410 is deductible.  That doesn't change regardless of excess contributions or contributions to Roth IRAs.

Correct, the $410 is what I can claim of the $5,500 and I'll plan on leaving that as is, unless there is a reason not to.

My mistake.  I was thinking he was saying his tax savings was $410. 

[katstache92]

Thanks for all of the advice!

I called and talked to Vanguard several times.  I got a lot of good information, including that I should move my additional account balance to them since I was in funds with fairly high expense ratios.  So I'll save a bundle over the next four years even though I might lose 1% now.  I found out today that if I switch things over "in kind," then I might not have to pay the 1% penalty, so hopefully Vanguard can help make that happen.

I am not pleased with how things have turned out, but everything will be better in the long run.  I will need to open a new account and having the old bank do the earnings/loss analysis for the conversion.  This will be done before taxes, so I should be able to file them now, since I know what my plan is for the money.  Then, as quickly as possible I will be moving the money to Vanguard.

I am glad someone at Vanguard talked to me about the expense ratios.  I am reasonably furious about what I was paying before, but that will be corrected shortly.

[katstache92]

The money is in the process of being moved from the traditional to the Roth.  However, I am concerned about the tax on the "earnings."  I believe the earnings are around $51 for the amount that is being re-characterized.

It looks like I should get a new form 5498 and a 1099-R.  Would this still apply for 2014 taxes and not 2015 since it's working with 2014 money?

I am okay to file my locals because they ignore this kind of income but I don't want to file my state and federal taxes yet because I have a feeling this will come back to bite me.  I also feel like guessing on this kind of thing is a bad idea.

So I am asking, will this income be considered 2014 money?  And who wants to bet that the forms I need will not be available before 4/15.  Is there a way I can come up with these amounts on my own without any official forms from the company?