Author Topic: I think I made a mistake, I think I want Roth IRA, what can I do?  (Read 1289 times)

Catica

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I've been thinking about this for several days now and I think I made a mistake opening traditional IRA and putting $11000 in it ($5500 for 2017 and $5500 for 2018).  I believe my marginal tax rate is 12% according to https://www.dinkytown.net/java/TaxMargin.html for 2017.  Is there anything I can do to change this?  And if so, what will I lose by doing this?  I mean I don't know what my tax rate will be for 2018 so I'm not sure if that makes sense to do for 2018 but how does one figure this out?

boarder42

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Re: I think I made a mistake, I think I want Roth IRA, what can I do?
« Reply #1 on: April 07, 2018, 05:46:05 AM »
Yes just roll it over

Catica

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Re: I think I made a mistake, I think I want Roth IRA, what can I do?
« Reply #2 on: April 07, 2018, 05:52:29 AM »
Yes just roll it over
When do I pay tax on it?

Financial.Velociraptor

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Re: I think I made a mistake, I think I want Roth IRA, what can I do?
« Reply #3 on: April 07, 2018, 08:05:11 AM »
You will get a tax form at year end.  So you'll pay as part of 2018 tax year.  You should make estimated payments on form 1040-ES to avoid penalty and interest.

Catica

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Re: I think I made a mistake, I think I want Roth IRA, what can I do?
« Reply #4 on: April 07, 2018, 10:38:14 AM »
You will get a tax form at year end.  So you'll pay as part of 2018 tax year.  You should make estimated payments on form 1040-ES to avoid penalty and interest.
Thanks and will I pay tax on the entire amount that I convert regardless that it was for 2017 and 2018?

terran

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Re: I think I made a mistake, I think I want Roth IRA, what can I do?
« Reply #5 on: April 07, 2018, 10:47:12 AM »
Yes just roll it over
When do I pay tax on it?

If you roll it over (convert it) you will pay tax in the year you make the conversion (2018) on the amount of the conversion (what is actually converted).

You still have time to recharacterize (make it as if you had contributed to a roth in the first place) until the tax filing deadline. Your IRA provider can help with this. If you've already filed your taxes you'll need to file an amended return. You would pay tax on the income on your 2017 taxes for the $5500 you're no longer deferring in a traditional IRA for 2017.

There is no marginal 12% bracket in for 2017. That bracket was introduced in the new tax bill which takes effect for the 2018 tax bill. If your income is staying about the same in 2018 as 2017 theres a pretty good chance your marginal tax bracket will go down in 2018 (from 15% to 12% for example).

Also consider the savers tax when deciding between traditional and Roth.

Remember that what matters is your marginal bracket when you contribute vs your marginal bracket in retirement. You want to make sure you have at least some tax deferred (traditional) when you get to retirement so you can fill up the standard deduction and the lower brackets with withdrawals. A pension would also fill up those lower brackets.

Catica

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Re: I think I made a mistake, I think I want Roth IRA, what can I do?
« Reply #6 on: April 07, 2018, 11:45:55 AM »
Yes just roll it over
When do I pay tax on it?

If you roll it over (convert it) you will pay tax in the year you make the conversion (2018) on the amount of the conversion (what is actually converted).

You still have time to recharacterize (make it as if you had contributed to a roth in the first place) until the tax filing deadline. Your IRA provider can help with this. If you've already filed your taxes you'll need to file an amended return. You would pay tax on the income on your 2017 taxes for the $5500 you're no longer deferring in a traditional IRA for 2017.

There is no marginal 12% bracket in for 2017. That bracket was introduced in the new tax bill which takes effect for the 2018 tax bill. If your income is staying about the same in 2018 as 2017 theres a pretty good chance your marginal tax bracket will go down in 2018 (from 15% to 12% for example).

Also consider the savers tax when deciding between traditional and Roth.

Remember that what matters is your marginal bracket when you contribute vs your marginal bracket in retirement. You want to make sure you have at least some tax deferred (traditional) when you get to retirement so you can fill up the standard deduction and the lower brackets with withdrawals. A pension would also fill up those lower brackets.
Thanks. I wasn't aware of savers tax.  So do you mean if contributing to traditional IRA earns me savers credit that's a good reason to chose traditional IRA?  I just checked and in 2017 I was short of getting the savers credit by $1200!  It's time to contribute more to my 403b!  So, I'm thinking that if I have a chance of being in 12% bracket for 2018 then it's a good time to convert.  Can I convert any time before April 15th 2019?

MDM

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Re: I think I made a mistake, I think I want Roth IRA, what can I do?
« Reply #7 on: April 07, 2018, 12:01:43 PM »
I believe my marginal tax rate is 12% according to https://www.dinkytown.net/java/TaxMargin.html for 2017.
Unlikely, given current income is $80322 and 41, single, childless, no debt,.

Quote
I mean I don't know what my tax rate will be for 2018 so I'm not sure if that makes sense to do for 2018 but how does one figure this out?
See Re: What to do with my money?:
If you enter your expected 2018 tax situation in the case study spreadsheet (or your 2017 tax situation in the last 2017 version (9.11), attached to post https://forum.mrmoneymustache.com/forum-information-faqs/case-study-spreadsheet-updates/msg1825323/#msg1825323), what marginal rates do you see on the chart over cell J93?