No longer eligible for TIRA deduction - can I move my contributions to a ROTH?

[sloth bear]

Hi all!

I have a question about non-deductible Traditional IRA contributions. In 2014 and 2015, I was able to fully deduct my Traditional IRA contribution ($5,500) from my gross wages. I started making monthly contributions to my TIRA in 2016, but I was promoted last month and now my MAGI will be too high for me to deduct the TIRA contributions (a good problem to have). I am, however, still eligible to contribute to a ROTH IRA. I switched over my remaining monthly contributions to the ROTH, but I don't know what to do about those six months of non-deductible TIRA contributions.

My question is - is it worthwhile for me to convert my 2016 non-deductible TIRA contributions to a ROTH IRA? I understand that I will have to pay taxes (http://www.investopedia.com/ask/answers/197.asp) on a portion of the conversion. Is this worthwhile? Or is it better to leave the money in the TIRA?

For reference, I've contributed $2,750.02 to the TIRA in 2016 (the remaining $2,749.98 will go to the ROTH). My total TIRA balance is $14,600 and my total ROTH balance is $19,500. Based on the formula in the Investopedia article, I'd pay taxes on about 94% of the conversion. Is it worth it?

I'd be grateful for any input!

Thanks,
Trin

[terran]

Yes, you want to recharacterize your 2016 contributions. Talk to your provider and they should be able to help. You'll need to add a statement to your taxes explaining what you did.

[dandarc]

Wait to do this until after all of your tax documents come in - you want to be sure you can't deduct any of those contributions before you recharacterize.  You can recharacterize up to your tax filing deadline (4/15, or up to 10/15 with an extension).

Wife and I contribute to Roth every year, but the last 2 years, we've wound up in the phase-out range for deducting traditional IRA contributions.  Our process is:

1.  Contribute to Roth IRAs through the year
2.  Prepare a draft version of taxes in Turbotax with 100% of our IRA contributions marked as traditional.
3.  Turbotax tells us how much is deductible.
4.  We call Vanguard and have them recharacterize the amount from step 3.
5.  Adjust Turbotax to show the real traditional-Roth split
6.  File

[secondcor521]

A few important things:

1.  A conversion and a recharacterization are two different things.  You probably want to do a recharacterization.
2.  If you recharacterize your 2016 T-IRA contributions to your Roth IRA, you will not owe any taxes on the recharacterization.
3.  There is a deadline to do the recharacterization (I think it's before you file your 2016 tax return next spring).
4.  To recharacterize, just call your T-IRA provider and inform them that you want to recharacterize your contributions from your T-IRA to your Roth IRA.  They will figure out the correct amount to move for you (they have to include any market increases or decreases associated with your contributions between the time you made the contributions and now).  The amount may be different from the sum of your contributions, but you don't have to worry about that difference at all.

As far as the statement goes that terran refers to, you'll want to look at the instructions for Form 8606.  Basically what you wrote in your OP should suffice.

[sloth bear]

terran, dandarc, and secondcor521 - Thank you all SO much for your replies! I was able to take care of the re-characterization today with Vanguard. I really appreciate the information. Thank you again!

Trin

[mizzourah2006]

Wait to do this until after all of your tax documents come in - you want to be sure you can't deduct any of those contributions before you recharacterize.  You can recharacterize up to your tax filing deadline (4/15, or up to 10/15 with an extension).

Wife and I contribute to Roth every year, but the last 2 years, we've wound up in the phase-out range for deducting traditional IRA contributions.  Our process is:

1.  Contribute to Roth IRAs through the year
2.  Prepare a draft version of taxes in Turbotax with 100% of our IRA contributions marked as traditional.
3.  Turbotax tells us how much is deductible.
4.  We call Vanguard and have them recharacterize the amount from step 3.
5.  Adjust Turbotax to show the real traditional-Roth split
6.  File

This is exactly what we do as well. Last year I think we got about $4.5k that was tax deductible.

[NESailor]

A few important things:

1.  A conversion and a recharacterization are two different things.  You probably want to do a recharacterization.
2.  If you recharacterize your 2016 T-IRA contributions to your Roth IRA, you will not owe any taxes on the recharacterization.
3.  There is a deadline to do the recharacterization (I think it's before you file your 2016 tax return next spring).
4.  To recharacterize, just call your T-IRA provider and inform them that you want to recharacterize your contributions from your T-IRA to your Roth IRA.  They will figure out the correct amount to move for you (they have to include any market increases or decreases associated with your contributions between the time you made the contributions and now).  The amount may be different from the sum of your contributions, but you don't have to worry about that difference at all.

As far as the statement goes that terran refers to, you'll want to look at the instructions for Form 8606.  Basically what you wrote in your OP should suffice.

I'm running into this same thing.  My wife got a substantial raise (job switch) and we're going to run into this.  Now, if we just recharacterize all of the non-deductible contributions as "Roth"

- do we still need form 8606? 
- do we need a statement explaining anything if we recharacterize the entire non-deductible piece?

There wouldn't be anything to explain, right?

Thanks!

[secondcor521]

I don't think so, but I'm not entirely sure.

Honestly, even though I make various transactions that have occasionally shown up on Form 8606, I find the form and its instructions horrendously confusing.  Someday soon I'm going to have to take my taxes to an accountant I trust and confirm I'm doing everything correctly.

I'd suggest taking a look at Form 8606 and its instructions, fill it out as best you can, and then take a step back and make sure the results from filling in the forms have the effect on your taxes that you think they should.

At one point in the distant past I had to provide a statement with my tax returns stating what I did, even though what I did was perfectly legal, had no impact on my taxes, and was a very common thing to do.  I was surprised that the statement was required, but that is what the tax software I used that year said was necessary so I went ahead and provided it.

[brad0247]

Wait to do this until after all of your tax documents come in - you want to be sure you can't deduct any of those contributions before you recharacterize.  You can recharacterize up to your tax filing deadline (4/15, or up to 10/15 with an extension).

Wife and I contribute to Roth every year, but the last 2 years, we've wound up in the phase-out range for deducting traditional IRA contributions.  Our process is:

1.  Contribute to Roth IRAs through the year
2.  Prepare a draft version of taxes in Turbotax with 100% of our IRA contributions marked as traditional.
3.  Turbotax tells us how much is deductible.
4.  We call Vanguard and have them recharacterize the amount from step 3.
5.  Adjust Turbotax to show the real traditional-Roth split
6.  File

If you ended up making too much money to contribute to a Roth directly, would your strategy be to recharacterize the full amount to Traditional IRA and then convert to Roth?

[dandarc]

Wait to do this until after all of your tax documents come in - you want to be sure you can't deduct any of those contributions before you recharacterize.  You can recharacterize up to your tax filing deadline (4/15, or up to 10/15 with an extension).

Wife and I contribute to Roth every year, but the last 2 years, we've wound up in the phase-out range for deducting traditional IRA contributions.  Our process is:

1.  Contribute to Roth IRAs through the year
2.  Prepare a draft version of taxes in Turbotax with 100% of our IRA contributions marked as traditional.
3.  Turbotax tells us how much is deductible.
4.  We call Vanguard and have them recharacterize the amount from step 3.
5.  Adjust Turbotax to show the real traditional-Roth split
6.  File

If you ended up making too much money to contribute to a Roth directly, would your strategy be to recharacterize the full amount to Traditional IRA and then convert to Roth?

Not an issue for us, but I think you can do this if you're close to the Frontdoor / Backdoor line than the deductible tIRA / Roth line.