The Money Mustache Community
Learning, Sharing, and Teaching => Taxes => Topic started by: Crazydude on February 20, 2016, 10:57:01 AM
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Just finished my taxes with Turbo Tax, I owe roughly $2,000 to the IRS. This is because I have self-employment income, which fluctuates, and I went from working full-time to student full-time so my estimate of what I'd owe was off.
I maxed out my ROTH contributions for myself and my wife at $11,000 last year. However if I "re-characterize" (I think this can be done) those from the Roth to a traditional IRA (which I already have opened), it'll cut my tax bill from $2,000 to at least $1,000.
I'm strongly considering doing this, however I like the idea of the later-on tax benefits of the Roth, so I'm just curious to hear people's opinions.
As a side note, it's not an issue for me to foot this bill.
Thanks!
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After searching the forums I found a couple threads talking about this already. I'm now leaning towards NOT re-characterizing simply because 1. I can pay the bill without issue, and 2. In the long-term, I think the X dollars I have in the Roth will end up producing more than $2k in tax free income, so I can wait.
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How close are you to the savers tax credit limits? If a bit of recharacterization will get you there it could be a very high marginal tax savings rate. https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Savings-Contributions-Savers-Credit
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How close are you to the savers tax credit limits? If a bit of recharacterization will get you there it could be a very high marginal tax savings rate. https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Savings-Contributions-Savers-Credit
Hmm I didn't know about this credit. AGI is above 80k though so not really close. Next year I may be though. I'll have to keep that in mind.
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After searching the forums I found a couple threads talking about this already. I'm now leaning towards NOT re-characterizing simply because 1. I can pay the bill without issue, and 2. In the long-term, I think the X dollars I have in the Roth will end up producing more than $2k in tax free income, so I can wait.
Roth is probably ok for you. What isn't clear is the "X dollars I have in the Roth will end up producing more than $2k in tax free income" reason.
You want to compare your current marginal rate (15% federal plus whatever state) to the marginal rate you expect to pay when you withdraw these funds. There is a decent chance you will pay the same 15% federal plus whatever state (or higher, if SS taxability comes into play). In that case Roth will be better.