Roth --> Traditional --> back to Roth. Seriously?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.

Roth --> Traditional --> back to Roth. Seriously?

Postby lches » Fri Dec 28, 2012 10:09 pm

Ok, first time posting here.

So my wife and I each contributed $5000 to a Roth IRA this year, but now we're over the income limits. I've requested a withdrawal of my contributions (plus earnings), which I will then use to max out our HSA contributions instead. My wife called today to have her Roth contributions for the year recharacterized into a new traditional IRA (all of our funds up until now have been in the Roths). Am I correct in thinking that I should now wait a few days and then convert her new traditional IRA back into the Roth, assuming that's where I would really prefer the money to end up? Does that really work?

I understand that I could have contributed to a traditional IRA in the first place, and then done the backdoor conversion, but something feels fishy about the fact that we initially made the contributions into the Roth, then had to recharacterize it, and then just converted it right back into the Roth.

Anyone want to give me some reassurance (or a word of caution)?
lches
 
Posts: 2
Joined: 28 Dec 2012

Re: Roth --> Traditional --> back to Roth. Seriously?

Postby englishgirl » Fri Dec 28, 2012 11:19 pm

Yes. Seriously. I may (but probably won't) have to do that myself. But, if my income is above the limit, I'll still be in phase-out territory - in that case, you only have to recharacterize the portion that you weren't entitled to put into the Roth. Anyway, however much you recharacterize, whether it's the full $5000 or a portion thereof, you would end up doing Roth --> traditional --> Roth + pay the taxes.

I previously did this the last time my income was high enough to get into the Roth phase-out limits, but this was before they removed the income limits on Roth conversions. So I had a few years where the money sat in the traditional IRA until they changed the law.

Edit: ignore bit about not waiting to reconvert, as it is corrected below by Epsilon Delta.

It does feel fishy. But then the whole "backdoor Roth" thing still feels fishy to my mind. I mean, it's a neat trick - choose whether to pay the tax now or on withdrawal, and when I put it like that, it doesn't SEEM fishy. But, still. I know what you mean. However, once you include the step of "pay the taxes" it makes a BIT more sense.
Last edited by englishgirl on Fri Dec 28, 2012 11:25 pm, edited 1 time in total.
Sarah
User avatar
englishgirl
 
Posts: 2064
Joined: 1 Mar 2007
Location: FL

Re: Roth --> Traditional --> back to Roth. Seriously?

Postby Epsilon Delta » Fri Dec 28, 2012 11:23 pm

There are time restrictions on the reconversion. From memory you have to wait till the later of
  • tax year after the year for which the recharacterized conversion was made (I believe this would be Jan 1 2013 in your case).
  • 30 days after the recharacterization. (Not yet determined, perhaps some time in Feb 2013).

Since pale ink beats a good memory and you have money on the line you should read pub 590.
User avatar
Epsilon Delta
 
Posts: 3077
Joined: 28 Apr 2011

Re: Roth --> Traditional --> back to Roth. Seriously?

Postby grabiner » Sat Dec 29, 2012 12:09 am

Epsilon Delta wrote:There are time restrictions on the reconversion. From memory you have to wait till the later of
  • tax year after the year for which the recharacterized conversion was made (I believe this would be Jan 1 2013 in your case).
  • 30 days after the recharacterization. (Not yet determined, perhaps some time in Feb 2013).


These rules apply to recharacterized conversions; that is, you can't convert, undo the conversion, and immediately redo it. The OP wants to recharacterize a contribution, which is not subject to that rule, according to IRS Publication 590.
David Grabiner
User avatar
grabiner
Advisory Board
 
Posts: 12284
Joined: 21 Feb 2007
Location: Columbia, MD

Re: Roth --> Traditional --> back to Roth. Seriously?

Postby Epsilon Delta » Sat Dec 29, 2012 12:31 am

grabiner wrote:
Epsilon Delta wrote:There are time restrictions on the reconversion. From memory you have to wait till the later of
  • tax year after the year for which the recharacterized conversion was made (I believe this would be Jan 1 2013 in your case).
  • 30 days after the recharacterization. (Not yet determined, perhaps some time in Feb 2013).


These rules apply to recharacterized conversions; that is, you can't convert, undo the conversion, and immediately redo it. The OP wants to recharacterize a contribution, which is not subject to that rule, according to IRS Publication 590.

I stand corrected.
User avatar
Epsilon Delta
 
Posts: 3077
Joined: 28 Apr 2011

Re: Roth --> Traditional --> back to Roth. Seriously?

Postby Bob's not my name » Sat Dec 29, 2012 6:28 am

lches wrote:now we're over the income limits
Are you sure? About three quarters of new posters have the misapprehension that the $173,000 - $183,000 phaseout is a gross income range. A working couple with access to two 401k's can have gross income over $210,000 and still be fully eligible for direct Roth IRA contributions.
Bob's not my name
 
Posts: 6559
Joined: 15 Nov 2009

Re: Roth --> Traditional --> back to Roth. Seriously?

Postby lches » Sat Dec 29, 2012 11:20 pm

Thanks everyone, this was helpful for me.

Yes, we are definitely over the limit, so I went ahead and did the conversion of my wife's IRA back into the Roth today, and I'm getting a withdrawal of my excess contributions and will put that in an HSA, since I believe I can use that for a deduction.

Thanks again.
lches
 
Posts: 2
Joined: 28 Dec 2012


Return to Investing - Help with Personal Investments

Who is online

Users browsing this forum: jj and 24 guests