Complicated Rollover/Conversions

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

Complicated Rollover/Conversions

Postby ijokergirl » Sat Jan 26, 2013 1:01 pm

Me:
March 2012: contributed $5000 to a traditional IRA for 2011 (8606 form filed with 2011 taxes), converted to roth in March of 2012
November 2012: switched employers and rolled over my 403b and money in to a Roth IRA

Now for the fun part! I have changed my mind about converting my 403B to a Roth IRA. I now live in a state with high taxes and a city tax, and I'm going to owe maximum rate federal taxes on the conversion. So, I plan on recharacterizing this to a traditional IRA.

My understanding is that this will mess with my back door roth. I have about $50,000 in the 403b that will become a traditional IRA after recharacterization, so I will owe taxes on 90% of my back door roth conversion right? If so, not the end of the world but having a traditional IRA will now negate the benefits of back door roth in the future. Wishing now that I just left my 403b with my previous employer

These are my options (I think)
1) go ahead an pay $18,000 in taxes to convert my 403b money to a Roth IRA, then my back door roth is fine (I just think I would rather invest that $18,000 instead of paying the federal/state/local taxes)

2) decide not to convert my 403b to a roth, then I will owe about $1800 on my back door roth conversion AND won't be able to do any meaningful back door roths in the future b/c I now have a large tradtional IRA

or

3) recharacterize my back door roth conversion and see if my new employer (which also offers a 403b) will take my traditional IRA as a 403(b). This is my favorite option I think b/c I would then be able to do back door roths in the future. However, even if my employer does accept the IRA to my 403b I assume I will still be forced to pay taxes on my 90% of my back door Roth for 2012?

Anything I'm missing? Any other options?
ijokergirl
 
Posts: 2
Joined: Sat Jan 26, 2013 12:48 pm

Re: Complicated Rollover/Conversions

Postby Alan S. » Sat Jan 26, 2013 6:07 pm

Choice 1 does not appear wise given your total marginal rates, and even though you might have gains in the Roth since November, they are probably not large enough to warrant paying the 18k.
Choice 2 also has drawbacks with respect to future back door Roths even though the 1,800 might be manageable if you have larger % gains from almost a full year since this conversion.
Choice 3 should involve two recharacterizations. Your 403b Roth rollover is recharacterized to a TIRA. And your TIRA conversion would also be recharacterized. Before you do this verify with your current 403b plan whether they will accept all IRA rollovers, just "rollover" IRA rollovers, or won't accept any.

If your plan will only accept rollovers from rollover IRA accounts, push your custodian to maintain "rollover" as part of the registration for the TIRA account set up to receive the recharacterization of the prior Roth rollover since it is still exclusively rollover money. You could still recharacterize the small conversion to a different TIRA to eliminate the 2012 tax and after the 30 day waiting period and the rollover to your plan is completed re convert it to a Roth in 2013 where it will be tax free except for gains accrued in the past year.
Alan S.
 
Posts: 3705
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Complicated Rollover/Conversions

Postby Default User BR » Sun Jan 27, 2013 2:47 am

Yes, recharacterize the Roth conversion. You will do a new one in 2013 after clearing up the taxable IRA situation. Because the original conversion was done in 2012, you only have to wait 30 days until redoing the conversion. Note that the recharacterization means that it's as if you never did it at all, so will have had a traditional IRA since 3/2012 (getting time-travel lingo). Any earnings from the time of the original contribution will now taxable when you do the new conversion.


Brian
Default User BR
 
Posts: 7501
Joined: Mon Dec 17, 2007 7:32 pm

Re: Complicated Rollover/Conversions

Postby ijokergirl » Mon Jan 28, 2013 3:30 pm

Thanks! So, I think I have decided to recharacterize my roth back to a traditional IRA and then roll this in to my 403b with my current employer. However, since the recharacterization will occur for 2012 but the roll-in won't occur until 2013, I think this will still mean I need to recharacterize my back-door roth conversion.

So, if I recharactrize my $5,000 roth back to a non-deductible traditional IRA, then the next time I contribute another $5,000 non-deductible can I convert both of them over to a roth, only paying taxes on any gains?

SP
ijokergirl
 
Posts: 2
Joined: Sat Jan 26, 2013 12:48 pm

Re: Complicated Rollover/Conversions

Postby Default User BR » Mon Jan 28, 2013 6:07 pm

ijokergirl wrote:Thanks! So, I think I have decided to recharacterize my roth back to a traditional IRA and then roll this in to my 403b with my current employer. However, since the recharacterization will occur for 2012 but the roll-in won't occur until 2013, I think this will still mean I need to recharacterize my back-door roth conversion.

Correct, do both.

ijokergirl wrote:So, if I recharactrize my $5,000 roth back to a non-deductible traditional IRA, then the next time I contribute another $5,000 non-deductible can I convert both of them over to a roth, only paying taxes on any gains?

You could make your 2013 contribution in 30 days or so, then convert both 2012 and 2013 at the same time.


Brian
Default User BR
 
Posts: 7501
Joined: Mon Dec 17, 2007 7:32 pm


Return to Investing - Help with Personal Investments

Who is online

Users browsing this forum: Bing [Bot], deerblue, ERISA Stone, Geist, Gill, LittleGreenSoldiers, Logan T, lululu, musbane, nkaufman, ny_rn, packet and 82 guests