Convert Roth IRA to Traditional IRA

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ThankYouJack
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Convert Roth IRA to Traditional IRA

Post by ThankYouJack » Fri Dec 05, 2014 10:33 am

Say you contribute $5,500 to your Roth IRA on 1/1/2015. Then while doing your taxes on 4/1/2016 you realize you would have been better off if you had contributed to a Traditional IRA instead. Will Vanguard let you switch from the Roth contribution to a Traditional so you can save on your 2015 tax bill?

placeholder
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Re: Convert Roth IRA to Traditional IRA

Post by placeholder » Fri Dec 05, 2014 12:33 pm

Yes it is called recharacterization and it's as if you had done the other type of contribution from the beginning.

ThankYouJack
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Re: Convert Roth IRA to Traditional IRA

Post by ThankYouJack » Fri Dec 05, 2014 1:10 pm

placeholder wrote:Yes it is called recharacterization and it's as if you had done the other type of contribution from the beginning.


Great, thanks for the reply. I just found the IRS FAQ for it: http://www.irs.gov/Retirement-Plans/Ret ... onversions

My follow up question is what if I contribute to a Roth IRA but then realize my MAGI exceeds the Roth limit. Do I need to recharacterize the Roth to a Traditional (and I wouldn't get a tax break on the traditional IRA because my income would exceeds the deduction limit)? Or could I pull the money out and put it in a taxable account?

placeholder
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Re: Convert Roth IRA to Traditional IRA

Post by placeholder » Fri Dec 05, 2014 1:28 pm

You can do either but if you have no other TIRAs with taxable amounts then the usual practice would be to recharacterize to TIRA then convert to Roth.

ThankYouJack
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Re: Convert Roth IRA to Traditional IRA

Post by ThankYouJack » Fri Dec 05, 2014 2:19 pm

placeholder wrote:You can do either but if you have no other TIRAs with taxable amounts then the usual practice would be to recharacterize to TIRA then convert to Roth.


Ok thanks. One benefit that I can think of is say you're in the borderline 15%-25% tax bracket. You contribute to a Roth at the beginning of the year and also have some capital gains later that year. It could make sense to switch to a TIRA if bring you down to the 15% bracket and eliminates the taxes on the gains

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abuss368
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Re: Convert Roth IRA to Traditional IRA

Post by abuss368 » Fri Dec 05, 2014 2:31 pm

Hi ThankYouJack,

It appears that you have received excellent advice and from my understanding the advice appears correct of your questions.

Best.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

RVD
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Re: Convert Roth IRA to Traditional IRA

Post by RVD » Fri Dec 05, 2014 4:43 pm

slightly different but i thought worth mentioning...

if you converted a traditional 401k to a roth 401k, this is an in-plan roth conversion and these are not allowed to be recharacterized back to a traditional 401k.

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celia
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Re: Convert Roth IRA to Traditional IRA

Post by celia » Sat Dec 06, 2014 4:09 pm

Since you can make your 2014 contribution to either until April 15, 2015, why don't you do your taxes first, then contribute?
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

ThankYouJack
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Re: Convert Roth IRA to Traditional IRA

Post by ThankYouJack » Sat Dec 06, 2014 11:21 pm

celia wrote:Since you can make your 2014 contribution to either until April 15, 2015, why don't you do your taxes first, then contribute?


I'd rather invest the money as soon as I can instead of earmarking it and keeping it in my checking account for 15 months.

ND Fan 1
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Re: Convert Roth IRA to Traditional IRA

Post by ND Fan 1 » Thu Oct 12, 2017 10:04 am

ThankYouJack wrote:
Fri Dec 05, 2014 2:19 pm
placeholder wrote:You can do either but if you have no other TIRAs with taxable amounts then the usual practice would be to recharacterize to TIRA then convert to Roth.
Ok thanks. One benefit that I can think of is say you're in the borderline 15%-25% tax bracket. You contribute to a Roth at the beginning of the year and also have some capital gains later that year. It could make sense to switch to a TIRA if bring you down to the 15% bracket and eliminates the taxes on the gains
Sorry to bring up an old topic, but this is the exact case I'm in this year. I did a 2017 Roth Contribution in Jan of 2017, the full $5500. I did some planned capital gain harvesting, thinking I was easily going to be in the 15% bracket. Well, my wife decided to work a little more than planned, I got promoted and I accumulated some bank bonuses (interest), so I'm right at the 15%-25% bracket for taxable income. I maxed my Traditional TSP, and HSA, plus 100% of my wife's paycheck goes into her Trad 403B, so I'm using up all my available tax advantaged space. I'm projecting to be about $2000-$3000 above the 15% tax bracket. Now, my last option is to re-characterize my Roth IRA contribution. Never done it before, so trying to understand the process.

So, I need to get a hold of Vanguard and request a re-characterization of my 2017 contributions? I guess, the downside is I now have both a Trad and Roth IRA, and an additional tax form 1009R?

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FiveK
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Re: Convert Roth IRA to Traditional IRA

Post by FiveK » Thu Oct 12, 2017 8:58 pm

ND Fan 1 wrote:
Thu Oct 12, 2017 10:04 am
...I did some planned capital gain harvesting, thinking I was easily going to be in the 15% bracket.
...
I'm projecting to be about $2000-$3000 above the 15% tax bracket. Now, my last option is to re-characterize my Roth IRA contribution. Never done it before, so trying to understand the process.

So, I need to get a hold of Vanguard and request a re-characterization of my 2017 contributions?
Yes.

See IRA recharacterization - Bogleheads for more.

It's probably worth the minor hassle, as you will save 30% (15% on the ordinary income plus 15% on LTCG) in federal tax on the tIRA amount that gets you down to $75,900 taxable income.

ND Fan 1
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Re: Convert Roth IRA to Traditional IRA

Post by ND Fan 1 » Fri Oct 13, 2017 3:38 pm

FiveK wrote:
Thu Oct 12, 2017 8:58 pm
ND Fan 1 wrote:
Thu Oct 12, 2017 10:04 am
...I did some planned capital gain harvesting, thinking I was easily going to be in the 15% bracket.
...
I'm projecting to be about $2000-$3000 above the 15% tax bracket. Now, my last option is to re-characterize my Roth IRA contribution. Never done it before, so trying to understand the process.

So, I need to get a hold of Vanguard and request a re-characterization of my 2017 contributions?
Yes.

See IRA recharacterization - Bogleheads for more.

It's probably worth the minor hassle, as you will save 30% (15% on the ordinary income plus 15% on LTCG) in federal tax on the tIRA amount that gets you down to $75,900 taxable income.
Thank you for your reply and good point on the 30% tax hit. After reading up on it isn't all that complicated, just working with Vanguard who should be familiar with it. I will feel better to be back under the $75,900 threshold. Will re-run my projections and look at processing the re-characterization.

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