Roth conversion, re-characterization, taxes

[Norris]

Forgive me if this has been discussed but, if so, I'm not finding it. 2014 is my first year of retirement and so I'm not sure what our taxable income will be. I want to convert part of my TIRA into my Roth. I know if I convert too much (resulting in being pushed beyond the 15% tax bracket), then I can re-characterize until October of 2015. My question is: In the event I have to re-characterize, am I also required to file an amended tax return?

Norris

[cheese_breath]

I would think you would want to file an amended return. When you convert to the Roth you have to pay taxes on the conversion. I have never recharacterized myself, but I imagine you should be able to recoup the taxes you paid on the recharacterized amount.

Please some else interject if I have this wrong.

[grabiner]

Forgive me if this has been discussed but, if so, I'm not finding it. 2014 is my first year of retirement and so I'm not sure what our taxable income will be. I want to convert part of my TIRA into my Roth. I know if I convert too much (resulting in being pushed beyond the 15% tax bracket), then I can re-characterize until October of 2015. My question is: In the event I have to re-characterize, am I also required to file an amended tax return?

A recharacterization changes the tax situation for the previous year, so you need to file a return which shows the correct numbers. This can be an amended return, or an original return if you haven't already filed.

In your situation, it would probably be best to fill out (but not file) a return in early 2014. Then, if you need to recharacterize, do the recharacterization, and change the return to reflect the new amount converted. This way, you only have to file one return, and you don't pay excess tax in April and then possibly wait a long time to get a refund on your amended return.

[FrugalInvestor]

Forgive me if this has been discussed but, if so, I'm not finding it. 2014 is my first year of retirement and so I'm not sure what our taxable income will be. I want to convert part of my TIRA into my Roth. I know if I convert too much (resulting in being pushed beyond the 15% tax bracket), then I can re-characterize until October of 2015. My question is: In the event I have to re-characterize, am I also required to file an amended tax return?

A recharacterization changes the tax situation for the previous year, so you need to file a return which shows the correct numbers. This can be an amended return, or an original return if you haven't already filed.

In your situation, it would probably be best to fill out (but not file) a return in early 2014. Then, if you need to recharacterize, do the recharacterization, and change the return to reflect the new amount converted. This way, you only have to file one return, and you don't pay excess tax in April and then possibly wait a long time to get a refund on your amended return.

This is what I've done in the past. I convert near year-end and re-characterize once all the final numbers are in and before I file my return (by April 15th). I've discovered that Vanguard is not always the best at understanding the rules for re-characterization so if you're using them give yourself a couple extra days. I had to educate the rep. last year and go up the chain a bit to get the re-characterization done.

[grabiner]

This is what I've done in the past. I convert near year-end and re-characterize once all the final numbers are in and before I file my return (by April 15th). I've discovered that Vanguard is not always the best at understanding the rules for re-characterization so if you're using them give yourself a couple extra days. I had to educate the rep. last year and go up the chain a bit to get the re-characterization done.

You can also pay your tax due on April 15 and apply for an extension to file until October 15. (This is why the recharacterization deadline is October 15; you are allowed to wait until October 15 to file your taxes if you have applied for an extension, so you might not know until October 15 that you needed to recharacterize.)

[FrugalInvestor]

This is what I've done in the past. I convert near year-end and re-characterize once all the final numbers are in and before I file my return (by April 15th). I've discovered that Vanguard is not always the best at understanding the rules for re-characterization so if you're using them give yourself a couple extra days. I had to educate the rep. last year and go up the chain a bit to get the re-characterization done.

You can also pay your tax due on April 15 and apply for an extension to file until October 15. (This is why the recharacterization deadline is October 15; you are allowed to wait until October 15 to file your taxes if you have applied for an extension, so you might not know until October 15 that you needed to recharacterize.)

Understood. I just don't like adding the extra step. The less time I spend on tax prep the better.

[Norris]

Precisely the information I was looking for! Thank you, everyone.

Norris

[dlw322]

I do similar to what others have said. Only difference is I convert an amount some time during the year that I am sure will get me into the next tax bracket. Then when all of my paperwork is in to do my taxes I prepare my returns and look at the taxable income (line 43). I then break out my calculator and do the math to see how much I will have to recharacterize to get me right at the top of my bracket. Then I fill out my tax return as if I have already done the recharacterization. After that is done I wait a few weeks to be sure I haven't forgotten something that will show up in the mail later.

In late March or early April I call Vanguard and recharacterize the amount that I already have filled out on my return. The only part I have to finish on my tax return at that point is the amount of the gain or loss associated with the recharacterization amount. I have never had a problem with Vanguard not knowing how to handle this.

[placeholder]

Note that generally pushing into the next bracket isn't a terrible thing it just costs a bit of extra tax on the amount that goes over as long as you don't have some credits that get abruptly phased out.

[Norris]

Good info, dlw322 and placeholder. Thanks.

Norris

[Peter Foley]

Placeholder wrote:

Note that generally pushing into the next bracket isn't a terrible thing it just costs a bit of extra tax on the amount that goes over as long as you don't have some credits that get abruptly phased out.

This has been my philosophy. A thousand into the 25% tax bracket is no big deal in the overall scheme of things, so I purposefully plan that way. I dislike doing taxes enough so as not to do them twice. I don't get an exact read on my dividends, long term capital gains and itemized deductions until I actually do the return some time in March.

[Deep Thoughts]

I'm in a very similar situation as the OP. I was thinking of doing the horse race strategy: Suppose I want to convert x dollars. Then in January 2015, I create two Roths one containing x dollars of US stocks and another one containing x dollars of ex-US stocks. Then in April of 2016, I recharacterize the one that has done the worst, and then pay the taxes on the x dollars converted to Roth of the winner.

I've never done this before. Do I need to pay/withhold taxes during 2015 on x dollars, 2x dollars, or 0 dollars? In other words, if I don't withhold at all, would I be fined or penalized?

[Epsilon Delta]

I'm in a very similar situation as the OP. I was thinking of doing the horse race strategy: Suppose I want to convert x dollars. Then in January 2015, I create two Roths one containing x dollars of US stocks and another one containing x dollars of ex-US stocks. Then in April of 2016, I recharacterize the one that has done the worst, and then pay the taxes on the x dollars converted to Roth of the winner.

I've never done this before. Do I need to pay/withhold taxes during 2015 on x dollars, 2x dollars, or 0 dollars? In other words, if I don't withhold at all, would I be fined or penalized?

It depends. Is your tax going to be higher in 2015 than 2014? Your required payments are based on the lower of the two. If your required payments are based on your 2014 taxes then 0, if your required payments are based on 2015 taxes then 90% of x (x if you round up).

Note that if both US stocks and ex-US stocks double you might decide to keep both conversions. In that case you've made out like a bandit and should happily pay the couple of percent penalty on under withholding.