Backdoor a re-characterized IRA?

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Gustie13
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Backdoor a re-characterized IRA?

Post by Gustie13 » Thu Aug 27, 2015 2:36 pm

Hi,
Wondering if someone can help me understand if this is possible (or point me in the direction of an easier solution).

I'm 32 and each year (in addition to contributing the max to my company's 401k) I contribute $5500 to a Roth IRA via 26 installments of ~$211 (auto contribution after each paycheck). I just realized that after the sale of our condo (should be finalized shortly) our MAGI will disqualify me from Roth contributions. With that being the case I plan on recharacterizing all of my Roth contributions to a Traditional IRA (which I still need to set up).

My questions are as follows:

- Once I recharacterize the Roth contributions to a Traditional IRA, can I turn right back around and backdoor to a Roth IRA?
- Would it be advisable to stop my current auto Roth contributions and set up a Traditional IRA, funding it with the difference between what I've contributed to the Roth so far and the max annual contribution (i.e. I've contributed $3000, max allowed is $5500, so start the Traditional with $2500)?

TIA

retiredjg
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Re: Backdoor a re-characterized IRA?

Post by retiredjg » Thu Aug 27, 2015 3:04 pm

Gustie13 wrote:Once I recharacterize the Roth contributions to a Traditional IRA, can I turn right back around and backdoor to a Roth IRA?
Yes. I am pretty sure there is a 30 day waiting period though. Also if you have other IRAs (SEP, SIMPLE, other tIRAs), they will interefer with your back door.
- Would it be advisable to stop my current auto Roth contributions and set up a Traditional IRA, funding it with the difference between what I've contributed to the Roth so far and the max annual contribution (i.e. I've contributed $3000, max allowed is $5500, so start the Traditional with $2500)?
Yes, I think so, but it may make no difference as long as you are able to keep up with the contributions.

I'm not sure how the earnings on your Roth up to now will be handled. I pretty sure they will go back into the tIRA and be considered non-taxed money. When you do your conversion to Roth 30 days later, you will pay tax on that money (with your 2015 taxes).

The same will happen with the earnings on the tIRA, but if you can just put in $2500 and convert soon after that, the tax should only amount to some pennies.

Alan S.
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Re: Backdoor a re-characterized IRA?

Post by Alan S. » Thu Aug 27, 2015 3:18 pm

With respect to the condo sale, was this your main home? Do you not qualify for the exclusion up to 500k of the LT gain?
If you qualify, then the condo sale will not increase your MAGI.

Gustie13
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Re: Backdoor a re-characterized IRA?

Post by Gustie13 » Thu Aug 27, 2015 3:34 pm

Alan S. wrote:With respect to the condo sale, was this your main home? Do you not qualify for the exclusion up to 500k of the LT gain?
If you qualify, then the condo sale will not increase your MAGI.
:shock: :oops:
First time I've sold a house, I assumed taxes were due on the profits no matter the amount.

If that's not the case then our MAGI will still be low enough to contribute to a Roth directly without any recharacterization or backdoor conversions.

retiredjg
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Re: Backdoor a re-characterized IRA?

Post by retiredjg » Thu Aug 27, 2015 3:47 pm

Gustie, a little voice whispering in my ear says the 30 day wait applies to recharacterizing a conversion, not a contribution. I'm thinking that is right and that I have remembered it wrong, and probably not for the first time. :oops:

Sounds like it does not matter though. Good catch, Alan!

Alan S.
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Re: Backdoor a re-characterized IRA?

Post by Alan S. » Thu Aug 27, 2015 4:09 pm

Here is some info on the cap gain exclusion for your condo:

http://www.irs.gov/taxtopics/tc701.html

See if you qualify. You can also get an idea from the closing agency (escrow of attorney handling sale) if a 1099 S will be filed. If there will be no 1099S, that is a major sign that they know your exclusion will apply and you will not need to report the sale on your return. Again, this is not always conclusive, but it should confirm your own thoughts based on the link attached.

If you do not qualify for the exclusion, there is plenty of time to recharacterize the contribution if you need to.

There is also a possibility that even if you do not qualify, a properly reported capital gain will not be enough for your MAGI to exceed the Roth contribution limit.

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celia
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Re: Backdoor a re-characterized IRA?

Post by celia » Thu Aug 27, 2015 4:29 pm

Any costs you spent on repairs or upgrades to the condo in the first 6 months you own it (or is it a year?) or in the last 6 or 12 months before you sell can be applied to the basis, as well as permanent upgrades (not replacements of broken appliances, say) made at any time and selling costs, such as agent's commissions.

The $500K exclusion is if a married couple owns the property as a married couple. A single person gets $250k.
Last edited by celia on Thu Aug 27, 2015 4:30 pm, edited 1 time in total.
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.

FactualFran
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Re: Backdoor a re-characterized IRA?

Post by FactualFran » Thu Aug 27, 2015 4:29 pm

retiredjg wrote:Gustie, a little voice whispering in my ear says the 30 day wait applies to recharacterizing a conversion, not a contribution. I'm thinking that is right and that I have remembered it wrong, and probably not for the first time.
The little voice may have whispered too softly for you to have heard the part about not being able to convert, recharacterize the conversion, and reconvert an amount during the same tax year. The 30 day wait typically applies when the recharacterizaion is done the following tax year (before the filing deadline).

retiredjg
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Re: Backdoor a re-characterized IRA?

Post by retiredjg » Thu Aug 27, 2015 4:41 pm

FactualFran wrote:
retiredjg wrote:Gustie, a little voice whispering in my ear says the 30 day wait applies to recharacterizing a conversion, not a contribution. I'm thinking that is right and that I have remembered it wrong, and probably not for the first time.
The little voice may have whispered too softly for you to have heard the part about not being able to convert, recharacterize the conversion, and reconvert an amount during the same tax year. The 30 day wait typically applies when the recharacterizaion is done the following tax year (before the filing deadline).
Maybe but that doesn't seem right either. :?

Either way, it will not apply to this poster.

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celia
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Re: Backdoor a re-characterized IRA?

Post by celia » Thu Aug 27, 2015 4:42 pm

FactualFran wrote:
retiredjg wrote:Gustie, a little voice whispering in my ear says the 30 day wait applies to recharacterizing a conversion, not a contribution. I'm thinking that is right and that I have remembered it wrong, and probably not for the first time.
The little voice may have whispered too softly for you to have heard the part about not being able to convert, recharacterize the conversion, and reconvert an amount during the same tax year. The 30 day wait typically applies when the recharacterizaion is done the following tax year (before the filing deadline).
This is closer, but not quite accurate either. The rule says a recharacterization can't be converted back again until the following year or 30 days, whichever is longer. So the 30 days applies to recharacterizations made in December.

OP, If you do a recharacterization, put it into a separate TIRA if you already have an TIRA. Put the new (future) 2015 contributions into the existing TIRA and convert them before the end of the year. This is because once you recharacterize into a TIRA, Vanguard will lock the account from further conversions until the correct time has passed to avoid the same dollars from being converted twice in the same year. (Funds are considered co-mingled.)
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.

FactualFran
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Re: Backdoor a re-characterized IRA?

Post by FactualFran » Thu Aug 27, 2015 5:08 pm

celia wrote:
FactualFran wrote:The little voice may have whispered too softly for you to have heard the part about not being able to convert, recharacterize the conversion, and reconvert an amount during the same tax year. The 30 day wait typically applies when the recharacterizaion is done the following tax year (before the filing deadline).
This is closer, but not quite accurate either. The rule says a recharacterization can't be converted back again until the following year or 30 days, whichever is longer. So the 30 days applies to recharacterizations made in December.
Please note that I wrote "typically applies" not "only applies".

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Duckie
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Re: Backdoor a re-characterized IRA?

Post by Duckie » Thu Aug 27, 2015 9:27 pm

Gustie13 wrote:Once I recharacterize the Roth contributions to a Traditional IRA, can I turn right back around and backdoor to a Roth IRA?
Yes. The waiting period before converting previously mentioned applies if you originally converted and recharacterized and now want to reconvert. In your case you originally contributed and will recharacterize, then convert. There's no waiting period for that. See here. Note they use the word "reconvert". You're not doing that.
Would it be advisable to stop my current auto Roth contributions and set up a Traditional IRA, funding it with the difference between what I've contributed to the Roth so far and the max annual contribution (i.e. I've contributed $3000, max allowed is $5500, so start the Traditional with $2500)?
If you know you can't contribute to the Roth IRA because of your income there is no reason to keep contributing to that Roth IRA, so yes, stop the auto-contributions.

Gustie13
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Re: Backdoor a re-characterized IRA?

Post by Gustie13 » Fri Aug 28, 2015 9:25 am

Duckie wrote: If you know you can't contribute to the Roth IRA because of your income there is no reason to keep contributing to that Roth IRA, so yes, stop the auto-contributions.
celia wrote: OP, If you do a recharacterization, put it into a separate TIRA if you already have an TIRA. Put the new (future) 2015 contributions into the existing TIRA and convert them before the end of the year. This is because once you recharacterize into a TIRA, Vanguard will lock the account from further conversions until the correct time has passed to avoid the same dollars from being converted twice in the same year. (Funds are considered co-mingled.)
Thanks. Since the whole reason for needing to recharacterize (I was under the impression ANY capital gains from the sale of a primary home was considered taxable income and would increase our MAGI) doesn't apply in our case (Capital Gains will only be ~$50k and we meet Use Test, thus Gains can be excluded) I don't believe I'll need to go through this process.

Appreciate the insights all.

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