IRA contribution issue

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beebog
Posts: 17
Joined: Sun Aug 27, 2017 9:51 am

IRA contribution issue

Post by beebog » Sun Oct 01, 2017 9:33 am

Background:
Based on feedback I received in my portfolio review request, I have been thinking more about the implications of contributing to a Roth vs traditional every year. Most years I do not know if I will be able deduct traditional so I have been doing Roth by default. I usually don't qualify for traditional deductions anyway, but now that I am putting more in my 401k, I may be able to deduct some. If I do qualify, I really would be better off doing the traditional with the deduction, especially as I get older and the Roth contribution has less time to grow tax free. More often than not though, I file extensions on my taxes. This is beyond my control, so I need to figure out a strategy where I can make the contributions in advance of knowing. IE I need to contribute by April 15, but I might not know my AGI until July.

If I set up a separate traditional IRA and contributed 5500 to that by April and then found out I don't qualify or partially qualify, I could then take the money that isn't deductible and do a backdoor Roth conversion of those assets to my Roth. And I wouldn't have to pay any taxes since I didn't get the deduction on that part to begin with. Is this correct?

Would it be best to keep a "clean" IRA for this purpose so it is easier to track gains that also may need conversion? Ie once I know the deal, I convert the Roth portion to Roth and move the traditional funds to my "real" traditional IRA. And then the next year start with a clean slate?

kaneohe
Posts: 4392
Joined: Mon Sep 22, 2008 12:38 pm

Re: IRA contribution issue

Post by kaneohe » Sun Oct 01, 2017 10:22 am

Can't you recharacterize the part that doesn't belong..........if you contributed to TIRA orginally, that part goes to Roth (and the opposite if you contributed to Roth). Then it's as if you contributed the correct amounts in the right places in the beginning. No backdoors necessary............

beebog
Posts: 17
Joined: Sun Aug 27, 2017 9:51 am

Re: IRA contribution issue

Post by beebog » Sun Oct 01, 2017 10:54 am

kaneohe wrote:
Sun Oct 01, 2017 10:22 am
Can't you recharacterize the part that doesn't belong..........if you contributed to TIRA orginally, that part goes to Roth (and the opposite if you contributed to Roth). Then it's as if you contributed the correct amounts in the right places in the beginning. No backdoors necessary............
I didn't realize you could recharacterize across accounts. I've only every recharacterized when I found out I had contributed too much to Roth one year and recharacterized contributions to the next year.

The thing that confuses me is keeping track of earnings. My roth and traditional already have quite a bit of money in them so how would I figure out what the 5.5K earned? Maybe I should do these contributions I am unsure of in a small IRA and have it be part of my bond AA so there isn't much growth in the months where I don't know where it is going?

Oh, and thank you. :)

MathWizard
Posts: 2629
Joined: Tue Jul 26, 2011 1:35 pm

Re: IRA contribution issue

Post by MathWizard » Sun Oct 01, 2017 11:03 am

I've been in that situation.

I don't contribute to my IRA until I fill out my taxes for that year.

I made my 2016 contribution in March of 2017.

I just save up in my savings account / first tier EF in 2016 and make the contribution in 2017.

I'll be able to make a contribution for the last year that I work in March of the following year.

beebog
Posts: 17
Joined: Sun Aug 27, 2017 9:51 am

Re: IRA contribution issue

Post by beebog » Sun Oct 01, 2017 11:07 am

MathWizard wrote:
Sun Oct 01, 2017 11:03 am
I've been in that situation.

I don't contribute to my IRA until I fill out my taxes for that year.

I made my 2016 contribution in March of 2017.

I just save up in my savings account / first tier EF in 2016 and make the contribution in 2017.

I'll be able to make a contribution for the last year that I work in March of the following year.
My issue is that because of tax extensions my taxes for 2016 may not get filed until October 2017 and the part that is causing the extension is beyond my control, not just me dragging my feet.

MathWizard
Posts: 2629
Joined: Tue Jul 26, 2011 1:35 pm

Re: IRA contribution issue

Post by MathWizard » Sun Oct 01, 2017 11:16 am

beebog wrote:
Sun Oct 01, 2017 11:07 am
MathWizard wrote:
Sun Oct 01, 2017 11:03 am
I've been in that situation.

I don't contribute to my IRA until I fill out my taxes for that year.

I made my 2016 contribution in March of 2017.

I just save up in my savings account / first tier EF in 2016 and make the contribution in 2017.

I'll be able to make a contribution for the last year that I work in March of the following year.
My issue is that because of tax extensions my taxes for 2016 may not get filed until October 2017 and the part that is causing the extension is beyond my control, not just me dragging my feet.
I understand now. I though that this was for your 2017 IRA.

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Kevin M
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Re: IRA contribution issue

Post by Kevin M » Sun Oct 01, 2017 11:29 am

Recharacterize the contribution. You have until the extension due date to recharacterize, and the custodian should be able to handle the earnings appropriately.

IRA recharacterization - Bogleheads
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