Will Vanguard help clean up your Roth IRA mess?

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DonDraper
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Will Vanguard help clean up your Roth IRA mess?

Post by DonDraper »

If you dollar cost average in your $5500 Roth contributions throughout the year at $458 a month and you get to December and realize you exceeded the income limit, will Vanguard help you recharacterize the correct $ amount?

Figuring out the contributions part is easy, but will they be able to provide the exact gain/loss on all those contributions made at different times throughout the year? Seems like that would be tricky if Vanguard wasn’t able to provide you the exact number to correct.
runner23
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Re: Will Vanguard help clean up your Roth IRA mess?

Post by runner23 »

They will provide you the amount of gain / loss on the recharicterized contributions.
aristotelian
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Re: Will Vanguard help clean up your Roth IRA mess?

Post by aristotelian »

Shouldn't be too hard. You could calculate the gains on the 2016 balance, then subtract that from the current balance to get 2017 contributions plus gains on the new funds.
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Epsilon Delta
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Re: Will Vanguard help clean up your Roth IRA mess?

Post by Epsilon Delta »

aristotelian wrote: Sat Dec 23, 2017 10:02 pm Shouldn't be too hard. You could calculate the gains on the 2016 balance, then subtract that from the current balance to get 2017 contributions plus gains on the new funds.
You can't do that. The IRS has a specific formula for calculating earnings, Vanguard will use it to calculate the earnings for you.

If you have Vanguard recharacterize the excess Roth contribution to a non-deductible traditional IRA contribution you're done, apart from the 8606 and whatever pain that inflicts in future years.
If you withdraw the excess the earnings are taxable in the year of the contribution (2017) which increase your income for 2017 and further decreases your allowable Roth contribution. For that reason it is usually advised that you guestimate the earnings and withdraw a bit too much. You can always top up the 2017 Roth contribution in 2018 once you have the final numbers.
dbr
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Re: Will Vanguard help clean up your Roth IRA mess?

Post by dbr »

Epsilon Delta wrote: Sat Dec 23, 2017 10:21 pm
aristotelian wrote: Sat Dec 23, 2017 10:02 pm Shouldn't be too hard. You could calculate the gains on the 2016 balance, then subtract that from the current balance to get 2017 contributions plus gains on the new funds.
You can't do that. The IRS has a specific formula for calculating earnings, Vanguard will use it to calculate the earnings for you.

If you have Vanguard recharacterize the excess Roth contribution to a non-deductible traditional IRA contribution you're done, apart from the 8606 and whatever pain that inflicts in future years.
If you withdraw the excess the earnings are taxable in the year of the contribution (2017) which increase your income for 2017 and further decreases your allowable Roth contribution. For that reason it is usually advised that you guestimate the earnings and withdraw a bit too much. You can always top up the 2017 Roth contribution in 2018 once you have the final numbers.
Does that answer yes or no to the question "Will Vanguard help?"
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samsoes
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Re: Will Vanguard help clean up your Roth IRA mess?

Post by samsoes »

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Njm8845
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Re: Will Vanguard help clean up your Roth IRA mess?

Post by Njm8845 »

dbr wrote: Sun Dec 24, 2017 10:19 am Does that answer yes or no to the question "Will Vanguard help?"
The answer is yes, vangd will help.

I had this issue a few years ago. Vangd caught it and called me. I may have filled out a form, but all excess was put into traditional ira. It was a painless process.
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Epsilon Delta
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Re: Will Vanguard help clean up your Roth IRA mess?

Post by Epsilon Delta »

dbr wrote: Sun Dec 24, 2017 10:19 am
Does that answer yes or no to the question "Will Vanguard help?"
It depends what help you need.
If you tell Vanguard to "Recharacterize $100 plus earnings of my Roth contribution to a traditional IRA contribution" they will calculate the earnings, complete the transaction, and in my experience do all necessary hand holding.

If you need further advice Vanguard will probably tell you to consult a tax advisor. For example: they don't know your income so they don't know how much you need to recharacterize; and if you withdraw the contribution I don't think they will warn you that earnings will increase 2017 income and further reduce the allowed Roth contribution.
Alan S.
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Re: Will Vanguard help clean up your Roth IRA mess?

Post by Alan S. »

TD 9056 includes a special provision which makes it easier for the custodian to calculate the net earnings in a case like this, but it does COMPROMISE the accuracy of the calculation. Applicable portion of TD 9056:

(
1) Adjusted opening balance. The term adjusted opening balance means the fair
market value of the IRA at the beginning of the computation period plus the amount of any
contributions or transfers (including the contribution that is distributed as a returned
contribution pursuant to section 408(d)(4) and recharacterizations of contributions pursuant
to section 408A(d)(6)) made to the IRA during the computation period.
(2) Adjusted closing balance. The term adjusted closing balance means the fair
market value of the IRA at the end of the computation period plus the amount of any
distributions or transfers (including recharacterizations of contributions pursuant to section
408A(d)(6)) made from the IRA during the computation period.
(3) Computation period. The term computation period means the period beginning
immediately prior to the time that the contribution being returned was made to the IRA and
ending immediately prior to the removal of the contribution. If more than one contribution
was made as a regular contribution and is being returned from the IRA, the computation
period begins immediately prior to the time the first contribution being returned was
contributed.
To paraphrase, if you are making monthly contributions, the opening balance is determined with the first contribution, then the rest of the monthly contributions are added up as if all were made at the time of the first contribution, and this is your opening balance. Therefore, each monthly contribution will include a computation period that started prior to that actual contribution. If there is extreme market volatility this method could really distort the accuracy of the calculation.

If you contributed 5500 with monthly contributions, and you ended up in the phaseout range such that 2500 was the actual excess amount, the custodian should apply the excess to the last contributions made. So they would count backwards to the first monthly contribution that exceeded the allowed contribution, and the computation period would start with that contribution.

In this situation, you should try to check the final result, since entry error could result in a major error with overstated earnings coming out of your Roth subject to tax and penalty.
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