Contributed to Roth, meant to do IRA

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MotoTrojan
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Contributed to Roth, meant to do IRA

Post by MotoTrojan » Fri Jan 12, 2018 2:16 pm

What are my options? Still in MM. Vanguard says to recharacterize, but I believe there are issues with that due to 2018 tax reform.

Since this is a Roth, can I not just withdraw it as an early distribution and then apply to my non-deductible IRA (for subsequent Roth conversion)? Since this is contribution only, and same year, it is as if the contribution never happened, right?

To be clear, I plan to still max-out the $5500 (via non-deductible IRA, backdoor Roth) after this correction.
Last edited by MotoTrojan on Fri Jan 12, 2018 2:44 pm, edited 1 time in total.

DarkHelmetII
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Re: Contributed to Roth, meant to do IRA

Post by DarkHelmetII » Fri Jan 12, 2018 2:44 pm

Usual disclaimer that I am not an accountant etc... (as I expect is the case for many posters here) BUT everything I read online is that tax reform removes the ability to recharacterize a Trad IRA -> Roth IRA conversion, not necessarily a straight Roth IRA contribution.

So by no means a final answer, but at least to consider in clarifying the question as you may ask your custodian and / or accountant.

Spirit Rider
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Re: Contributed to Roth, meant to do IRA

Post by Spirit Rider » Fri Jan 12, 2018 2:49 pm

DarkHelmetII is correct. The tax reform only removed the ability to recharacterize Roth Conversions. You are still freely able to recharacterize between IRA types. If we are both wrong your custodian would not let you do it if it wasn't allowed. Why not call them.

MotoTrojan
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Re: Contributed to Roth, meant to do IRA

Post by MotoTrojan » Fri Jan 12, 2018 3:18 pm

Spirit Rider wrote:
Fri Jan 12, 2018 2:49 pm
DarkHelmetII is correct. The tax reform only removed the ability to recharacterize Roth Conversions. You are still freely able to recharacterize between IRA types. If we are both wrong your custodian would not let you do it if it wasn't allowed. Why not call them.
Thanks a bunch, that makes sense and now with more digging I see the distinction. Doesn't sound like much difference for me between recharacterizing vs. withdrawing and depositing in correct account (no interest accrued) but given this, I'll keep it in the IRA world and just call them to recharacterize.

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Soul.in.Progress
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Re: Contributed to Roth, meant to do IRA

Post by Soul.in.Progress » Fri Jan 12, 2018 3:28 pm

Hi OP,

I also accidentally did this exact same thing the other day! :oops: I simply got on the phone with vanguard and was able to get it fixed (via a a recharacterization from Roth to traditional). It all went pretty smoothly; I hope it goes the same for you!
Start by doing what is necessary; | then do what is possible; | and suddenly you are doing the impossible. | -- Francis of Assisi

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Epsilon Delta
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Re: Contributed to Roth, meant to do IRA

Post by Epsilon Delta » Fri Jan 12, 2018 5:08 pm

You only get to recharacterize each contribution once. So if you are not certain you want a tIRA wait until you are. You have until the tax return is due (plus extension in most cases) to do the recharacterization. The recharacterization is essentially retroactive to the date of the contribution so there is no rush. This is actually a bigger issue if you'd done a tIRA and meant to do a Roth since unexpected income could put you over the Roth income limit.

MotoTrojan wrote:
Fri Jan 12, 2018 2:16 pm
Since this is a Roth, can I not just withdraw it as an early distribution and then apply to my non-deductible IRA (for subsequent Roth conversion)? Since this is contribution only, and same year, it is as if the contribution never happened, right?
Something like this, but the details matter.

You could ask the custodian for a corrective distribution of the contribution plus any earnings. The earnings would be taxable, but are probably small if it's only been a few days or weeks. That would reset it as if the contribution never happened.

If you just take an ordinary early distribution you've still made your IRA contribution for the year and if you another $5,500 into any IRA you will have made an excess contribution.

MotoTrojan
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Re: Contributed to Roth, meant to do IRA

Post by MotoTrojan » Fri Jan 12, 2018 6:18 pm

Epsilon Delta wrote:
Fri Jan 12, 2018 5:08 pm
This is actually a bigger issue if you'd done a tIRA and meant to do a Roth since unexpected income could put you over the Roth income limit.

Is this not backwards? A tIRA -> Roth conversion is what I plan to do after recharacterizing this, and my understanding is that gains (I won't have any) are just taxed, but no income limit for tIRA so no problem. Backdoor Roth.

Anyways, I'll recharacterize and then convert, same as I did last year. Thanks!

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Epsilon Delta
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Re: Contributed to Roth, meant to do IRA

Post by Epsilon Delta » Fri Jan 12, 2018 7:12 pm

MotoTrojan wrote:
Fri Jan 12, 2018 6:18 pm
Epsilon Delta wrote:
Fri Jan 12, 2018 5:08 pm
This is actually a bigger issue if you'd done a tIRA and meant to do a Roth since unexpected income could put you over the Roth income limit.

Is this not backwards? A tIRA -> Roth conversion is what I plan to do after recharacterizing this, and my understanding is that gains (I won't have any) are just taxed, but no income limit for tIRA so no problem. Backdoor Roth.

Anyways, I'll recharacterize and then convert, same as I did last year. Thanks!
That was meant as a warning to others who made the opposite mistake to the one you did. Apparently I have got the hang using the subjunctive for counterfactual conditionals yet,

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