Withdraw $6.94 from tIRA & pay penalty?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
User avatar
Topic Author
Posts: 184
Joined: Fri May 18, 2018 10:29 am

Withdraw $6.94 from tIRA & pay penalty?

Post by LinusP »

I had a bit of a messy year IRA-wise, originally making my normal Roth contribution, convincing myself that it would be better to recharacterize that to Traditional for tax reasons, and then realizing that it was, in fact, better as a Roth. After the two recharacterizations, I'm left with a Traditional IRA at Vanguard with a balance of a whopping $6.94, presumably some interest earned over a day or two in the settlement fund. It seems like too much hassle to recharacterize that amount - are there any downsides to just taking it as an early distribution and paying a buck or two more in tax? Just want to make sure I don't somehow shoot myself in the foot here...thanks for any help.
Posts: 2684
Joined: Sun Jan 08, 2017 12:25 pm

Re: Withdraw $6.94 from tIRA & pay penalty?

Post by PFInterest »

Or convert it next year.
User avatar
Posts: 11409
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Withdraw $6.94 from tIRA & pay penalty?

Post by celia »

If the first recharacterization was done into an empty tIRA, the contribution and its interest would have been moved there and then you would treat it as if it had been put in that account in the first place.

If the second recharacterization was to put it back in the Roth, I would think that the interest would have gone back with it, the same as if the contribution had been made to the Roth (which it was). This would have no tax consequence if they agree to recharacterize it back to Roth. I would call the custodian and ask if the interest should have gone back and have them move it. If not, I would convert it, and pay taxes on the 6.94.

The last thing I would do is withdraw it. If you are under 59.5, there will be a small "penalty" for withdrawing from the tIRA plus the tax that is due on that growth.

This is a cheap lesson for you, but imagine if the amounts had been 10 or 100 times more. You would want to correct it properly wouldn't you? So do the same thing here.

Note that all of this assumes you asked for 2 re-characterizations. Start by asking if they see it the same way or did you ask for something else to be done?
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.
Alan S.
Posts: 9920
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Withdraw $6.94 from tIRA & pay penalty?

Post by Alan S. »

Something wrong here. You cannot recharacterize the same contribution twice, in other words no round trip. Vanguard should know that. Ref Pub 590 A p 31 "Election can't be changed"

Good chance you actually CONVERTED back to Roth and were just using the wrong terminology. That would be allowable but is quite different than a second recharacterization.

Please confirm what type of transaction was actually done and the amounts moved each time, and we can then go forward from that point, as there are different reporting requirements.
User avatar
Earl Lemongrab
Posts: 7270
Joined: Tue Jun 10, 2014 1:14 am

Re: Withdraw $6.94 from tIRA & pay penalty?

Post by Earl Lemongrab »

Besides what Alan said, converting that small amount is probably not much more trouble than withdrawing it. It sounds likely that you will need to do form 8606 for this year anyway, so that really won't complicate things much.
Post Reply