Deductible trad IRA contribution and Conversion to Roth in the same year

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Topic Author
OnLevel
Posts: 47
Joined: Mon Feb 12, 2018 1:14 pm

Deductible trad IRA contribution and Conversion to Roth in the same year

Post by OnLevel » Sat Dec 15, 2018 8:54 pm

Is there anything wrong with doing that?

I made a deductible $1k contribution to a traditional IRA earlier this year, but have realized after the fact that for long term reasons I want to convert the trad IRA to Roth.

It looks like I have two options:

1. Re-characterize the trad contribution as Roth, then convert the remaining balance. Tax consequence: Pay tax on remaining trad IRA balance, and lose the $1k deduction

2. Convert the traditional IRA as it currently is. Tax consequence: keep the $1k deduction, pay tax on the full trad IRA balance.

The reason this matters to me right now is that the funds I bought with the $1k deduction are way down, so I would pay less in taxes if I could do #2. I'm not sure if it's legal, though.

Any feedback would be appreciated!

krow36
Posts: 2267
Joined: Fri Jan 30, 2015 6:05 pm
Location: WA

Re: Deductible trad IRA contribution and Conversion to Roth in the same year

Post by krow36 » Sat Dec 15, 2018 9:28 pm

It seems to me that the 1k you contributed to your tIRA will just be added to the tIRA's balance. I think you can recharacterize the 1k contribution, but I don't think you can convert that particular 1k contribution to a Roth IRA. How much do you think you will save in taxes if you use option 2?

Topic Author
OnLevel
Posts: 47
Joined: Mon Feb 12, 2018 1:14 pm

Re: Deductible trad IRA contribution and Conversion to Roth in the same year

Post by OnLevel » Sat Dec 15, 2018 10:44 pm

krow36 wrote:
Sat Dec 15, 2018 9:28 pm
It seems to me that the 1k you contributed to your tIRA will just be added to the tIRA's balance. I think you can recharacterize the 1k contribution, but I don't think you can convert that particular 1k contribution to a Roth IRA. How much do you think you will save in taxes if you use option 2?
Not a lot, honestly. I'm also motivated by laziness: want to avoid the extra step of the recharacterization.

kaneohe
Posts: 6019
Joined: Mon Sep 22, 2008 12:38 pm

Re: Deductible trad IRA contribution and Conversion to Roth in the same year

Post by kaneohe » Sat Dec 15, 2018 11:04 pm

Contribute 1K to TIRA. Value decreases to near 0 (extreme example)
1)Recharacterize to Roth. Now have near 0 in Roth.

2)Leave in TIRA. Then convert. Now have near 0 in Roth.
Pay 25% of conversion in taxes = near 0 x 25%
Deduct 1K contribution = worth 0.25K
The net benefit of this combo is nearly 0.25K

2) is better than 1) by nearly 0.25K. This is extreme example so benefit won't be as large.
25% marginal tax rate assumed
Last edited by kaneohe on Sun Dec 16, 2018 12:17 am, edited 1 time in total.

Topic Author
OnLevel
Posts: 47
Joined: Mon Feb 12, 2018 1:14 pm

Re: Deductible trad IRA contribution and Conversion to Roth in the same year

Post by OnLevel » Sun Dec 16, 2018 8:22 am

b0B wrote:
Sun Dec 16, 2018 12:08 am
OnLevel wrote:
Sat Dec 15, 2018 8:54 pm
I'm not sure if it's legal, though.
Of course it is. It's completely obvious you should do #2. /thread. :happy
Thanks! Thinking about it more, it seems like this is an opportunity to "TLH" in a tax-advantaged account :D

Topic Author
OnLevel
Posts: 47
Joined: Mon Feb 12, 2018 1:14 pm

Re: Deductible trad IRA contribution and Conversion to Roth in the same year

Post by OnLevel » Sun Dec 16, 2018 8:23 am

kaneohe wrote:
Sat Dec 15, 2018 11:04 pm
Contribute 1K to TIRA. Value decreases to near 0 (extreme example)
1)Recharacterize to Roth. Now have near 0 in Roth.

2)Leave in TIRA. Then convert. Now have near 0 in Roth.
Pay 25% of conversion in taxes = near 0 x 25%
Deduct 1K contribution = worth 0.25K
The net benefit of this combo is nearly 0.25K

2) is better than 1) by nearly 0.25K. This is extreme example so benefit won't be as large.
25% marginal tax rate assumed
Thanks!

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