Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax impact

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healthiswealth
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Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax impact

Post by healthiswealth » Mon Jan 13, 2020 3:58 pm

I just realized I contributed my 2017-2019 IRA into my rollover account instead of my Roth account at Vanguard in VTSAX. I do not qualify for the traditional IRA given my AGI. I was able to change my automatic contribution for 2020.

The post-tax contributions have been documented in my tax returns. Am I able to transfer from traditional to Roth without any ramifications?

Definitely an oversight on my end.

44 yrs
Head of household
32% tax bracket

Ddd7651
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Re: Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax imp

Post by Ddd7651 » Mon Jan 13, 2020 4:09 pm

If it is a "post-tax" contribution, you can just move it over whenever. You will pay tax on any earnings you made from the contribution. You are doing a backdoor roth just lengthened since you made a non-deductible contribution if you did your taxes proper. This sounds just like a backdoor Roth.

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healthiswealth
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Re: Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax imp

Post by healthiswealth » Mon Jan 13, 2020 4:18 pm

If I contributed post-tax $$s, why would I need to do a conversion and pay taxes on any gains? Sorry, not versed on this topic...I know people convert traditional to roth, but aren't they converting pre-tax contributions?

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Re: Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax imp

Post by HomeStretch » Mon Jan 13, 2020 4:41 pm

You can call a Vanguard retirement specialist to recharacterize the 2019 tIRA contribution to change it to a Roth IRA contribution. Vanguard’s website explains this here:
https://investor.vanguard.com/ira/ira-r ... terization

Or you can do step 2 of the backdoor Roth to convert a non-deductible tIRA balance to a Roth IRA as suggested above. You can do this yourself in your online Vanguard account. Here’s a link to the BH wiki page about Backdoor Roth:
https://www.bogleheads.org/wiki/Backdoor_Roth
Last edited by HomeStretch on Mon Jan 13, 2020 5:01 pm, edited 4 times in total.

Ddd7651
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Re: Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax imp

Post by Ddd7651 » Mon Jan 13, 2020 4:42 pm

Only in a Roth do you not pay tax on gains. That is the benefit of a Roth IRA. You must now pay taxes on earnings since it is not in a Roth. After that, then you can enjoy that benefit. It doesn't matter if the contribution was non-deductible or not.
Last edited by Ddd7651 on Mon Jan 13, 2020 4:45 pm, edited 1 time in total.

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Re: Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax imp

Post by Ddd7651 » Mon Jan 13, 2020 4:44 pm

healthiswealth wrote:
Mon Jan 13, 2020 4:18 pm
If I contributed post-tax $$s, why would I need to do a conversion and pay taxes on any gains? Sorry, not versed on this topic...I know people convert traditional to roth, but aren't they converting pre-tax contributions?
If it is pre-tax, they are paying taxes on contributions + earnings since they took a tax deduction. If it is post-tax, they are paying taxes on earnings only. Backdoor Roth.

Edit: You don't HAVE to move it to a Roth IRA. It is just that when you do, at that point you pay taxes on the gains. You won't pay taxes on the contributions since taxes were already paid.
Last edited by Ddd7651 on Mon Jan 13, 2020 4:48 pm, edited 1 time in total.

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Re: Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax imp

Post by Stinky » Mon Jan 13, 2020 4:48 pm

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Last edited by Stinky on Mon Jan 13, 2020 4:55 pm, edited 1 time in total.
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Re: Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax imp

Post by retiredjg » Mon Jan 13, 2020 4:51 pm

healthiswealth wrote:
Mon Jan 13, 2020 3:58 pm
I just realized I contributed my 2017-2019 IRA into my rollover account instead of my Roth account at Vanguard in VTSAX. I do not qualify for the traditional IRA given my AGI.
Yes you can contribute to tIRA. What you can't do is deduct it.

The post-tax contributions have been documented in my tax returns.
What does this mean? Do you mean you already did the Forms 8606? If yes, why do you think you do not qualify for traditional IRA?

Am I able to transfer from traditional to Roth without any ramifications?
You can recharacterize your 2019 contribution from tIRA to Roth IRA until October. Contact Vanguard to do this. Do it now rather than later.


2017 contribution - there is nothing you can do to undo this because the time to fix it has passed. Assuming your AGI was high in 2017, you have simply made a non-deductible contribution to your tIRA. This needs to be documented on Form 8606 (you can download old forms from the internet).

2018 - same as above; Do the 2017 Form before doing the 2018 form because each form builds from the form before it.

2019 - as said above, you still have time to re-characterize this contribution from tIRA to Roth IRA, assuming your MAGI does not make you ineligible.


There is a way for you to separate your non-deductible contributions from the tIRA. But let's get this part straight first.

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Re: Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax imp

Post by lakpr » Mon Jan 13, 2020 4:53 pm

Edit: I meant posts above retiredjg’s.


I see multiple errors in the advice above. Firstly, the OP has said he contributed additional post tax amounts to the same Rollover IRA. So that Rollover IRA now has a mix of pretax and post tax amounts. OP cannot simply convert the $5500 or $6000 that he contributed and expect to not pay taxes. It is not quite backdoor Roth, since backdoor Roth assumes and REQUIRES that all Traditional IRA balances are zero, or will be zero, as of 12/31/20xx, the year in which Roth conversion takes place.

Secondly, the recharacterization maneuver is only possible until the tax filing deadline, including extensions, for the tax year you made the contribution for. So for the OP who said contributions are made 2017 through 2019, only the 2019 contribution can be recharacterized. The deadline for recharacterization of previous year (2017 and 2018) contributions has already passed.

For the OP, the only hope now to straighten out this mess is if the 401k or 403b plan at work place accepts incoming rollover from a Traditional IRA. Before advising on further steps, I would like the OP to confirm whether that is a possibility. Enquire with the workplace HR or 401k/403b plan administrator. If it is a possibility, we can put together a migration strategy.

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healthiswealth
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Re: Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax imp

Post by healthiswealth » Tue Jan 21, 2020 12:33 pm

Thanks.

I reached out to Vanguard and they said I can convert into a Roth IRA and pay taxes on the gains. Or I can continue to contribute and track my post-tax contributions over time and when I withdraw(upon retirement) they will do a ratio of post-tax vs. pre-tax contributions to determine the taxes I would pay.

I started contributing to my IRA in the traditional roll-over at Vanguard to consolidate my holdings.

Fidelity (400k)
401k Account
rollover/traditional
roth IRA

Vanguard (400k)
rollover/traditional - contributing to the VTSAX fund for my IRA
traditional IRA ETF
roth IRA
taxable account

Is it better to create a separate IRA account for post-tax contributions in Vanguard to make it easier upon retirement? Right now 2017-2019 have been contributed. I have it set-up for monthly contributions and the ETF (also Total stock market) does not allow for automated contributions.

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Re: Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax imp

Post by lakpr » Tue Jan 21, 2020 1:14 pm

I suspect your conversation with Vanguard did not quite go as we hoped. Can you please -

1. Call Vanguard, and ask them to "recharacterize" the 2019 contribution only, to Roth IRA. I am assuming you are eligible to contribute to a Roth IRA directly (that is, you are in the 22% bracket now). If your income as SINGLE is > 124k, or if your income as MFJ COUPLE is > 206k, you cannot contribute to Roth IRA directly.

If YES, you can contribute to Roth IRA directly -- the first thing you should do is to "recharacterize" (mention that word!) with a Vanguard representative. Ask the rep to "Please recharacterize my 2019 IRA contributions from Traditional IRA to Roth IRA, I found I was unable to deduct them". Nothing more nothing less. Vanguard might take about a week, but at the end of it, that would at least remove the 2019 contribution from the equation.

2. I did ask before, do you have access to a 401k or 403b at work place, and CAN accept rollovers from an external IRA? Without that escape outlet, there's nothing that can be done by anyone. Your new post unfortunately did not answer this question.

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Re: Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax imp

Post by retiredjg » Wed Jan 22, 2020 7:56 am

healthiswealth wrote:
Tue Jan 21, 2020 12:33 pm
I reached out to Vanguard and they said I can convert into a Roth IRA and pay taxes on the gains. Or I can continue to contribute and track my post-tax contributions over time and when I withdraw(upon retirement) they will do a ratio of post-tax vs. pre-tax contributions to determine the taxes I would pay.
A misunderstanding perhaps.

It is true there is a ratio of post-tax vs pre-tax contributions and that taxes are paid according to that ratio when you take money out. But doing all that is your responsibility. Vanguard will have absolutely nothing to do with it. It is between you and the IRS.

You start by documenting the 2017 non-deductible contribution on a 2017 Form 8606. Then you document the 2018 non-deductible contribution on a 2018 Form 8606. Then (if you don't recharacterize your 2019 contribution now) you do the same for the 2019 contribution. L

Line 14 on the first form flows into line 2 on the next year's form. This happens each year. It is important to start with the oldest year.

These old forms can be downloaded from the internet.


Is it better to create a separate IRA account for post-tax contributions in Vanguard to make it easier upon retirement?
No. This accomplishes nothing.


I have it set-up for monthly contributions and the ETF (also Total stock market) does not allow for automated contributions.
What account are you talking about here?


Are you sure you could not deduct your contributions in 2017 and 2018? Was your income too high?

Were you eligible to contribute to Roth iRA in 2019 or was your income too high?


Earlier you said...."The post-tax contributions have been documented in my tax returns. ". What does that mean?

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healthiswealth
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Re: Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax imp

Post by healthiswealth » Thu Jan 23, 2020 1:05 pm

Thanks for sharing my options. Apparently, I do not quality for a Roth IRA. My marginal tax rate is 32%.

Yes, I completed Form 8606 when filing 2017, 2018 tax returns and will do so for 2019 as well, so I have been tracking my cost basis.

So what is the recommended approach when making non-deductible IRA contributions? To set-up a separate account so when you retire/withdraw from it, you're just paying taxes on any gains? Or to consolidate and contribute to an existing rollover account(primarily comprised of pre-tax 401k)?

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Re: Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax imp

Post by lakpr » Thu Jan 23, 2020 1:12 pm

healthiswealth wrote:
Thu Jan 23, 2020 1:05 pm
Thanks for sharing my options. Apparently, I do not quality for a Roth IRA. My marginal tax rate is 32%.

Yes, I completed Form 8606 when filing 2017, 2018 tax returns and will do so for 2019 as well, so I have been tracking my cost basis.

So what is the recommended approach when making non-deductible IRA contributions? To set-up a separate account so when you retire/withdraw from it, you're just paying taxes on any gains? Or to consolidate and contribute to an existing rollover account(primarily comprised of pre-tax 401k)?
That really accomplishes nothing. For the IRS, all your IRAs are one whole giant IRA. Any withdrawal, from one custodian or multiple, is a proportional withdrawal from the basis and the earnings, and you will be taxed on the earnings portion thus computed.

Why aren't you answering the question of whether your 401k will allow the roll in of an IRA? This is the third time I have asked that in this thread, and there's a reason why. That's your ONLY ticket out of your predicament at this time. If your 401k plan does accept incoming rollovers from IRA, it's possible to separate the basis and roll the taxable portion to your 401k. If that's not possible or you don't want to consider it for whatever reason, you will be married to Form 8606 for your life, both when contributing and when withdrawing.
Last edited by lakpr on Thu Jan 23, 2020 2:01 pm, edited 1 time in total.

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healthiswealth
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Re: Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax imp

Post by healthiswealth » Thu Jan 23, 2020 1:52 pm

Apologies, I was awaiting on a response from my 40Ik plan administrator...unfortunately, that is not an option. I can hold a separate rollover account with that brokerage firm, as I already am from a prior rollover, but it cannot be combined with my existing 401k.

Ok, so it looks like I continue as-is.

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Re: Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax imp

Post by lakpr » Thu Jan 23, 2020 1:59 pm

healthiswealth wrote:
Thu Jan 23, 2020 1:52 pm
Apologies, I was awaiting on a response from my 40Ik plan administrator...unfortunately, that is not an option. I can hold a separate rollover account with that brokerage firm, as I already am from a prior rollover, but it cannot be combined with my existing 401k.

Ok, so it looks like I continue as-is.
Very sorry indeed to hear that update. Given this, I would stop contributing to any IRA for future years, and just invest in taxable. The advantage of investing in taxable is that you get to enjoy the lower capital gains tax rate (18.8% for someone in your bracket, 15% nominal rate + 3.8% NIIT) on the earnings. With a non-deductible IRA, your growth is taxable as ordinary income.

With only 3 years worth of contributions so far, I think we caught this problem early enough.

If you change jobs in the future, where a rollover from IRA to 401k is possible, consider rolling over the (total IRA value - basis) into the 401k, leave the basis back in the IRA, and once the rollover is completed, convert the basis to a Roth IRA with no additional tax due.

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Re: Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax imp

Post by abuss368 » Thu Jan 23, 2020 2:16 pm

Can you contact Vanguard and have it reversed?
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Re: Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax imp

Post by lakpr » Thu Jan 23, 2020 2:17 pm

abuss368 wrote:
Thu Jan 23, 2020 2:16 pm
Can you contact Vanguard and have it reversed?
OP is in 32% tax bracket, not eligible to contribute to Roth { If that's what you mean by asking Vanguard to "reverse" }

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Re: Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax imp

Post by abuss368 » Thu Jan 23, 2020 2:20 pm

lakpr wrote:
Thu Jan 23, 2020 2:17 pm
abuss368 wrote:
Thu Jan 23, 2020 2:16 pm
Can you contact Vanguard and have it reversed?
OP is in 32% tax bracket, not eligible to contribute to Roth { If that's what you mean by asking Vanguard to "reverse" }
Correct.
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Re: Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax imp

Post by retiredjg » Thu Jan 23, 2020 4:48 pm

So what is the recommended approach when making non-deductible IRA contributions? To set-up a separate account so when you retire/withdraw from it, you're just paying taxes on any gains? Or to consolidate and contribute to an existing rollover account(primarily comprised of pre-tax 401k)?
The usual recommendation is not to make non-deductible contributions except as part of the back door process. Better to put those contributions into something else - a taxable account or paying off debt - unless you specifically need more room for bonds in a tax-deferred account. If/when that is the case, do make more non-deductible contributions.

I suppose there is another exception - if you are going to retire soon, making more non-deductible contributions is probably OK. This is because there is not enough time for these contributions to grow much before you might start using the IRA or converting the IRA to Roth.

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Re: Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax imp

Post by $musicman$ » Thu Jan 23, 2020 4:59 pm

I think I made the same mistake once..contributed to the wrong one..called Vanguard and they fixed it.

Because of differentiating incomes and financial strategies throughout my life, I have a traditional, a Roth, and a Sep.

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healthiswealth
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Re: Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax imp

Post by healthiswealth » Thu Jan 23, 2020 9:35 pm

Thanks all.
That’s a good idea, if/when I have that option.

I have 25 years until retirement and no pension. I will be paying my mortgage off in a few months so no other debt after that. I assume I will be in the lowest tax bracket upon retirement, but based on your example, it’s definitely more advantageous to just invest in my taxable, given the capital gains tax is definitely lower!

Is it advantageous to do the back door conversion when the market tanks when there are less gains to pay taxes on?

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Re: Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax imp

Post by retiredjg » Fri Jan 24, 2020 7:59 am

healthiswealth wrote:
Thu Jan 23, 2020 9:35 pm
Is it advantageous to do the back door conversion when the market tanks when there are less gains to pay taxes on?
It is advantageous to do Roth conversions when the market is down because you get more shares into Roth for less tax. But I would not wait till the market is down to do Roth conversions. Do them when you are in lower tax bracket.

The "backdoor" is something else. Better not to use the term "backdoor Roth conversion" at all because people don't know which you mean.

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Re: Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax imp

Post by healthiswealth » Fri Jan 24, 2020 12:04 pm

Got it.

I had no idea, I just looked it up, thanks for the clarification.

So much to still learn, appreciate all the insight everyone has been sharing, as I embark on this journey to become more financially literate and overcome my fear in investing to secure my future. Thank you!!

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