Did son get wrong Roth advice from Vanguard?

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Topic Author
Boatguy
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Joined: Fri Apr 19, 2019 7:54 pm

Did son get wrong Roth advice from Vanguard?

Post by Boatguy »

My son has an existing Roth account at Vanguard. He had previously funded it twice: in 2019, as a direct Roth deposit (his income was just low enough), and again in 2020 doing a backdoor. For some silly reason this year, he made his 2021 deposit directly into his Roth, despite the fact that his income made him ineligible. I called this to his attention, and I was under the impression that, because he made his contribution directly to the Roth rather than via rollover, he could pull that money back into his empty traditional IRA and then do a backdoor.
I thought that the CARES Act elimination of recharacterizations doesn’t apply to the recharacterization of a direct Roth contribution vs a rollover.

They told him that he had to move the entire amount into a tIRA, pay any taxes on gains, and then backdoor the entire amount back into the Roth. He begrudgingly told them to go ahead.

Was the Vanguard rep correct? Thanks!
MotoTrojan
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Joined: Wed Feb 01, 2017 8:39 pm

Re: Did son get wrong Roth advice from Vanguard?

Post by MotoTrojan »

These two things sound like they are describing the same situation so I am a little confused as to what you are getting at. Did Vanguard not do a recharacterization (you say they moved the entire amount to a tIRA, not sure how they moved it if not a recharacterization)? Then he converted back to Roth (the backdoor), and yes, that requires paying taxes on any gains that were accrued beyond the original contribution amount.

Sounds like VG did exactly what you originally were under the impression he should do, unless I am missing something. If you are implying they made him move the ENTIRE Roth (3 years worth) then yes, that makes no sense to me and sounds like he got robbed.
Boatguy wrote: Wed Apr 07, 2021 7:36 pm I was under the impression that, because he made his contribution directly to the Roth rather than via rollover, he could pull that money back into his empty traditional IRA and then do a backdoor.
I thought that the CARES Act elimination of recharacterizations doesn’t apply to the recharacterization of a direct Roth contribution vs a rollover.
Boatguy wrote: Wed Apr 07, 2021 7:36 pm
They told him that he had to move the entire amount into a tIRA, pay any taxes on gains, and then backdoor the entire amount back into the Roth. He begrudgingly told them to go ahead.
Topic Author
Boatguy
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Joined: Fri Apr 19, 2019 7:54 pm

Re: Did son get wrong Roth advice from Vanguard?

Post by Boatguy »

MotoTrojan wrote: Wed Apr 07, 2021 7:41 pm These two things sound like they are describing the same situation so I am a little confused as to what you are getting at. Did Vanguard not do a recharacterization (you say they moved the entire amount to a tIRA, not sure how they moved it if not a recharacterization)? Then he converted back to Roth (the backdoor), and yes, that requires paying taxes on any gains that were accrued beyond the original contribution amount.

Sounds like VG did exactly what you originally were under the impression he should do, unless I am missing something. If you are implying they made him move the ENTIRE Roth (3 years worth) then yes, that makes no sense to me and sounds like he got robbed.
Boatguy wrote: Wed Apr 07, 2021 7:36 pm I was under the impression that, because he made his contribution directly to the Roth rather than via rollover, he could pull that money back into his empty traditional IRA and then do a backdoor.
I thought that the CARES Act elimination of recharacterizations doesn’t apply to the recharacterization of a direct Roth contribution vs a rollover.
Boatguy wrote: Wed Apr 07, 2021 7:36 pm
They told him that he had to move the entire amount into a tIRA, pay any taxes on gains, and then backdoor the entire amount back into the Roth. He begrudgingly told them to go ahead.
Yes, they told him that he must recharacterize the entire amount (his 3 contributions plus gains) into the tIRA and then do the backdoor. It made no sense to me...and sorry if I wasn’t clear enough with my question.
MotoTrojan
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Re: Did son get wrong Roth advice from Vanguard?

Post by MotoTrojan »

Boatguy wrote: Wed Apr 07, 2021 7:49 pm
MotoTrojan wrote: Wed Apr 07, 2021 7:41 pm These two things sound like they are describing the same situation so I am a little confused as to what you are getting at. Did Vanguard not do a recharacterization (you say they moved the entire amount to a tIRA, not sure how they moved it if not a recharacterization)? Then he converted back to Roth (the backdoor), and yes, that requires paying taxes on any gains that were accrued beyond the original contribution amount.

Sounds like VG did exactly what you originally were under the impression he should do, unless I am missing something. If you are implying they made him move the ENTIRE Roth (3 years worth) then yes, that makes no sense to me and sounds like he got robbed.
Boatguy wrote: Wed Apr 07, 2021 7:36 pm I was under the impression that, because he made his contribution directly to the Roth rather than via rollover, he could pull that money back into his empty traditional IRA and then do a backdoor.
I thought that the CARES Act elimination of recharacterizations doesn’t apply to the recharacterization of a direct Roth contribution vs a rollover.
Boatguy wrote: Wed Apr 07, 2021 7:36 pm
They told him that he had to move the entire amount into a tIRA, pay any taxes on gains, and then backdoor the entire amount back into the Roth. He begrudgingly told them to go ahead.
Yes, they told him that he must recharacterize the entire amount (his 3 contributions plus gains) into the tIRA and then do the backdoor. It made no sense to me...and sorry if I wasn’t clear enough with my question.
Gotcha. That is upsetting, I would probably make a point to call and ask for some sort of compensation equal to the tax-cost (and then some) unless they can fix this.
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gobel
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Re: Did son get wrong Roth advice from Vanguard?

Post by gobel »

Boatguy wrote: Wed Apr 07, 2021 7:49 pm Yes, they told him that he must recharacterize the entire amount (his 3 contributions plus gains) into the tIRA and then do the backdoor. It made no sense to me...and sorry if I wasn’t clear enough with my question.
My guess is they will definitely have to undo this. The deadline to recharacterize the 2019 contribution was Oct 15, 2020. And they can't recharacterize a Roth conversion at all (2020).

But first make sure that you find out exactly what they did. I wouldn't think such a mistake is even possible based on the rules.
livesoft
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Re: Did son get wrong Roth advice from Vanguard?

Post by livesoft »

Generally, when I read something like this reported by a 3rd party not involved, then I attribute all of it to miscommunication which could happen between multiple people at multiple times.

That is, I suggest your son get informed and try again with his IRA custodian.
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Topic Author
Boatguy
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Joined: Fri Apr 19, 2019 7:54 pm

Re: Did son get wrong Roth advice from Vanguard?

Post by Boatguy »

OP here.

I took Livesoft’s sage advice, called my son, and asked him to check his Roth account to see what had been moved out as a recharacterization. Sure enough, only the $6k contribution from 2021 was moved. So...false alarm, and either the Vanguard rep did a poor job of explaining, my son did an even worse job of understanding, or a bit of both.

Thanks to everyone for your input!
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