Roth IRA - Recharacterize vs. Remove - Over Income Limit

[mrbogleyhead]

Hi there,

I contributed $5,310.00 to Roth IRA for 2022. However, our AGI exceeded $214,000 so that contribution is all in excess. I assume that those contributions lost about ~10% for 2022 (looking at VTSAX 1-year performance). My understanding is that I will need to recharacterize/remove the contribution to a T-IRA (traditional IRA) and then convert back to R-IRA (roth IRA), and that given it is 2023 I will need to account for this with taxes this year and next.

Given this, I have a few questions and am hoping for some guidance from the community .

1) Is it best to recharacterize the contribution or remove the contribution? Why?
2) Are the tax forms the same for both processes? Most information I've found on the forums is for recharacterization (IRS Form 8606 etc). Removing seems more complicated but perhaps the right approach given the ~10% loss?
3) Moving forward, do people do monthly backdoor contributions? Seems like a lot of work - what is the simplest approach?

Thanks for your help and time.

Other considerations:
* I've already filed taxes for 2022 with Turbo Tax (so I assume I will need to amend)
* No existing Tradtional IRA or similar
* Funds in Vanguard

[Alan S.]

Hi there,

I contributed $5,310.00 to Roth IRA for 2022. However, our AGI exceeded $214,000 so that contribution is all in excess. I assume that those contributions lost about ~10% for 2022 (looking at VTSAX 1-year performance). My understanding is that I will need to recharacterize/remove the contribution to a T-IRA (traditional IRA) and then convert back to R-IRA (roth IRA), and that given it is 2023 I will need to account for this with taxes this year and next.

Given this, I have a few questions and am hoping for some guidance from the community .

1) Is it best to recharacterize the contribution or remove the contribution? Why?
2) Are the tax forms the same for both processes? Most information I've found on the forums is for recharacterization (IRS Form 8606 etc). Removing seems more complicated but perhaps the right approach given the ~10% loss?
3) Moving forward, do people do monthly backdoor contributions? Seems like a lot of work - what is the simplest approach?

Thanks for your help and time.

Other considerations:
* I've already filed taxes for 2022 with Turbo Tax (so I assume I will need to amend)
* No existing Tradtional IRA or similar
* Funds in Vanguard

1) With a loss of around $500 you should have the contribution returned to you, come up with the additional $500 to make your ND TIRA contribution, make that contribution and the immediately convert it to Roth. Even better if you can come up with another $690 to make a FULL 2022 ND TIRA contribution before converting it. If you cannot come up with this last $690 till April, you could do it then. This not only results in more money in your Roth IRA, but it eliminates having a ND contribution basis larger than your conversion that would carry over to 2023 as would be the case for recharacterization.

2) The 1099R forms will differ, but the amount of tax reporting is about the same. You would need to file a 2022 1040 X with an 8606 either way showing your ND contribution. You would also include an explanatory statement on the 1040X indicating the amount and date of your Roth contributions, that you removed them and what they were worth when removed (around $4800). The conversion is reported on your 2023 return.

3) Cleaner to make your contributions at a single time, then immediately convert it. If you can't you will have some loss or gain on the contributions before converting unless you convert right after every contribution, which would result in several more transactions.

[mhalley]

Recharacterize to trad and then do a backdoor Roth. If you forgo the ira contribution for that year, so that money plus it’s gains loses its tax advantage forever. The 10% loss is a blip in a 40 plus year timeframe of market ups and downs. After you recharacterize you can contribute the remainder (690) to max out the trad ira and do the backdoor Roth for that too.

[mrbogleyhead]

Hi! It missed the notifications for these responses. Thank you for your help and input.