Roth IRA Recharacterization for 2024 due to exceeding MAGI mechanics

[caklim00]

Just went through taxes for 2024 and this is the first year I exceeded the MAGI threshold. Both myself and spouse contributed 7K last year to Roth IRA. I'm in process of filling out the recharacterization form but I'm confused about the mechanics.

I have a Traditional IRA already at the brokerage from a rollover from a standard 401K. I was told I could just recharacterize the 7K plus any profits/losses, but is this going to cause an issue since the money this is going to be non-deductible for 2024 since I hit MAGI income limits? My goal is to convert this back over to Roth IRA after.

[toddthebod]

Just went through taxes for 2024 and this is the first year I exceeded the MAGI threshold. Both myself and spouse contributed 7K last year to Roth IRA. I'm in process of filling out the recharacterization form but I'm confused about the mechanics.

I have a Traditional IRA already at the brokerage from a rollover from a standard 401K. I was told I could just recharacterize the 7K plus any profits/losses, but is this going to cause an issue since the money this is going to be non-deductible for 2024 since I hit MAGI income limits? My goal is to convert this back over to Roth IRA after.

You won't be able to convert back without pro rata taxation. Any conversion or withdrawal will be considered to come proportionally from your non-deductible and pre-tax amounts, treating all pre-tax IRAs (e.g., including rollover IRAs) as one.

The only way to cleanly separate the pre-tax dollars from the non-deductible basis is to "reverse rollover" the pre-tax dollars into a workplace plan (e.g., a 401(k)). That will allow you to convert the remaining basis tax free.

If you do not have a workplace plan in which to do this and don't expect to for several years or more, you are probably better off requesting a return of excess contributions instead of a recharacterization and just saving that money in a taxable account (as the growth will be taxed at preferential LTCG rates versus in your IRA where it will be taxed at ordinary income rates).

[caklim00]

Just went through taxes for 2024 and this is the first year I exceeded the MAGI threshold. Both myself and spouse contributed 7K last year to Roth IRA. I'm in process of filling out the recharacterization form but I'm confused about the mechanics.

I have a Traditional IRA already at the brokerage from a rollover from a standard 401K. I was told I could just recharacterize the 7K plus any profits/losses, but is this going to cause an issue since the money this is going to be non-deductible for 2024 since I hit MAGI income limits? My goal is to convert this back over to Roth IRA after.

You won't be able to convert back without pro rata taxation. Any conversion or withdrawal will be considered to come proportionally from your non-deductible and pre-tax amounts, treating all pre-tax IRAs (e.g., including rollover IRAs) as one.

The only way to cleanly separate the pre-tax dollars from the non-deductible basis is to "reverse rollover" the pre-tax dollars into a workplace plan (e.g., a 401(k)). That will allow you to convert the remaining basis tax free.

If you do not have a workplace plan in which to do this and don't expect to for several years or more, you are probably better off requesting a return of excess contributions instead of a recharacterization and just saving that money in a taxable account (as the growth will be taxed at preferential LTCG rates versus in your IRA where it will be taxed at ordinary income rates).

Don't believe I have that option. Also, there is another issue with a withdrawal as it may affect a big bonus I have coming my way (I really would prefer not to test this since there was a fair amount of negotiation and requirements to meet this upfront).

By the way, spouse has no Traditional IRA currently. Only Roth IRA, guessing easiest option for her would be to re-characterize traditional and immediately convert to Roth?

[toddthebod]

You won't be able to convert back without pro rata taxation. Any conversion or withdrawal will be considered to come proportionally from your non-deductible and pre-tax amounts, treating all pre-tax IRAs (e.g., including rollover IRAs) as one.

The only way to cleanly separate the pre-tax dollars from the non-deductible basis is to "reverse rollover" the pre-tax dollars into a workplace plan (e.g., a 401(k)). That will allow you to convert the remaining basis tax free.

If you do not have a workplace plan in which to do this and don't expect to for several years or more, you are probably better off requesting a return of excess contributions instead of a recharacterization and just saving that money in a taxable account (as the growth will be taxed at preferential LTCG rates versus in your IRA where it will be taxed at ordinary income rates).

Don't believe I have that option. Also, there is another issue with a withdrawal as it may affect a big bonus I have coming my way (I really would prefer not to test this since there was a fair amount of negotiation and requirements to meet this upfront).

By the way, spouse has no Traditional IRA currently. Only Roth IRA, guessing easiest option for her would be to re-characterize traditional and immediately convert to Roth?

Yes, if she has no pre-tax IRAs (including "traditional", "rollover", SEP, or SIMPLE), then she can re-characterize and convert. In her case, the earnings will be taxable in 2025 when she reports the conversion (although you still need to report the contribution in 2024).

You should probably just request a return of contributions. In your case, the earnings will be taxable in 2024 on the return you are currently working on.

[caklim00]

Don't believe I have that option. Also, there is another issue with a withdrawal as it may affect a big bonus I have coming my way (I really would prefer not to test this since there was a fair amount of negotiation and requirements to meet this upfront).

By the way, spouse has no Traditional IRA currently. Only Roth IRA, guessing easiest option for her would be to re-characterize traditional and immediately convert to Roth?

Yes, if she has no pre-tax IRAs (including "traditional", "rollover", SEP, or SIMPLE), then she can re-characterize and convert. In her case, the earnings will be taxable in 2025 when she reports the conversion (although you still need to report the contribution in 2024).

You should probably just request a return of contributions. In your case, the earnings will be taxable in 2024 on the return you are currently working on.

Makes sense. Is there a way to do backdoor Roth strategy for 2024 and 2025 now for myself given I have a Traditional IRA already?

[toddthebod]

Yes, if she has no pre-tax IRAs (including "traditional", "rollover", SEP, or SIMPLE), then she can re-characterize and convert. In her case, the earnings will be taxable in 2025 when she reports the conversion (although you still need to report the contribution in 2024).

You should probably just request a return of contributions. In your case, the earnings will be taxable in 2024 on the return you are currently working on.

Makes sense. Is there a way to do backdoor Roth strategy for 2024 and 2025 now for myself given I have a Traditional IRA already?

No. If your traditional IRA is small, you could convert it all. That's about it.

[retiredjg]

Makes sense. Is there a way to do backdoor Roth strategy for 2024 and 2025 now for myself given I have a Traditional IRA already?

Oh sure, there is a way to do it. But backdoor Roth is a poor choice for someone with an IRA on the side and you most likely will regret doing it. Exception is the IRA on the side is small enough to just convert to Roth as well.

The only good way for you to do backdoor Roth is to roll your entire pre-tax balance into a 401k/403b/457 that will accept the rollover. Leave the basis (your re-characterized Roth IRA contribution) in the tIRA. Once all the pre-tax money is out of the tIRA, you can convert the basis to Roth.

Instead, you should request a return of your 2024 contribution and forget about backdoor Roth.

[caklim00]

Makes sense. Is there a way to do backdoor Roth strategy for 2024 and 2025 now for myself given I have a Traditional IRA already?

Oh sure, there is a way to do it. But backdoor Roth is a poor choice for someone with an IRA on the side and you most likely will regret doing it. Exception is the IRA on the side is small enough to just convert to Roth as well.

The only good way for you to do backdoor Roth is to roll your entire pre-tax balance into a 401k/403b/457 that will accept the rollover. Leave the basis (your re-characterized Roth IRA contribution) in the tIRA. Once all the pre-tax money is out of the tIRA, you can convert the basis to Roth.

Instead, you should request a return of your 2024 contribution and forget about backdoor Roth.

Thanks, I do have a way with my employer to move it into my 401k at work, but I need to decide if its worth it. I'm getting a little over $1200 per year for the next 5 years for just leaving the traditional IRA there.

[caklim00]

Makes sense. Is there a way to do backdoor Roth strategy for 2024 and 2025 now for myself given I have a Traditional IRA already?

Oh sure, there is a way to do it. But backdoor Roth is a poor choice for someone with an IRA on the side and you most likely will regret doing it. Exception is the IRA on the side is small enough to just convert to Roth as well.

The only good way for you to do backdoor Roth is to roll your entire pre-tax balance into a 401k/403b/457 that will accept the rollover. Leave the basis (your re-characterized Roth IRA contribution) in the tIRA. Once all the pre-tax money is out of the tIRA, you can convert the basis to Roth.

Instead, you should request a return of your 2024 contribution and forget about backdoor Roth.

Thanks, I do have a way with my employer to move it into my 401k at work, but I need to decide if its worth it. I'm getting a little over $1200 per year for the next 5 years for just leaving the traditional IRA there.

[retiredjg]

Backdoor Roth is nice, but not necessarily worth more than $1,200 a year for 5 years, in my opinion.

[RyeBourbon]

Backdoor Roth is nice, but not necessarily worth more than $1,200 a year for 5 years, in my opinion.

Agreed. I'd rather have $6k.

[caklim00]

Would there be any reason to do non-deductible contributions to traditional IRA for the next few years or would that just unnecessary complicate things? I'm trying to think of a scenario in a few years where it would be helpful to have a non-deductible IRA to convert to Roth. I have way too much in pretax traditional right now and it's not like I'm retiring soon where I will be converting to Roth. 5 years seems like too long of a period especially if this is going to require a lot of tax tracking.

[toddthebod]

Would there be any reason to do non-deductible contributions to traditional IRA for the next few years or would that just unnecessary complicate things? I'm trying to think of a scenario in a few years where it would be helpful to have a non-deductible IRA to convert to Roth. I have way too much in pretax traditional right now and it's not like I'm retiring soon where I will be converting to Roth. 5 years seems like too long of a period especially if this is going to require a lot of tax tracking.

Sure, it's a reasonable consideration. In five years you can hopefully rollover not just the large rollover IRA but also the earnings on your non-deductible contributions, leaving only the contributions in the account. Then you can convert tax free at that point. I don't think it's a bad idea. I'd have to think about the implications some more. On the one hand, there probably won't be that much in earnings off your contributions, maybe $5,000-$10,000. Those earnings will continue to grow into your 70s or 80s before they are withdrawn at ordinary income rates. So your choice ends up being between, on the one hand, five years of extra Roth contributions with five years of earnings moved into your pre-tax accounts versus, on the other hand, five years of taxable brokerage contributions with the earnings also growing in the taxable brokerage, ultimately being taxed primarily at long-term capital gains rates. You probably won't be in a very high tax bracket in your 80s, so it's not a bad deal to do the long drawn out backdoor Roth.

[caklim00]

Would there be any reason to do non-deductible contributions to traditional IRA for the next few years or would that just unnecessary complicate things? I'm trying to think of a scenario in a few years where it would be helpful to have a non-deductible IRA to convert to Roth. I have way too much in pretax traditional right now and it's not like I'm retiring soon where I will be converting to Roth. 5 years seems like too long of a period especially if this is going to require a lot of tax tracking.

Sure, it's a reasonable consideration. In five years you can hopefully rollover not just the large rollover IRA but also the earnings on your non-deductible contributions, leaving only the contributions in the account. Then you can convert tax free at that point. I don't think it's a bad idea. I'd have to think about the implications some more. On the one hand, there probably won't be that much in earnings off your contributions, maybe $5,000-$10,000. Those earnings will continue to grow into your 70s or 80s before they are withdrawn at ordinary income rates. So your choice ends up being between, on the one hand, five years of extra Roth contributions with five years of earnings moved into your pre-tax accounts versus, on the other hand, five years of taxable brokerage contributions with the earnings also growing in the taxable brokerage, ultimately being taxed primarily at long-term capital gains rates. You probably won't be in a very high tax bracket in your 80s, so it's not a bad deal to do the long drawn out backdoor Roth.

Thanks for the input, its something I'll definitely consider. Although one of the reasons I withdrew the former 401k was to chase bonuses to juice my returns. I wonder if in 5 years something else crazy will appear that I'll want to jump at as well...

[retiredjg]

Would there be any reason to do non-deductible contributions to traditional IRA for the next few years or would that just unnecessary complicate things? I'm trying to think of a scenario in a few years where it would be helpful to have a non-deductible IRA to convert to Roth. I have way too much in pretax traditional right now and it's not like I'm retiring soon where I will be converting to Roth. 5 years seems like too long of a period especially if this is going to require a lot of tax tracking.

I would not do this. It will mix deductible and non-deductible contributions and 5 years from now, you may not have a 401k plan at work to use to separate the cream from the coffee. Then you'll be stuck with pro-rating essentially forever (or until you no longer have any money in traditional IRA).

You can save that money perfectly well in a taxable brokerage account. It does not all have to be in a 401k or IRA or Roth IRA. In fact, once you reach retirement, you'll be happy to have a taxable account.

Or use what would be your IRA contribution to pay down debt. Don't complicate your finances by mingling deductible and non-deductible contributions to IRA.