IRA recharacterization

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Snowster
Posts: 10
Joined: Sun Jan 01, 2017 2:05 pm

IRA recharacterization

Post by Snowster » Sun Jan 22, 2017 7:10 pm

I'm a new investor and first-time poster so any advice is greatly appreciated!
I have a question about recharacterization of my recently opened Roth IRA at Vanguard. Here is my situation.

November: I opened a new Traditional IRA at Vanguard with a contribution $5042.
December: topped off traditional IRA with +$458 contribution, bringing 2016 total contribution to $5500

My wife and I both have employer 401k plans. I started our taxes (filing jointly) and found that our MAGI is at $128k, which is over the $118k limit for deductible IRA's. So, after some reading, my plan is to recharacterize my Vanguard traditional IRA to a Roth IRA.

- Is recharacterizing the preferred option?
- Is the best way to start this process over the phone with Vanguard?
- Do I also need to recharacterize any earnings from the traditional IRA? If so, how is this possible while still staying under the Roth limit of $5,500? (From looking at my Vanguard account, I think my earnings from the two 2016 contributions are about $30 in market gain and $30 in dividends, which were re-invested).
- If I understand the IRS instructions (https://www.irs.gov/instructions/i8606/ch01.html#d0e476), I will need to attach a statement to my tax return explaining the recharacterization. But, I do not to fill out a form 8606 nor do I report any distributions from the traditional IRA. Correct? Does anyone know if Turbotax will step through this process and allow a statement to be attached electronically?
- What am I missing?

Thanks!

livesoft
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Joined: Thu Mar 01, 2007 8:00 pm

Re: IRA recharacterization

Post by livesoft » Sun Jan 22, 2017 7:22 pm

Maybe you should just do a conversion instead? Since you have not told the IRS whether this is a deductible or non-deductible traditional IRA by filing a Form 8606 with your 2016 Form 1040 tax return, I would think you might as well use the conversion route. This is often called a "Back door Roth IRA"

https://www.bogleheads.org/wiki/Backdoor_Roth_IRA

But I am not sure of the benefits of recharacterize versus conversion. I always do conversions myself.

TurboTax will do conversions with ease.
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kaneohe
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Joined: Mon Sep 22, 2008 12:38 pm

Re: IRA recharacterization

Post by kaneohe » Sun Jan 22, 2017 8:06 pm

I would think recharacterization is the way to go. Recharacterization in this case means it is as if you contributed to the Roth originally. That means that the gains are incorporated into the Roth and are not taxable (in principle a good thing tho in practice small potatoes here). VG should be able to
do the calculation for you and move the appropriate amount to the Roth.

If you convert you have possible complications if you have deductible TIRAs or earnings somewhere that might present more taxes.
You are correct that the recharacterization means no 8606 ........if you do a full recharacterization http://www.investopedia.com/articles/re ... 092403.asp

Snowster
Posts: 10
Joined: Sun Jan 01, 2017 2:05 pm

Re: IRA recharacterization

Post by Snowster » Sun Jan 22, 2017 9:37 pm

Thanks for the advice and links.

If I understand correctly, a recharcterization event is defined based on each contribution...? So, in my case, I would recharacterize the $5042 contribution in November as well as recharacterize the $458 contribution in December. If I recharacterize the full amount of these two contributions (and associated earnings), that would qualify as a "full" recharcterization? And therefore it wouldn't be a "partial" recharcterization requiring a form 8606...?

Or, does a "full" recharcterization refer to the complete VG account? I ask, because for the 2017 tax year, I have already made a contribution to the traditional IRA as well as a Rollover from TIAA. I'd like to keep the traditional IRA in place with these funds for 2017 moving forward.

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House Blend
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Joined: Fri May 04, 2007 1:02 pm

Re: IRA recharacterization

Post by House Blend » Mon Jan 23, 2017 9:45 am

Snowster wrote:If I understand correctly, a recharcterization event is defined based on each contribution...? So, in my case, I would recharacterize the $5042 contribution in November as well as recharacterize the $458 contribution in December. If I recharacterize the full amount of these two contributions (and associated earnings), that would qualify as a "full" recharcterization? And therefore it wouldn't be a "partial" recharcterization requiring a form 8606...?

Or, does a "full" recharcterization refer to the complete VG account? I ask, because for the 2017 tax year, I have already made a contribution to the traditional IRA as well as a Rollover from TIAA. I'd like to keep the traditional IRA in place with these funds for 2017 moving forward.
Read the instructions for Form 8606, particularly the subsection on recharacterization.

You'll discover that "partiality" and filing Form 8606 arises if you contribute a total of $X to a trad IRA for tax year Y, and recharacterize some amount $Z < $X. For you, $X = $Z, so it doesn't apply.

Even in the event that $Z < $X, you would only file Form 8606 if you will be not taking a deduction for the $X - $Z contribution you have effectively made to the trad IRA.

SheReadsHere719
Posts: 86
Joined: Fri Jan 06, 2017 7:28 pm

Re: IRA recharacterization

Post by SheReadsHere719 » Mon Jan 23, 2017 4:02 pm

I posted this in another thread as well, but if you and your wife are married filing jointly and your MAGI is $128,000, you’re under the Roth contribution limit for 2016 ($128,000 < $184,000): https://www.irs.gov/retirement-plans/pl ... e-for-2016. The $117,000 limit is for married filing separately or single filers.

Since you both have 401k plans to contribute to, you’re not getting any tax advantages from contributing to a tIRA. May as well make 2016 and 2017 Roth IRAs and max out the $11,000/year.

Snowster
Posts: 10
Joined: Sun Jan 01, 2017 2:05 pm

Re: IRA recharacterization

Post by Snowster » Mon Jan 23, 2017 4:36 pm

Thanks again all!

SheReadsHere...
For 2016 we will recharacterize to Roth because our MAGI of $128k is over the $118k limit for a deductible tIRA.
In 2017 we should be able to get under the $118k MAGI limit by maxing out our 401k's and maxing out a new HSA, something we didn't quite do in 2016.

https://www.irs.gov/retirement-plans/pl ... an-at-work

retiredjg
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Re: IRA recharacterization

Post by retiredjg » Mon Jan 23, 2017 4:59 pm

I think recharacterize to Roth is the better answer if you are actually able to contribute to Roth IRA directly.

If you convert to Roth IRA and have other IRAs (SEP, SIMPLE, traditional, rollover) you'll get mixed up in a pro-rating mess.

charis23
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Joined: Mon Jan 02, 2017 3:25 pm

Re: IRA recharacterization

Post by charis23 » Sat Jan 13, 2018 4:20 pm

Looks like I'm in the same situation as the op in wanting to recharacterize a traditional IRA contribution I made in Jan 2017 to a Roth IRA. Our MAGI will be less than the phase-out limit (189k). Just to be clear with the new tax law, if my understanding is correct, recharacterizations like this (trad IRA to Roth IRA) are still allowed for 2017 and on as long as one was eligible to contribute to a Roth IRA in the first place. Is my thinking correct?

Alan S.
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Location: Prescott, AZ

Re: IRA recharacterization

Post by Alan S. » Sat Jan 13, 2018 7:58 pm

Yes, recharacterizations of regular contributions were not affected by the new tax law.

You can recharacterize the TIRA contribution made in Jan, 2017 as a Roth contribution as long as that contribution was a 2017 contribution and not a prior year contribution. The phase out range for 2017 started at 186k, not 189k.

If you recharacterized it and then found your MAGI was too high to qualify for a Roth, then you will have created an excess Roth contribution, that would have to be corrected by one of the 3 methods available to accomplish that.

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