back-to-back recharacterization mess

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trx
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Joined: Tue Mar 06, 2018 9:35 pm

back-to-back recharacterization mess

Post by trx » Tue Mar 06, 2018 9:48 pm

Hey all,

Last year, I contributed to a Roth IRA. I didn't know that there were income limits, and I noticed that I was over the limit, and should not have contributed directly at all.

To fix this, I called my broker and asked if I could perform a recharacterization (non-deductible contribution to Traditional Ira), followed by a conversion (back to the Roth Ira). The standard backdoor Roth. This first assistant said "yep", and then proceeded to perform the recharacterization. He informed me that I'd have to fill out form 8606.

After waiting a day or so, I called to perform the conversion. This time, someone else answered and said that I didn't need to convert, in fact, I could just recharacterize it back to a Roth, and even skip out filling form 8606! She said that only contributions have an income cap, not recharacterizations. She said that I'd get a 1099 later during tax season.

Now since its tax time, this maneuver does not make sense. Doesn't just recharacterizing it back basically push be back to step 1, where I made my mistake? Isn't it basically as if I had directly contributed?


Here's a summary:
1) put money in Roth IRA (when I shouldn't have contributed to begin with)
2) recharacterized that to a Traditional Ira
3) recharacterized that to a Roth Ira

Is the above maneuver legit? It sounds too good to be true. If one could do this, why haven't I seen any other blogs talk about this? They all talk about directly contributing to a tIRA and then converting.

Let me know if anything is unclear, happy to clarify.

Thanks!

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tfb
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Re: back-to-back recharacterization mess

Post by tfb » Tue Mar 06, 2018 11:12 pm

trx wrote:
Tue Mar 06, 2018 9:48 pm
Here's a summary:
1) put money in Roth IRA (when I shouldn't have contributed to begin with)
2) recharacterized that to a Traditional Ira
3) recharacterized that to a Roth Ira

Is the above maneuver legit?
It's not. A recharacterized contribution can't be recharacterized again. It's possible the person you spoke to ended up doing a conversion for you anyway because a well-built system wouldn't allow the 2nd recharacterization. Find out what actually happened, not just what the person said would happen. If this broker's system allowed the 2nd recharacterization, you should leave.
Harry Sit, taking a break from the forums.

trx
Posts: 3
Joined: Tue Mar 06, 2018 9:35 pm

Re: back-to-back recharacterization mess

Post by trx » Tue Mar 06, 2018 11:16 pm

tfb wrote:
Tue Mar 06, 2018 11:12 pm
It's not. A recharacterized contribution can't be recharacterized again. It's possible the person you spoke to ended up doing a conversion for you anyway because a well-built system wouldn't allow the 2nd recharacterization. Find out what actually happened, not just what the person said would happen. If this broker's system allowed the 2nd recharacterization, you should leave.
Yea, I would've thought that Vanguard would've had checks against this. You're right. I think its likely that a conversion occurred, but I'll need to give them a call to double check. Thanks for the advice!

trx
Posts: 3
Joined: Tue Mar 06, 2018 9:35 pm

Re: back-to-back recharacterization mess

Post by trx » Tue Mar 06, 2018 11:41 pm

All right, I have an update.

The timelapse view looks like this:

[Roth Ira] Buy (here's my original, erroneous, purchase)
[Roth Ira] Recharacterization (outgoing, to tIRA)
[tIRA] Recharacterization (incoming, from Roth)
[tIRA] Recharacterization (outgoing, to Roth)
[Roth Ira] Recharacterization (incoming, from tIRA)

So yea.. It looks like the account history shows a double recharacterization!

Looks like my options now are to either:
1) pull out all this money so that I won't get hit by the 6% penalty
2) try to recharacterize it to traditional and convert it to a roth (is it possible in 2018, since its before April?)

Does that sound right?

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