Here are the two options I’m considering for our excess Roth contributions:
- Withdrawing the excess contributions (plus earnings) and putting them in a taxable account.
- Recharacterizing the excess contributions as non-deductible tIRA contributions.
Is there another option I’m missing?
Which would you recommend?
The Bogleheads prioritizing investments wiki suggests that contributing to a taxable account is generally preferable to making non-deductible tIRA contributions. However, in this case choosing the taxable account also reduces the amount I can contribute to (1) my deductible IRA, (2) my Roth, and (3) my wife's Roth.
Pros of moving to the taxable account
We don’t have to sort out the non-taxable basis in our tIRAs for the rest of our lives.
We now have a chunk of money to invest elsewhere.
The drawback is that we have to pay taxes on the earnings from 2017 (and these 2017 earnings also reduce the amount we can contribute to our Roths and the deductible contributions I can make to my tIRA).
Pros of recharacterizing to non-deductible contributions
Greater contributions to our Roths this year
Greater deductible contribution to my tIRA
We don’t have to pay any taxes on the re-characterized gains this year.
Most of the proponents of non-deductible tIRA contributions mention the possibility of a backdoor Roth. Because we both have tIRAs funded entirely with deductible contributions the backdoor Roth does not appear feasible (I don't have any good options for moving the deductible contributions to a non-IRA).
Here are the specific contribution numbers I'm looking at:
Taxable Account Option
My deductible tIRA: $1300
My non-deductible tIRA: 0
My Roth: $1300
Wife tIRA: 0
Wife Roth: $1300
Taxable Account: $7100 (+ earnings - taxes on earnings= ~$7800)
Non-deductible tIRA Option
My deductible tIRA: $2080
My non-deductible tIRA: $1340
My Roth: $2080
Wife tIRA: $0
Wife Roth: $2080
Wife non-deductible tIRA: $3420
Taxable Account: $0