Same-year IRA recharacterization and conversion: Did I do this correctly?

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Topic Author
RememberNovember
Posts: 7
Joined: Mon Mar 05, 2018 9:42 pm

Same-year IRA recharacterization and conversion: Did I do this correctly?

Post by RememberNovember » Wed Jan 09, 2019 10:29 pm

Hello everyone! I could use a friendly sanity-check on this. In 2018 I made a same-year IRA recharacterization and conversion (details below), and while it all seemed to make sense at the time, as tax season approaches and my memory grows fuzzy, I hope I have not gotten myself into hot water. Please help me not lose more sleep over this tonight. :?

1) On 1/12/18 I opened a new Vanguard Roth IRA account and added $5500 cash as my 2018 contribution.
2) On 1/18/18 I used this contribution to buy $5500 of mutual funds in the Vanguard Roth IRA.

In March I realized that after a promotion at work, my MAGI probably meant I’d exceeded my Roth IRA contribution maximum for the year. I had read that in order to do a backdoor IRA, you couldn’t have any money in a Traditional IRA, so I converted my old Traditional IRA at Schwab:
2.5) On 2/20/18 I converted the full ~$16000 balance of my Schwab Traditional IRA to a new Schwab Roth IRA. (Additional context, possibly not relevant: The Traditional IRA itself was a rollover from an old employer’s retirement account, but that rollover was done in February 2017 and tracked in that tax year.)

Then for the Vanguard IRA account, I recharacterized and reconverted:
3) On 3/8/18, I recharacterized the Roth IRA to a Traditional IRA. This moved ~$5370 in mutual funds and ~$1.30 in sweep funds over to the new Vanguard Traditional account.
4) On 3/9/18, I converted the Traditional IRA back to a Roth IRA. This moved ~$5435 in mutual funds and ~$1.30 in sweep funds over to the Roth IRA.

Thank you in advance!

Alan S.
Posts: 8102
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Same-year IRA recharacterization and conversion: Did I do this correctly?

Post by Alan S. » Thu Jan 10, 2019 12:05 am

RememberNovember wrote:
Wed Jan 09, 2019 10:29 pm
Hello everyone! I could use a friendly sanity-check on this. In 2018 I made a same-year IRA recharacterization and conversion (details below), and while it all seemed to make sense at the time, as tax season approaches and my memory grows fuzzy, I hope I have not gotten myself into hot water. Please help me not lose more sleep over this tonight. :?

1) On 1/12/18 I opened a new Vanguard Roth IRA account and added $5500 cash as my 2018 contribution.
2) On 1/18/18 I used this contribution to buy $5500 of mutual funds in the Vanguard Roth IRA.

In March I realized that after a promotion at work, my MAGI probably meant I’d exceeded my Roth IRA contribution maximum for the year. I had read that in order to do a backdoor IRA, you couldn’t have any money in a Traditional IRA, so I converted my old Traditional IRA at Schwab:
2.5) On 2/20/18 I converted the full ~$16000 balance of my Schwab Traditional IRA to a new Schwab Roth IRA. (Additional context, possibly not relevant: The Traditional IRA itself was a rollover from an old employer’s retirement account, but that rollover was done in February 2017 and tracked in that tax year.)

Then for the Vanguard IRA account, I recharacterized and reconverted:
3) On 3/8/18, I recharacterized the Roth IRA to a Traditional IRA. This moved ~$5370 in mutual funds and ~$1.30 in sweep funds over to the new Vanguard Traditional account.
4) On 3/9/18, I converted the Traditional IRA back to a Roth IRA. This moved ~$5435 in mutual funds and ~$1.30 in sweep funds over to the Roth IRA.

Thank you in advance!

You should have checked to see if your 401k plan would accept an IRA rollover, and if so rolled your pre tax IRA balance into the 401k. Then you could convert your recharacterized Roth contribution to the Roth IRA tax free.


As it is you will owe tax on 16,000 of your combined conversions that you might have avoided. Your 2018 8606 will report a 5500 non deductible contribution for 2018 and Part I of the 8606 will then calculate the non taxable and taxable amount of your total conversions. Since you will have a basis of 5500, the taxable amount of the combined conversions will be the total converted less 5500.


The statement that you cannot have a pre tax TIRA balance to do a back door Roth is false. What that statement should actually say is that your conversion of the back door Roth will be pro rated and you will pay taxes if you have either a year end IRA balance or converted everthing before you recharacterized and did the second conversion.

Decades from now this conversion might actually turn out quite well because it is possible that your marginal tax rate paid on this 16,000 will turn out to be lower than your rate in retirement. There is no way to know. At least now you no longer have a pre tax balance in your TIRA, so the coast is clear to do more back door conversions in the future if you do not qualify for direct Roth contributions.

Topic Author
RememberNovember
Posts: 7
Joined: Mon Mar 05, 2018 9:42 pm

Re: Same-year IRA recharacterization and conversion: Did I do this correctly?

Post by RememberNovember » Thu Jan 10, 2019 8:23 am

Yes, for the Schwab conversion from traditional IRA to Roth IRA, I knew there would be a tax hit and had planned for it. Maybe not pleasant for 2018 taxes, but it closes out a few-year saga with those funds and will hopefully come out for the better in the long term.

My main concern is rather about what I’ve done on the Vanguard side with the recharacterization and conversion. I’ve seen some articles discussing the other way around (conversion and then recharacterization, and what is and isn’t kosher after the TCJA tax law changes — e.g. being able to make both of those changes in the same year), but nothing about this order of operations. I *think* what I’ve done in this case is okay, but was looking for a second opinion.

Alan S.
Posts: 8102
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Same-year IRA recharacterization and conversion: Did I do this correctly?

Post by Alan S. » Thu Jan 10, 2019 6:03 pm

RememberNovember wrote:
Thu Jan 10, 2019 8:23 am
Yes, for the Schwab conversion from traditional IRA to Roth IRA, I knew there would be a tax hit and had planned for it. Maybe not pleasant for 2018 taxes, but it closes out a few-year saga with those funds and will hopefully come out for the better in the long term.

My main concern is rather about what I’ve done on the Vanguard side with the recharacterization and conversion. I’ve seen some articles discussing the other way around (conversion and then recharacterization, and what is and isn’t kosher after the TCJA tax law changes — e.g. being able to make both of those changes in the same year), but nothing about this order of operations. I *think* what I’ve done in this case is okay, but was looking for a second opinion.

You could have done the contribution recharacterization and conversion before the conversion of the 16k and the result would have been the same for either order.

However, the chronological order you mentioned is for those people who do not want to have a taxable conversion. In your case, let's say you wanted to be able to convert the 5436 tax free. You would then need to roll the 16k IRA over to an accepting employer plan. Since these rollovers sometimes cannot get done due to plan restrictions, we advise to complete the rollover to the employer plan before converting just to be sure your conversion will actually be tax free.

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Duckie
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Re: Same-year IRA recharacterization and conversion: Did I do this correctly?

Post by Duckie » Thu Jan 10, 2019 9:45 pm

RememberNovember wrote:I hope I have not gotten myself into hot water. Please help me not lose more sleep over this tonight.
You're fine.

When you do your 2018 taxes you will fill out IRS Form 8606. (Right now this is the 2017 form.) It will have (roughly) the following:
  • Part I
    Line 1 -- $5,500
    Line 2 -- 0
    Line 3 -- 5,500
    Line 4 -- 0 or blank
    Line 5 -- 5,500
    Line 6 -- 0 or blank
    Line 7 -- 0 or blank
    Line 8 -- 21,436 ($16,000 + $5436)
    Line 9 -- 21,436
    Line 10 -- 0.25657772 (the more numbers the better)
    Line 11 -- 5,500
    Line 12 -- 0
    Line 13 -- 5,500
    Line 14 -- 0
    Line 15a -- 0
    Line 15b -- 0 (probably)
    Line 15c -- 0

    Part II
    Line 16 -- 21,436
    Line 17 -- 5,500
    Line 18 -- 15,936 (will go on line 4b of 1040 form)
You will also need to add a statement about the recharacterization. It will say something like:
  • On 1/12/18 I made a $5,500.00 contribution to a Roth IRA for 2018. On 3/8/18 I recharacterized the entire Roth IRA contribution totaling $5,371.30 to a traditional IRA.
If you're using tax-software make sure you tell it that you made a non-deductible contribution to a TIRA of $XX, that you converted $YY to a Roth IRA, and that you recharacterized. That'll trigger Form 8606 and the recharacterization statement.

Topic Author
RememberNovember
Posts: 7
Joined: Mon Mar 05, 2018 9:42 pm

Re: Same-year IRA recharacterization and conversion: Did I do this correctly?

Post by RememberNovember » Fri Jan 11, 2019 7:18 am

Thank you so much, Duckie — that’s exactly what I’ve been trying to puzzle out!

I appreciate everyone’s help! You are all wonderful, brilliant human beings. I love this forum. :beer

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