Roth IRA - Recharacterization

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Roth IRA - Recharacterization

Post by renue74 » Tue Oct 08, 2019 3:29 pm

My wife and I made too much to contribute to our Roth IRAs in 2018. (we filed an extension and Oct. 15 is our deadline to correct)

I know I can recharacterize our contribution + earnings into our Rollover IRAs, but my question is, I have a SIMPLE IRA that I maxed out my contribution for in 2018. So, I need to just remove my 2018 Roth contribution + earnings and place in my taxable account instead?

My wife is a teacher and only contributes to her pension plan, 403(b), and Roth IRA. But, she has a Rollover IRA from an old job. So we can recharacterize her 2018 Roth contribution?

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Re: Roth IRA - Recharacterization

Post by Wiggums » Tue Oct 08, 2019 3:40 pm

If your funds are at Vanguard,
Start by calling them at 800-205-6189—a retirement specialist may be able to complete your recharacterization in a single phone call. If it can't be done over the phone, you'll be instructed to complete and return this form instead:
IRA Recharacterization Form

Remember, a Roth conversion completed after December 31, 2017, can no longer be recharacterized back to a traditional IRA

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Re: Roth IRA - Recharacterization

Post by retiredjg » Tue Oct 08, 2019 3:45 pm

You can each recharacterize your contributions from Roth to tIRA, but I'm not sure you want to. If you do, they will each be non-deductible contributions to tIRA.

That puts some "basis" (already taxed money) into your IRAs. If you don't have any basis at this point, you may not want to create some now because every time you take money out of IRA, the amount that is taxable will have to be pro-rated.

This is not an onerous task once you do it once or maybe twice, but many people want to avoid this.

I believe you still have time to have your contributions to Roth withdrawn or returned (not sure which is the right term). You would not do this yourself, you would have the custodians do it. They will return the contribution and the earnings the contribution has made. Those contributions become taxable income for 2018 so you would need to amend your taxes for 2018.

I believe that amendment would be simple - just reporting more income (the amount of earnings the excess contributions made from then till now).

If you believe your income was over the limit just for 2018, there is another method you can follow. If you believe it will continue to be over the Roth limit, just have your contributions withdrawn (by the custodian), pay the tax on the earnings, and invest in taxable.

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