Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax impact

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healthiswealth
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Joined: Sat May 07, 2016 11:44 pm

Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax impact

Post by healthiswealth » Mon Jan 13, 2020 3:58 pm

I just realized I contributed my 2017-2019 IRA into my rollover account instead of my Roth account at Vanguard in VTSAX. I do not qualify for the traditional IRA given my AGI. I was able to change my automatic contribution for 2020.

The post-tax contributions have been documented in my tax returns. Am I able to transfer from traditional to Roth without any ramifications?

Definitely an oversight on my end.

44 yrs
Head of household
32% tax bracket

Ddd7651
Posts: 94
Joined: Tue May 07, 2019 2:15 pm

Re: Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax imp

Post by Ddd7651 » Mon Jan 13, 2020 4:09 pm

If it is a "post-tax" contribution, you can just move it over whenever. You will pay tax on any earnings you made from the contribution. You are doing a backdoor roth just lengthened since you made a non-deductible contribution if you did your taxes proper. This sounds just like a backdoor Roth.

Topic Author
healthiswealth
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Joined: Sat May 07, 2016 11:44 pm

Re: Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax imp

Post by healthiswealth » Mon Jan 13, 2020 4:18 pm

If I contributed post-tax $$s, why would I need to do a conversion and pay taxes on any gains? Sorry, not versed on this topic...I know people convert traditional to roth, but aren't they converting pre-tax contributions?

HomeStretch
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Re: Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax imp

Post by HomeStretch » Mon Jan 13, 2020 4:41 pm

You can call a Vanguard retirement specialist to recharacterize the 2019 tIRA contribution to change it to a Roth IRA contribution. Vanguard’s website explains this here:
https://investor.vanguard.com/ira/ira-r ... terization

Or you can do step 2 of the backdoor Roth to convert a non-deductible tIRA balance to a Roth IRA as suggested above. You can do this yourself in your online Vanguard account. Here’s a link to the BH wiki page about Backdoor Roth:
https://www.bogleheads.org/wiki/Backdoor_Roth
Last edited by HomeStretch on Mon Jan 13, 2020 5:01 pm, edited 4 times in total.

Ddd7651
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Re: Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax imp

Post by Ddd7651 » Mon Jan 13, 2020 4:42 pm

Only in a Roth do you not pay tax on gains. That is the benefit of a Roth IRA. You must now pay taxes on earnings since it is not in a Roth. After that, then you can enjoy that benefit. It doesn't matter if the contribution was non-deductible or not.
Last edited by Ddd7651 on Mon Jan 13, 2020 4:45 pm, edited 1 time in total.

Ddd7651
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Re: Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax imp

Post by Ddd7651 » Mon Jan 13, 2020 4:44 pm

healthiswealth wrote:
Mon Jan 13, 2020 4:18 pm
If I contributed post-tax $$s, why would I need to do a conversion and pay taxes on any gains? Sorry, not versed on this topic...I know people convert traditional to roth, but aren't they converting pre-tax contributions?
If it is pre-tax, they are paying taxes on contributions + earnings since they took a tax deduction. If it is post-tax, they are paying taxes on earnings only. Backdoor Roth.

Edit: You don't HAVE to move it to a Roth IRA. It is just that when you do, at that point you pay taxes on the gains. You won't pay taxes on the contributions since taxes were already paid.
Last edited by Ddd7651 on Mon Jan 13, 2020 4:48 pm, edited 1 time in total.

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Stinky
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Re: Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax imp

Post by Stinky » Mon Jan 13, 2020 4:48 pm

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Last edited by Stinky on Mon Jan 13, 2020 4:55 pm, edited 1 time in total.
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retiredjg
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Re: Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax imp

Post by retiredjg » Mon Jan 13, 2020 4:51 pm

healthiswealth wrote:
Mon Jan 13, 2020 3:58 pm
I just realized I contributed my 2017-2019 IRA into my rollover account instead of my Roth account at Vanguard in VTSAX. I do not qualify for the traditional IRA given my AGI.
Yes you can contribute to tIRA. What you can't do is deduct it.

The post-tax contributions have been documented in my tax returns.
What does this mean? Do you mean you already did the Forms 8606? If yes, why do you think you do not qualify for traditional IRA?

Am I able to transfer from traditional to Roth without any ramifications?
You can recharacterize your 2019 contribution from tIRA to Roth IRA until October. Contact Vanguard to do this. Do it now rather than later.


2017 contribution - there is nothing you can do to undo this because the time to fix it has passed. Assuming your AGI was high in 2017, you have simply made a non-deductible contribution to your tIRA. This needs to be documented on Form 8606 (you can download old forms from the internet).

2018 - same as above; Do the 2017 Form before doing the 2018 form because each form builds from the form before it.

2019 - as said above, you still have time to re-characterize this contribution from tIRA to Roth IRA, assuming your MAGI does not make you ineligible.


There is a way for you to separate your non-deductible contributions from the tIRA. But let's get this part straight first.

lakpr
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Re: Help! accidently contributed my IRA in traditional instead of Roth at Vanguard...how to transfer without any tax imp

Post by lakpr » Mon Jan 13, 2020 4:53 pm

Edit: I meant posts above retiredjg’s.


I see multiple errors in the advice above. Firstly, the OP has said he contributed additional post tax amounts to the same Rollover IRA. So that Rollover IRA now has a mix of pretax and post tax amounts. OP cannot simply convert the $5500 or $6000 that he contributed and expect to not pay taxes. It is not quite backdoor Roth, since backdoor Roth assumes and REQUIRES that all Traditional IRA balances are zero, or will be zero, as of 12/31/20xx, the year in which Roth conversion takes place.

Secondly, the recharacterization maneuver is only possible until the tax filing deadline, including extensions, for the tax year you made the contribution for. So for the OP who said contributions are made 2017 through 2019, only the 2019 contribution can be recharacterized. The deadline for recharacterization of previous year (2017 and 2018) contributions has already passed.

For the OP, the only hope now to straighten out this mess is if the 401k or 403b plan at work place accepts incoming rollover from a Traditional IRA. Before advising on further steps, I would like the OP to confirm whether that is a possibility. Enquire with the workplace HR or 401k/403b plan administrator. If it is a possibility, we can put together a migration strategy.

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