Why Roth IRA when you have not maxed out 401k?

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Topic Author
stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Wed Mar 25, 2020 10:23 pm

retiredjg wrote:
Wed Mar 25, 2020 9:26 am

Is it possible they may have done a conversion instead of a recharacterization. Or maybe they actually did a recharacterization and the person you talked to does not know the difference? Or maybe you used the word "convert" when you should have said "recharacterize". Any number of things may have happened.

The first thing to do is find out for sure what they did.
You are right on what I am trying to do. It is simple. 2019 is the year that I opened an IRA account, and I want to put some from T-IRA into Roth IRA.
Characterization has not taken place, because I did not want to do anything that I did not understand, so I did not proceed. I never used the word "Conversion." Is it possible that the support person did not know what was required. That is exactly why I am asking for your wisdom and help here.

Topic Author
stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Wed Mar 25, 2020 10:34 pm

retiredjg wrote:
Wed Mar 25, 2020 9:32 am
Wait, wait...your contribution to tIRA was deductible. If you now recharacterize that to Roth, you will owe more taxes.

Have you filed your taxes yet or are you still working on your taxes?
No I have not file the taxes yet.
The purpose is to bring my taxable income to the maximum amount of 12% bracket. Right now I put too much into T-IRA.

12% tax bracket ends at $39,474
my taxable income now is $37,000

Yes, I will pay more taxes now, but I will gain more when I retire. So back to my question. Do I need 8606?

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FiveK
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Re: Why Roth IRA when you have not maxed out 401k?

Post by FiveK » Wed Mar 25, 2020 10:53 pm

stingray777 wrote:
Wed Mar 25, 2020 10:23 pm
2019 is the year that I opened an IRA account, and I want to put some from T-IRA into Roth IRA.
stingray777 wrote:
Wed Mar 25, 2020 10:34 pm
No I have not file the taxes yet.
The purpose is to bring my taxable income to the maximum amount of 12% bracket. Right now I put too much into T-IRA.

12% tax bracket ends at $39,474
my taxable income now is $37,000

Yes, I will pay more taxes now, but I will gain more when I retire. So back to my question. Do I need 8606?
Is the following your situation?
AGI without any subtraction for tIRA = $55,200
Contribution to a tIRA in 2019 = $6,000
AGI if the entire tIRA contribution is subtracted = $49,200
Standard deduction = $12,200
Taxable income if the entire tIRA contribution is subtracted = $37,000

If so, you could have the brokerage recharacterize $3,525 of the tIRA contribution into a Roth contribution. No form 8606 would be required, but adding a note to your return explaining the situation would be good.

Topic Author
stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Wed Mar 25, 2020 11:58 pm

FiveK wrote:
Wed Mar 25, 2020 10:53 pm

Is the following your situation?
AGI without any subtraction for tIRA = $55,200
Contribution to a tIRA in 2019 = $6,000
AGI if the entire tIRA contribution is subtracted = $49,200
Standard deduction = $12,200
Taxable income if the entire tIRA contribution is subtracted = $37,000

If so, you could have the brokerage recharacterize $3,525 of the tIRA contribution into a Roth contribution. No form 8606 would be required, but adding a note to your return explaining the situation would be good.
Yes, your description is correct. It's just I think I need to recharacterize $2474, not $3525. Either way, I just needed to know that I do not need 8606.
Thank you very much!

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FiveK
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Re: Why Roth IRA when you have not maxed out 401k?

Post by FiveK » Thu Mar 26, 2020 12:04 am

stingray777 wrote:
Wed Mar 25, 2020 11:58 pm
It's just I think I need to recharacterize $2474, not $3525.
Correct. You want to subtract the $3525 so you only recharacterize $2475. Glad you caught that!

retiredjg
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Re: Why Roth IRA when you have not maxed out 401k?

Post by retiredjg » Thu Mar 26, 2020 7:16 am

stingray777 wrote:
Wed Mar 25, 2020 10:34 pm
So back to my question. Do I need 8606?
It could be needed for two things.

1) You are supposed to notify the IRS that something was recharacterized - I think that happens on the 8606 but I am not sure. If you must use it for that, it does not mean you have to fill out the rest of the form.

2) You would use it if the tIRA part of your contribution is non-deductible. In your case it is not - you want to deduct it. But the service rep may have assumed that your case is like all the other cases and was telling you to be sure to record the non-deductible contribution.

retiredjg
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Re: Why Roth IRA when you have not maxed out 401k?

Post by retiredjg » Thu Mar 26, 2020 7:19 am

stingray777 wrote:
Wed Mar 25, 2020 11:58 pm
Yes, your description is correct. It's just I think I need to recharacterize $2474.
I suggest that you do not recharacterize exactly that number. Give yourself a little buffer maybe?

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stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Thu Mar 26, 2020 1:02 pm

It could be needed for two things.

1) You are supposed to notify the IRS that something was recharacterized - I think that happens on the 8606 but I am not sure. If you must use it for that, it does not mean you have to fill out the rest of the form.
I need to attach a piece of paper that says 1) initial contribution date 2) recharacterization completion date 3) amount 4) reason when I do my tax return 1040. I think this would replace 8606.

2) You would use it if the tIRA part of your contribution is non-deductible. In your case it is not - you want to deduct it. But the service rep may have assumed that your case is like all the other cases and was telling you to be sure to record the non-deductible contribution.
Not every customer rep is equally knowledgeable and experienced. I will call Vanguard again today.
Thank you!

Topic Author
stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Thu Mar 26, 2020 1:05 pm

retiredjg wrote:
Thu Mar 26, 2020 7:19 am
stingray777 wrote:
Wed Mar 25, 2020 11:58 pm
Yes, your description is correct. It's just I think I need to recharacterize $2474.
I suggest that you do not recharacterize exactly that number. Give yourself a little buffer maybe?
Haha. I think he just meant to say to keep that amount $3525 in T-IRA.

retiredjg
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Re: Why Roth IRA when you have not maxed out 401k?

Post by retiredjg » Thu Mar 26, 2020 3:51 pm

No, I meant only recharacterize $2,450 or something like that in case there is some small thing you forgot. But I suppose it does not matter if a few dollars get put into Roth IRA at 22% instead of 12%.

I think you are picking up on how taxes work pretty quickly. Are you also checking this with some software?

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stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Thu Mar 26, 2020 5:23 pm

retiredjg wrote:
Thu Mar 26, 2020 3:51 pm
No, I meant only recharacterize $2,450 or something like that in case there is some small thing you forgot. But I suppose it does not matter if a few dollars get put into Roth IRA at 22% instead of 12%.

I think you are picking up on how taxes work pretty quickly. Are you also checking this with some software?
I called Vanguard today, and asked the rep about 8606. She confirmed that it was not necessary, so I made the transfer.
I put the numbers and H&R Block software gave me $39475 as a taxable income. So I am paying 10 cents extra tax. All good.

Thank you so much for your help, and everybody else here. All I need to do now is to have a statement for this recharacterization and send it with 1040.

retiredjg
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Re: Why Roth IRA when you have not maxed out 401k?

Post by retiredjg » Thu Mar 26, 2020 5:38 pm

Good. :happy Thanks for the update.

Keep good notes. Sometimes a written explanation gets overlooked and you might get a question later on.

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stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Sun Apr 05, 2020 9:39 pm

One last question, please. I could not find a particular format for the statement explaining this recharacterization. So will I just take a Microsoft Word document, and type up a few things that are needed, and attach to my 1040?

Here is what I see that need to be included:
-Data and amount of your original contribution to the traditional IRA
-Portion of the original contribution you recharacterized and any related earnings or loss
-Date on which the recharacterization took place
-Portion, if any, of the remaining traditional IRA contribution you're deducting

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FiveK
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Re: Why Roth IRA when you have not maxed out 401k?

Post by FiveK » Sun Apr 05, 2020 9:49 pm

stingray777 wrote:
Sun Apr 05, 2020 9:39 pm
One last question, please. I could not find a particular format for the statement explaining this recharacterization. So will I just take a Microsoft Word document, and type up a few things that are needed, and attach to my 1040?
That will work.

See the examples under Reporting recharacterizations. Taking the applicable sentence word for word after "The statement indicates that...", except changing "you" to "I", "your" to "my", the dates, and amounts, etc., would be a good format. Keep it short and to the point.

Topic Author
stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Sun Apr 12, 2020 5:50 pm

FiveK wrote:
Sun Apr 05, 2020 9:49 pm
stingray777 wrote:
Sun Apr 05, 2020 9:39 pm
One last question, please. I could not find a particular format for the statement explaining this recharacterization. So will I just take a Microsoft Word document, and type up a few things that are needed, and attach to my 1040?
That will work.

See the examples under Reporting recharacterizations. Taking the applicable sentence word for word after "The statement indicates that...", except changing "you" to "I", "your" to "my", the dates, and amounts, etc., would be a good format. Keep it short and to the point.
My apology for late reply. Thank you. I used Excel to list these things, and sent it with 1040. I was not sure if it would have gone electronically, so I mailed it this year.

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