Roth to Traditional IRA just for 2013?

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Material Guy
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Roth to Traditional IRA just for 2013?

Post by Material Guy » Thu Feb 27, 2014 9:06 pm

I contributed the maximum to a Roth IRA in 2013. Now that we are doing our taxes, we have a largish tax bill for 2013 and the only way to reduce this is convert the Roth to a Traditional IRA and then claim the deduction. Can we do this just for the 2013 contribution to the Roth and convert this part to a traditional IRA to claim a deduction now? I have been contributing to the Roth for a few years but we would only want to convert the 2013 contribution. Is this even possible? My wife contributed the maximum to a traditional IRA so that avenue is closed.

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House Blend
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Re: Roth to Traditional IRA just for 2013?

Post by House Blend » Fri Feb 28, 2014 10:53 am

You can recharacterize your 2013 Roth IRA contribution as a traditional IRA contribution. If you are eligible to deduct tIRA contributions, you will be able to take the deduction on your 2013 tax return. Contact the custodian of your Roth IRA to find out how to recharacterize.

You should also at least ponder whether to leave things as they are. That is, keep the money in the Roth and pay the higher tax bill now rather than defer the taxes. Depending on your tax rates now and your tax rates at withdrawal time, the savings might not be large either way.

DSInvestor
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Re: Roth to Traditional IRA just for 2013?

Post by DSInvestor » Fri Feb 28, 2014 11:06 am

Make sure you're eligible to take the Traditional IRA tax deduction. If you or your wife were covered by an employer plan for 2013, the tax deduction phases out. See IRS Pub 590 - How much can I deduct? Limit if covered by an employer plan. If one spouse was covered by an employer plan and the other not covered, different MAGI limits will apply for each spouse. See tables 1-2 and 1-3:
http://www.irs.gov/publications/p590/ch ... 1000230467

If you prepared your tax return with tax software, you can try to remove the Roth IRA contribution and enter Traditional IRA contribution. It will tell you if you can take the deduction (full, partial or none).

If full deduction is possible, recharacterize the entire Roth IRA contribution to Traditional IRA contribution.
If no deduction is possible, there is nothing to do.
If partial deduction, recharacterize an amount that gets the partial deduction. Contribute/recharacterize too much and some of the TIRA contribution will be non-deductible and require tracking with Form 8606. Run your numbers carefully.

When you recharacterize a contribution, it will be as though you contributed to the other account all along. Any growth (or losses) experienced in the Roth IRA will be moved moved to the Traditional IRA as well. So if your $5,500 grew to $7,000, a recharacterization of $5,500 contribution will move $7,000 to the Traditional-IRA.

Call your IRA custodian to ask how to recharacterize the contributions. They may require that you mail in a form.

If turns out that you can take TIRA deduction but your wife cannot, you can both recharacterize. You Roth to Traditional to get the deduction. She Traditional to Roth to avoid non-deductible contribution to TIRA (assuming income allows direct Roth IRA contribution).

Do you have High Deductible Health Plan (HDHP) and did you max out HSA contribution for 2013?
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Material Guy
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Re: Roth to Traditional IRA just for 2013?

Post by Material Guy » Fri Feb 28, 2014 2:19 pm

Thank you, DSInvestor and House Blend, for your responses and suggestions!

We will run the numbers and do some what-if analyses in the tax software.

Also, DSInvestor, since this is a ROTH to TIRA, the growth part will go into the TIRA without further current tax consequences (other than the deduction), yes?

We do not have a High Deductible Health Plan (HDHP) and we cannot contribute to an HSA. My employer covers full health and also an HRA for deductibles.

DSInvestor
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Re: Roth to Traditional IRA just for 2013?

Post by DSInvestor » Fri Feb 28, 2014 3:29 pm

Material Guy wrote: Also, DSInvestor, since this is a ROTH to TIRA, the growth part will go into the TIRA without further current tax consequences (other than the deduction), yes?
The growth or loss associated with the contribution moves into the account because of recharacterization. It doesn't matter whether you recharacterized Roth-> Traditional or Traditional to Roth. There is no tax on the growth - it is like you contributed $5,500 to Traditional IRA all along and the growth happened in the Traditional IRA.

Recharacterization is different from conversion. Conversion is from Traditional to Roth only.
Let's say you contributed $5,500 tax deductible to Traditional IRA, and grows to $7,000.

Option 1: You recharacterize $5,500 to Roth IRA. You don't the $5,500 tax deduction. The recharacterization moves $5,500 contribution and $1500 growth (total of $7000) into Roth IRA. No tax consequence for moving the growth.

Option 2: You keep the TIRA contribution, the tax deducton and CONVERT $7,000 to Roth. Very different tax impact.
You have $5,500 tax deduction but the $7000 conversion is taxable. The conversion income negates the $5,500 deduction but the growth is also taxed. Your AGI is $1500 higher than if you recharacterized.
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Material Guy
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Re: Roth to Traditional IRA just for 2013?

Post by Material Guy » Fri Feb 28, 2014 4:08 pm

Got it. Thanks, DSInvestor. I was confusing recharacterization with conversion. I'll run the numbers.

SGM
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Re: Roth to Traditional IRA just for 2013?

Post by SGM » Fri Feb 28, 2014 4:43 pm

Recharacterizing a Roth back to a traditional IRA for 2013 can be done up until October 15th of 2014. Realistically it is better to get the recharacterization done a month in advance of Oct 15th to avoid any potential to go beyond the deadline. Some file an extension on April 15th and delay filing their final 1040 until October 15 to avoid having to file an amended return. If you do conversions into different Roth accounts you can choose to recharacterize Roth accounts that have not done well and save some taxes, while keeping the Roth conversions that went up in value.

James Lange's "Roth Revolution" seems to cover all the angles thoroughly. I have no connection with the guy, but also use his yearly tax card as a reference tool.

Material Guy
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Re: Roth to Traditional IRA just for 2013?

Post by Material Guy » Sat Mar 01, 2014 6:20 pm

Thanks, SGM, for the info on the October 15 date. I will keep this in mind in case we decide to move forward with this and can't complete this by April 15.

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