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Roth Conversion/Recharacterization strategy finally sunk in
Old 04-02-2017, 08:55 AM   #1
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Roth Conversion/Recharacterization strategy finally sunk in

I've been whittling away at my tIRA for a few years with partial conversions, trying to smooth out my income tax rate over the years, and avoid RMDs later which would probably push me into a higher income tax, especially with more SS benefits getting taxed.

Every year I try to get the conversion amount just right, to the top of the 15% bracket or the edge of the ACA cliff. It's very tough to do since I don't know exactly what my dividends and interest income will be. But I slave to try to get it as close as possible, but every year I either fall short or have to do a small (or not-so-small) recharacterization--usually the latter.

I kept seeing posts here from people who'd convert a larger amount than they know would work, and then recharacterize after doing their taxes. I always dismissed this, thinking recharacterizations are too much trouble. But I inevitably do one anyway, so why go to all the effort.

So this year I finally wised up and converted a larger amount and I know for sure I'll be recharacterizing. It's not that big of a deal and I'm going to do it anyway, so what's the big deal with $10 or $10K on the form? I don't know if it matters but I kept it as simple as possible by converting a holding from the tIRA that I don't already have in the Roth, so I can just rechar part of that holding back. Vanguard will figure it all out anyway.

I love the things you learn here by just opening your eyes and being willing to consider doing something different. I'm going to both optimize my conversion and simplify my life by not tracking my tax situation throughout the year to try to get it perfect in advance. Rather than trying to hit the bulls-eye from a distance, I can shoot an arrow at a huge target, and draw the bulls-eye circle around it after doing taxes next spring.

Withholding taxes is a potential issue as one might have to pay estimated taxes on the worst case, but I can use safe harbor from last year.
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Old 04-02-2017, 10:17 AM   #2
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I love the things you learn here by just opening your eyes and being willing to consider doing something different.
+1. More a general observation, but the biggest reason I participate in this forum, and I assume many others. That and the relative civility and intelligence here vs most other forums I am a part of online shouting matches I wade through 90% garbage looking for the 10% insights and pearls of wisdom.
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Old 04-02-2017, 03:31 PM   #3
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I'm planning on starting Roth conversions this year and probably for the next few years until I turn 62 and my pension kicks in and will likely need to recharacterize. I would expect to get a 1099-R showing the IRA distribution that was converted to a ROTH but it probably won't include the amount that was recharacterized. When you do your tax returns how do you subtract the amount that was recharacterized from what the 1099-R indicates was converted?
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Old 04-02-2017, 03:48 PM   #4
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I just subtract it, making sure to use the right number. If I initially converted $25K, and recharacterize $20K many months later, Vanguard (or whoever you use) will calculate what that $20K earned in the Roth and transfer that back, but that's not the number to use. If you made 5% on the funds in that time, they will transfer $21K back, but $5.25K is left (if my math is correct). So I subtract $20K from $25K for a net $5K conversion even though the transfer back amount was more.


I think eventually you get another 1099-R that reflects the recharacterization, but it may not come for another year and you don't need to wait for it. Made me uneasy the first year but I could easily show the transaction history on the accounts if audited.
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Old 04-02-2017, 03:54 PM   #5
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But you also have to do amended tax return right?
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Old 04-02-2017, 04:53 PM   #6
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I'm planning on starting Roth conversions this year and probably for the next few years until I turn 62 and my pension kicks in and will likely need to recharacterize. I would expect to get a 1099-R showing the IRA distribution that was converted to a ROTH but it probably won't include the amount that was recharacterized. When you do your tax returns how do you subtract the amount that was recharacterized from what the 1099-R indicates was converted?
You also attach a descriptive narrative that describes the recharacterization.
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Old 04-02-2017, 04:56 PM   #7
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But you also have to do amended tax return right?
No, I'll prepare my return, see where I'm at, then play with recharacterization numbers until I get what I want. Then I'll recharacterize exactly that amount, and file my return, probably waiting to make sure the transfer goes through.
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Old 04-02-2017, 05:05 PM   #8
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I was hoping to do a Roth conversion this year, but I'm waiting to see what if any changes will be made to the tax brackets by this administration. From what I've gathered so far, the bottom of that 33% bracket could be pulled down into the "danger zone".
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Old 04-02-2017, 11:39 PM   #9
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I'm waiting (for this year) until the stock market tanks, and then convert in kind, so I move more shares than doing it today.
Of course I could be waiting all year only to find the market keeps going up, but that is a nice problem.
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Old 04-03-2017, 07:00 AM   #10
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I'm waiting (for this year) until the stock market tanks, and then convert in kind, so I move more shares than doing it today.
Of course I could be waiting all year only to find the market keeps going up, but that is a nice problem.
You can do it now and if the market tanks do it again into a separate Roth and recharacterize the first one.
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Old 04-03-2017, 07:30 AM   #11
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No, I'll prepare my return, see where I'm at, then play with recharacterization numbers until I get what I want. Then I'll recharacterize exactly that amount, and file my return, probably waiting to make sure the transfer goes through.
+1 I convert an amount that I think will be more than what I need in December. When I finalize my return in February or March, I determine how much we are over the top of the 15% tax bracket and recharacterize that amount. I enter the amount that was NOT recharacterized on line C3 of the 1099-R that I received for the conversion, which effectively reduces the conversion to the amount that I input (with the recharacterization being the difference). Then I do a final check that the taxable income is exactly equal to the top of the 15% tax bracket (the target in my case) and file my return. I also wait until the recharacterization is processed before filing my return.

The following year I get a 1099-R that has the amount that was recharacterized in box 1 and a R code (for recharacterization) in box 7 and put that in my subsequent year's return. Because of the R code it does not actually get included in the subsequent year return... in fact, if I didn't input it it probably would not affect the subsequent year return but it comes in automatically when I download from Vanguard.
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Old 04-06-2017, 08:08 AM   #12
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You also attach a descriptive narrative that describes the recharacterization.
And Form 8606 if the conversion was a partial one; i.e. not the full amount of the tIRA was converted to a Roth.
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Old 04-06-2017, 12:53 PM   #13
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Consider making super sized conversions while staying within your sectors and asset allocations (Roth IRA horse race). That way you can leave the sector with the best return and recharacterize the worse performing ones. That way you will only pay taxes on the highest performing sector.
Just my $0.02
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Old 04-06-2017, 01:03 PM   #14
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Consider making super sized conversions while staying within your sectors and asset allocations (Roth IRA horse race). That way you can leave the sector with the best return and recharacterize the worse performing ones. That way you will only pay taxes on the highest performing sector.
Just my $0.02
Good idea. OP, the horse race concept has been frequently discussed on bogleheads--here, however, is a good overview in a single blogpost at White Coat Investor's site: Roth Conversion Horse Race
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Old 04-07-2017, 09:32 AM   #15
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+1 I convert an amount that I think will be more than what I need in December. When I finalize my return in February or March, I determine how much we are over the top of the 15% tax bracket and recharacterize that amount. I enter the amount that was NOT recharacterized on line C3 of the 1099-R that I received for the conversion, which effectively reduces the conversion to the amount that I input (with the recharacterization being the difference). Then I do a final check that the taxable income is exactly equal to the top of the 15% tax bracket (the target in my case) and file my return. I also wait until the recharacterization is processed before filing my return.
Exactly how I transacted my first-ever tIRA => Roth conversion last December. I also plan to do more conversions in the future, as I didn't ever contribute to Roths while w*rking due to taxes.

I have a question about the accessibility of the converted money. I did some research on Bogleheads and other places and got confused. Do I need to wait for 5 years prior to withdrawing the money from the Roth? And does each annual conversion have its own 5 year waiting period? I just turned 59 this year. Thanks.
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Old 04-07-2017, 09:48 AM   #16
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One Roth account. As long as the account is 5 years old.
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Old 04-07-2017, 10:34 AM   #17
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Good idea. OP, the horse race concept has been frequently discussed on bogleheads--here, however, is a good overview in a single blogpost at White Coat Investor's site: Roth Conversion Horse Race
I haven't gotten over the complexity of that yet, but I probably should. One in bonds and one in stocks makes really good sense. Can I open two Roths at Vanguard, or do they have to be at different places?
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Old 04-07-2017, 10:49 AM   #18
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I haven't gotten over the complexity of that yet, but I probably should. One in bonds and one in stocks makes really good sense. Can I open two Roths at Vanguard, or do they have to be at different places?
I believe you can open multiple Roths at Vanguard or the like without a problem. (We won't be doing big conversions until 2018 tax year, so I don't have personal knowledge yet.)
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Old 04-07-2017, 10:59 AM   #19
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Can I open two Roths at Vanguard, or do they have to be at different places?
Yes you can open two Roths at Vanguard.
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Old 04-07-2017, 12:45 PM   #20
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Thanks to both of you. It was very easy to do, and I've already done the second conversion to this new account. Not sure it's that worthwhile as my final conversion for 2017 is likely to be around $5K, but it seems like a risk free way to invest in equities or whatever I want.
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