FUEGO
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- Joined
- Nov 13, 2007
- Messages
- 7,746
I haven't seen anything posted on this yet, so I'll throw out an idea.
Consider recharacterizing your 2008 Roth IRA contributions to deductible Traditional IRA contributions to maximize tax savings.
I contributed a total of $10,000 to Roth IRA's in January 2008 for DW and me. Now they are only worth around $6000. We have low enough adjusted gross income to allow us to recharacterize the IRA contributions from Roth to Traditional. The AGI limits are $85,000 for a full $10,000 deductibility, and the amount deductible decreases up to a $105,000 AGI. These are dollar amounts for married taxpayers.
My reasoning is that I get a tax deduction of $10,000 for IRA contributions that amount to only $6000 today. I'm in the 22% state/federal bracket, so I pay $2200 less tax for a $6000 traditional IRA contribution. So when I withdraw this in the future, yes it will be taxed at ordinary income rates, but I also have $2200 in my hand to invest today.
I didn't do a net present value calculation on this, but rather took this decision on the "bird in hand is better than two in the bush" rationale. A similar rationale would apply if I made traditional IRA contributions and then they doubled within the allowable recharacterization period - ie went from $10,000 to $20,000. I could then recharacterize this $20,000 to Roth IRA and have effectively made $20,000 in roth contributions in one year, and only forfeited $2200 in tax savings.
Anyone else doing this?
Consider recharacterizing your 2008 Roth IRA contributions to deductible Traditional IRA contributions to maximize tax savings.
I contributed a total of $10,000 to Roth IRA's in January 2008 for DW and me. Now they are only worth around $6000. We have low enough adjusted gross income to allow us to recharacterize the IRA contributions from Roth to Traditional. The AGI limits are $85,000 for a full $10,000 deductibility, and the amount deductible decreases up to a $105,000 AGI. These are dollar amounts for married taxpayers.
My reasoning is that I get a tax deduction of $10,000 for IRA contributions that amount to only $6000 today. I'm in the 22% state/federal bracket, so I pay $2200 less tax for a $6000 traditional IRA contribution. So when I withdraw this in the future, yes it will be taxed at ordinary income rates, but I also have $2200 in my hand to invest today.
I didn't do a net present value calculation on this, but rather took this decision on the "bird in hand is better than two in the bush" rationale. A similar rationale would apply if I made traditional IRA contributions and then they doubled within the allowable recharacterization period - ie went from $10,000 to $20,000. I could then recharacterize this $20,000 to Roth IRA and have effectively made $20,000 in roth contributions in one year, and only forfeited $2200 in tax savings.
Anyone else doing this?