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Undeposit Roth Contribution?
Old 02-26-2011, 06:13 AM   #1
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Undeposit Roth Contribution?

I just took the first swag at my taxes and I owe the government about double what I was expecting. I spent about half of last year working as an independent contractor and just didn't realize how much the tax hit was going to be. I think I've covered most of the big ticket deductions, but I'm looking for some other ways to reduce my taxes. So my question is:

If I have fully funded my Roth IRA for 2010, can I pull that money out and instead put it towards a conventional IRA so I could take the tax deduction?

If this is legal, is it something I should even consider? Would there be a good reason not to do it?

Thanks,
thehundt
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Old 02-26-2011, 07:26 AM   #2
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It's called recharacterization. Call the caretaker of the IRA and ask what forms you need to fill out to do this.
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Old 02-26-2011, 07:38 AM   #3
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Thanks so much! Recharacterization was the word that I needed. It looks like there is a lot of information out there once you know what to search for.
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Old 02-26-2011, 07:49 AM   #4
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The word to add to your vocabulary is recharacterization:
Recharacterization Overview
Be sure to poke around the related links in that article so you get a good view.

You want to confirm that you were even eligible for a Roth (function of MAGI)
and also confirm that you can make IRA deductions (also function of MAGI and'
whether you have a retirement plan at work......look for the box on your W2).

In the article above you'll see one of the reasons for recharacterizing a Roth
is that the value went down and you would have paid too much in taxes for the Roth. Conversely, some say one of the reasons for not recharacterizing is if the value of the Roth increased a lot because that meant you paid less taxes to
get that size of a Roth.
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Old 02-26-2011, 08:10 AM   #5
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This tax year I also had to do a recharacterization from a Roth to a TIRA. As K says above, be sure to check the income limits. If they are too high, then you'll have to do the recharacterization anyway, plus, if your income is too high the TIRA won't be deductible so you'll still have the tax hit. And, if your Roth has gained in value you'll actually take an even larger hit on taxes.

Best of luck
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Old 02-26-2011, 11:12 AM   #6
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If you are incorporated, look into 401 k vehicles. If sched C, look at solo 401k (Keogh). Some of the larger discount brokers support these. If you plan to keep working this way, very likely this will be worth your while.

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Old 02-26-2011, 11:30 AM   #7
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Thanks for all of the replies. This is all very helpful. I'll give a little more background information:

I was laid off from IBM in October of 2009. In the first half of 2010 I took a couple different jobs as a contract programmer, essentially working for myself. In the second half of 2009, I got a job through a contracting company. I was a W-2 employee with the contracting company and taxes were automatically taken out of my paycheck from that point on.

Unfortunately, I was nowhere near the income limits for IRAs so that won't be an issue. As of January 21st of this year, I was brought on full time to the company I was contracting for, so I don't anticipate incorporating or working on my own in the future. However, the past year has been a very interesting experience and I definitely gained some confidence in the fact that I can work for myself and may choose to go that route someday under better circumstances.
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Old 02-26-2011, 11:36 AM   #8
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I currently have my Roth IRA with mbtrading. I opened a conventional IRA with sharebuilder awhile back, but have always just put everything in my Roth up until now. My 401k is almost all in pre-tax money, so I figure I would balance with post tax money in the Roth. However, for 2009, I didn't have a 401k and it looks like from a tax perspective it will save me a fair amount of money by using the conventional IRA instead. I really haven't considered the long term impact of doing this if there is any.
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Old 02-27-2011, 08:38 AM   #9
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Sounds like you might qualify for the Solo 401k with self-employment income. That's your best bet, though I don't remember if the account must be established in the same tax year or not. You can stash almost $30k in one before you have to start paying taxes.
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Old 02-27-2011, 08:42 AM   #10
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I have a solo 401(k) for my Schedule C income with Fidelity. They made it very easy to open and operate.
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