Recharacterizing a mistaken Roth contribution, then backdooring it

[soupcxan]

I am over the income limit to contribute to a Roth IRA but have been using the "backdoor" method where I fund a Traditional (non-deductible) IRA then immediately convert the funds to a Roth. However I just realized that for 2014 I mistakenly made a Roth contribution directly instead of going through the Trad IRA first. I haven't filed my 2014 taxes yet. So my plan is:

1. File a recharacterization with Vanguard to move the ineligible Roth contribution into my Trad IRA.
2. After that recharacterization is processed, convert the new funds in my Trad IRA back to the Roth.

Are there any pitfalls I need to beware of with this? Or reasons why I can't/shouldn't do this? I don't have any before-tax rollover IRAs that would be pro-rated in step #2.

 

[pb4uski]

Check with your custodian. You may need to 3 step it in that since the funds erroneously in the Roth came from a taxable account rather than from an IRA they may need to go back to the taxable account, then go the the tIRA and then get converted to the Roth.

 

[bingybear]

check here

 

[soupcxan]

I called Vanguard, someone from their IRA team said my plan would be no problem.

 

[Gatordoc50]

You could get a private letter ruling from the IRS. I was thinking of helping my daughter do backdoor Roths since she files married filing separate. Under that designation you can't make more than 10 K and qualify for the Roth. I ultimately decided not to. I feel there is too much risk associated with the BDR to justify its use.

 

[kaneohe]

I called Vanguard, someone from their IRA team said my plan would be no problem.

I agree. From the instructions for the 1040, line 15:
................................................................
Exception 2. If any of the following apply,
enter the total distribution on
line 15a and see Form 8606 and its instructions
to figure the amount to enter
on line 15b..........................................

2. You received a distribution from
a Roth IRA.
6. You recharacterized part or all of
a contribution to a Roth IRA as a traditional
IRA contribution, or vice versa.
***********************************************
From the 8606 itself:
Part III Distributions From Roth IRAs
Complete this part only if you took a distribution from a Roth IRA in 2014. For this purpose, a distribution does not
include ...................................., recharacterization,
********************************************************
and from Pub 590A

Recharacterizations.......................

Report the recharacterization on your tax return for the
year during which the contribution was made
**********************************************************
You report the amount recharacterized on line 15a of 1040; amount taxed=0
on line 15b; also file a narrative description of the original Roth contribution
(date, amount, perhaps acct no.) and the recharacterization(date, amount, perhaps acct. no.) w/ your tax return so IRS understands what you did.

 

[pb4uski]

So in essence the OP will recharacterize the mistaken Roth contribution to a tIRA and then do a tIRA>Roth conversion and the money will end up back in the Roth, right?

 

[kaneohe]

Yes, it is the "classic" recharacterization as described in Pub 590A"

"To recharacterize a contribution, you generally must
have the contribution transferred from the first IRA (the
one to which it was made) to the second IRA in a
trustee-to-trustee transfer. If the transfer is made by the
due date (including extensions) for your tax return for the
tax year during which the contribution was made, you can
elect to treat the contribution as having been originally
made to the second IRA instead of to the first IRA."

It has always seemed like some unbelievable magic to me....that
you can treat it like you originally made the contribution to #2.

 

[Animorph]

Does the 30 day wait after recharacterization (for Roth conversions) apply to recharacterizations of contributions? I know if I recharacterize a 2014 Roth conversion in 2015 I have to wait 30 days before I can Roth convert those shares again for 2015. I'd check to see if you need a 30 day delay before Roth converting your non-deductible IRA after recharacterizing the contribution.

 

[pb4uski]

+1 Just the other day I just did a recharacterization of my 2014 Roth conversions back to my tIRA to bring my 2014 TI to $73,800... I was not willing to pay 30% on the overage even though it was minor. I don't usually do my 2015 Roth conversion until the end of the year so the 30 day wait wasn't an issue for me.

 

[kaneohe]

Does the 30 day wait after recharacterization (for Roth conversions) apply to recharacterizations of contributions? I know if I recharacterize a 2014 Roth conversion in 2015 I have to wait 30 days before I can Roth convert those shares again for 2015. I'd check to see if you need a 30 day delay before Roth converting your non-deductible IRA after recharacterizing the contribution.

The general rule of contribution recharacterizations (not of conversion recharacterizations) seems to apply.....that it is as if you had never made the the first contribution (Roth) but only the 2nd (TIRA).

Fairmark Forum :: Retirement Savings and Benefits :: recharacterize roth to traditional and then convert back (don't stop at the first answer;
keep reading till you get to Alan S.

There possibly are cases where the general rule does not apply....but I am unaware (or forgetful) of what those are.

 

[soupcxan]

So in essence the OP will recharacterize the mistaken Roth contribution to a tIRA and then do a tIRA>Roth conversion and the money will end up back in the Roth, right?

Exactly. All these tax acrobatics are a total waste of time.

 

[gauss]

I think you could also withdraw the excess contribution. This would be done in conjunction, in the manner prescribed by your IRA custodain.

This may be simpler than a re-characterization (ie less tax reporting).

Vanguard talks about the options here
and another article about removing excess contributions is here.

I believe that the simplest case to correct is prior to filing your income taxes for the year. If you have not filed yet, you may wish to get an extension to give you time to process this at a convenient pace.

Just don't forget to make a payment when you file your extension before Apr 15 if you think you will owe taxes.

Here is some IRS training material that shows how a removal of excess contributions and earnings will be handled if withdrawn before the due date of the return including extensions.

Bottom line, you will include the earnings on the contribution as income and you will pay the 10% penalty on the earnings if under 59 1/2.

-gauss

 

[soupcxan]

Vanguard recharacterized my Roth contribution to my tIRA. Does anyone here know if the "greater of 1 year or 30 days" waiting period applies before I can convert the tIRA back to the Roth? The language is unclear to me whether it applies to my situation. I did a recharacterization, now I want to do a conversion...


IRA FAQs - Recharacterization of Roth Rollovers and Conversions

 

[pb4uski]

Call them but I think the 30 days applies... I agree the wording is very confusing.

 

[kaneohe]

Fairmark Forum :: Retirement Savings and Benefits :: recharacterize roth to traditional and then convert back (don't stop at the first answer;
keep reading till you get to Alan S.

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