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Is this reasonable? Roth to adjust income
Old 12-01-2016, 01:59 PM   #1
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Is this reasonable? Roth to adjust income

Problem: I may have gotten myself into a bit of a pickle with complicated option trades. I can probably figure it all out by December 30 but if I make a mistake, it could end up being quite costly because of ACA MAGI income I am supposed to have in 2016. I am trying to land my MAGI plane on a $23,000 runway and if I undershoot or overshoot it is going to be expensive.

One way I think I can easily fix the problem of too low a MAGI to have qualified for subsidies at all (Medicaid territory) is to do a Roth conversion now and then re-characterize all or a portion of it after I figure out our actual MAGI next year.

That should work, right? It seems like it should work. The Roth conversion would be counted as income for MAGI calculations but if you later recharacterize it, you remove that income.
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Old 12-01-2016, 02:04 PM   #2
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Yes, conversion from tIRA to Roth should produce income assuming at least some of your tIRA contribs were deductible. Then you can undo later if needed.
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Old 12-01-2016, 05:08 PM   #3
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I'm in a similar situation and agree that a Roth conversion / recharacterization is the best way to handle things to land my MAGI plane. (Feels like I am trying to land on an aircraft carrier at night in rolling 15 foot seas though :-) )

One point, which most will know but it's a good reminder: You'll need to do the Roth conversion before the end of the year. You will need to do the recharacterization before you file your return, but you can do the recharacterization in the spring and still have it affect your current year MAGI.
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Old 12-01-2016, 05:13 PM   #4
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Nice analogy!

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Old 12-02-2016, 11:43 AM   #5
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Glad to know I have company in this area. I usually keep an eye on income, conversions, withholding, gains, etc. and then make adjusting moves at the end of the year to land smoothly. I haven't used the re-characterization but that is what I would do if needed.
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Old 12-02-2016, 12:46 PM   #6
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Quote:
Originally Posted by Fermion View Post
..... That should work, right? It seems like it should work. The Roth conversion would be counted as income for MAGI calculations but if you later recharacterize it, you remove that income.
Yes, that is a perfect application for conversions/recharacterizations.

For the past two years, I have converted in December based on estimates then finalized my tax return in February and recharacterized however much I needed to to hit my target. For each of the last two years our taxable income in our filed return has been exactly equal to the top of the 15% tax bracket. You just have a different target.

There is a bit of risk if your return were to be audited and changes made... mine is relatively minor (just 30% on any additional income) where your risk is more extreme... but at the same time the probability of a modest income return being audited is remote enough that I would not fret any about it.
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