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Help recharacterizing Roth IRA contributions

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  • Avatar sjdoc 
    Participant
    Status: Resident
    Posts: 3
    Joined: 11/15/2018
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    I am new to investing and have a quick question about recharacterizing Roth IRA contributions.

     

    In January 2019 I contributed $6000 to my Roth IRA, as I do every year during residency.  Because of moonlighting income it turns out that I will exceed the yearly limit to remain eligible for Roth contributions. My plan is to recharacterize the contribution to a traditional IRA and then shortly reconvert it back to the Roth IRA via a backdoor. My question is how much to recharacterize? Should I recharacterize only $6000, as that was the amount that I contributed to the Roth IRA in January 2019? Or should I recharacterize $6000 plus all the earnings so far this year on that $6000, because this investment has increased in value since January.  If the second option is correct and I recharacterize $6000 plus approximately $500 earning so far in 2019, can I then convert the total $6500 back to the Roth IRA or can I only convert $6000. I know this question is confusing and I would really appreciate any help you can give.

     

    Thanks,

    Sam

    #236282 Reply
    Faithful Steward Faithful Steward 
    Participant
    Status: Financial Advisor, Small Business Owner
    Posts: 493
    Joined: 06/12/2017

    Just convert it all and pay the small amount of taxes on the growth.

    On a separate note, you don’t have any Traditional IRA or SEP IRA money hat will cause you pro-rate rules, do you?

    Michael Peterson, CFP® | Faithful Steward Wealth Advisors
    https://ProsperousPhysician.com | (717) 496-0900

    #236319 Reply
    Avatar sjdoc 
    Participant
    Status: Resident
    Posts: 3
    Joined: 11/15/2018

    Thanks very much for the reply.  Just so I understand: I am allowed to re-characterize ~$6750 from my Roth IRA to my traditional IRA and then the following day (or week) convert that whole amount $6750 back to the Roth IRA, even though the annual contribution limit to an IRA is only $6000 per year? The extra $750 is the approximate gain on my 2019 Roth IRA contributions since investing in January. I really appreciate your clarifying this issue.

     

    Also, on a related note: I am planning to roll over my 403B from my former residency institution into my Roth IRA in the next month or two. I know that I will have to pay taxes on this transaction and I have the money saved up to do so. Do you know if this conversion would mess up the recharacterization process described above? I am planning to report this taxable event on IRS form 8606; do you know if this is correct?

     

     

    #237433 Reply
    Faithful Steward Faithful Steward 
    Participant
    Status: Financial Advisor, Small Business Owner
    Posts: 493
    Joined: 06/12/2017
    I am allowed to re-characterize ~$6750 from my Roth IRA to my traditional IRA and then the following day (or week) convert that whole amount $6750 back to the Roth IRA, even though the annual contribution limit to an IRA is only $6000 per year?

    Click to expand…

    Yes. Just make sure the person processing the transaction is knowledgeable. Otherwise, they will screw it up.

    The extra $750 is the approximate gain on my 2019 Roth IRA contributions since investing in January.

    Click to expand…

    Yes. The $750 of gain is what will be taxed when you convert.

    Do you know if this conversion would mess up the recharacterization process described above?

    Click to expand…

    Legally, there is no reason to delay this transaction. But, from a operational perspective, I would wait until the recharacterization and conversion is complete. That way, you don’t have the possibility of some service rep conflating the two transactions.

    Michael Peterson, CFP® | Faithful Steward Wealth Advisors
    https://ProsperousPhysician.com | (717) 496-0900

    #237560 Reply

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