Page 1
Page 1
Started By
Message

ROTH Income Limits, Recharacterizing, Back Door

Posted on 4/20/15 at 12:53 pm
Posted by Teddy Ruxpin
Member since Oct 2006
39577 posts
Posted on 4/20/15 at 12:53 pm
Hey guys,

So, I'm trying to decide what to do in my current situation. I'll note what I already know (or think I know)

*I know the income phase out from 181 - 191,000 a year for married households.

*I know we could do backdoor ROTH contributions by contributing to a Traditional in a lump sum, then converting to a ROTH.

*I also know, that if you are above the income limits, you can recharacterize ROTH contributions to traditional, or be subject to tax if you don't.

I will receive a series of raises I negotiated this year, and my wife and I will be somewhere in this range or just below from 181 to 191k, and pretty much assuredly over in 2016 once I get my full year of new wages and she gets her usual salary, raises and bonuses.

So, backdoor ROTHs are pretty easy when you go straight to a Traditional and convert to ROTH, but what pitfalls may exist in a situation where I contribute to a ROTH, then have to recharacterize, and then try to convert back to the ROTH to complete the backdoor? Can I do that all at the same time without incurring some problem?

I'm fine if there is no way to avoid some limited taxes on the conversion (ie I know the longer you wait to convert a Traditional to ROTH the more likely you will incur taxes, but I don't know when this clock starts ticking in this recharacterization scenario, time of contribution or time of characterization) or if I have to let the recharacterization ride one taxable year and then do a simple backdoor ROTH in 2016 which includes the money from 2015.

Last resort if required by unknown pitfall I could just keep the money aside until I'm sure one way or another so I can complete the backdoor ROTH in a less confusing manner.

Thanks, hope that makes sense.

This post was edited on 4/20/15 at 1:00 pm
Posted by Dusty Bottoms
Guadalajara
Member since Nov 2006
931 posts
Posted on 4/20/15 at 2:40 pm to
quote:

Last resort if required by unknown pitfall I could just keep the money aside until I'm sure one way or another so I can complete the backdoor ROTH in a less confusing manner.


I've experienced firsthand how difficult it is to estimate AGI when around the phaseout, especially when bonus(es) are part of the equation. Your last resort is now my preferred approach after being bitten twice. It isn't that difficult to recharacterize, but it is an exercise I would rather not have to put myself through - especially the tax part of it. This year, I waited until I prepared our taxes and squeezed out every dollar of Roth eligibility.
Posted by Teddy Ruxpin
Member since Oct 2006
39577 posts
Posted on 4/20/15 at 2:44 pm to
quote:

I've experienced firsthand how difficult it is to estimate AGI when around the phaseout, especially when bonus(es) are part of the equation. Your last resort is now my preferred approach after being bitten twice. It isn't that difficult to recharacterize, but it is an exercise I would rather not have to put myself through - especially the tax part of it. This year, I waited until I prepared our taxes and squeezed out every dollar of Roth eligibility.


Thanks for the input from experience. It is quite the annoying situation from appearances.
Posted by Dusty Bottoms
Guadalajara
Member since Nov 2006
931 posts
Posted on 4/20/15 at 2:55 pm to
Totally agree. Just my opinion, obviously, but if the phaseout is in play, save yourself the headache and wait until you calculate your actual AGI. Then fund your Roth as much as possible and put the remainder in your 401k or employer provided retirement account, or regular IRA if already maxing 401k.
Posted by geauxbears08
Houston, TX
Member since Jun 2011
223 posts
Posted on 4/20/15 at 4:05 pm to
quote:

I contribute to a ROTH, then have to recharacterize, and then try to convert back to the ROTH to complete the backdoor


I did this in 2013 because I accidentally contributed to my Roth IRA (I never was good at double checking my work). It's a headache, but definitely not impossible.
Posted by TDsngumbo
Alpha Silverfox
Member since Oct 2011
41576 posts
Posted on 4/20/15 at 4:11 pm to
I wish I had your problems...
Posted by StinkBait72
Member since Nov 2011
2057 posts
Posted on 4/20/15 at 4:13 pm to
quote:

Last resort if required by unknown pitfall I could just keep the money aside until I'm sure one way or another so I can complete the backdoor ROTH in a less confusing manner.


This is my method now that I had to go through
quote:

contribute to a ROTH, then have to recharacterize, and then try to convert back to the ROTH to complete the backdoor


Not worth the headache...
Posted by tigers win2
Baton Rouge
Member since Oct 2009
3837 posts
Posted on 4/20/15 at 10:08 pm to
Does your 401k allow after tax contributions? If so, does it allow for inservice distributions of after-tax dollars? If so, contribute after tax dollars into 401k, then do inservice distribution into Roth IRA. Any gains for deferral until rollover have to go into a traditional IRA.
No income limit issues at all. Can also put away a lot more $ this way.
Posted by lsu777
Lake Charles
Member since Jan 2004
31041 posts
Posted on 4/21/15 at 8:51 am to
This shite pisses me off everytime i go sit down with my financial guy. I am in the same situation and bonuses screw me up one way or another everytime.

I really dont understand why the limit is so low. its meant to keep millionaires from abusing the roth, but you arent a millionaire making less than 200 a year.

Btw i just backdoor it now after getting popped two years agao.
Posted by LSU9102
West of the Mississippi
Member since Mar 2007
2476 posts
Posted on 4/21/15 at 8:58 am to
quote:

Not worth the headache...


Recharacterize is easy and not a headache.

Client had American Funds in a traditional IRA and Roth IRA.
2 weeks ago they realize they made too much in 2014 for Roth contributions.
They fax American funds the form to recharacterize Roth to Tradional IRA 2 days before April 15th.

American funds recharacterizes it before the 15th. Everything is done.
Posted by Dusty Bottoms
Guadalajara
Member since Nov 2006
931 posts
Posted on 4/21/15 at 9:30 am to
quote:

I really dont understand why the limit is so low. its meant to keep millionaires from abusing the roth, but you arent a millionaire making less than 200 a year.


The irony is that HCE limitations for 401k contributions further exacerbates the problem. Can't fully contribute to 401k, which increases AGI, which then prevents you from contributing to ROTH IRA.

HCE limitations are the greatest injustice I have experienced in our tax system. AMT is a close second. My wife and I are trapped in the dreaded sweet spot. We want to save for retirement but are severely restricted, while those who make more AND those who make less than we do can save more and enjoy the tax advantages of doing so.
Posted by Hawkeye95
Member since Dec 2013
20293 posts
Posted on 4/21/15 at 10:40 am to
quote:

HCE limitations are the greatest injustice I have experienced in our tax system. AMT is a close second. My wife and I are trapped in the dreaded sweet spot. We want to save for retirement but are severely restricted, while those who make more AND those who make less than we do can save more and enjoy the tax advantages of doing so.


we are in the same spot. We save a ton but don't get the tax benefits that others do, but we max out our 401ks and are happy with the $35000 tax free we get.

for the backdoor to a roth, you can get screwed on taxes if you rolled over a 401k.
Posted by TexasTiger34
Austin, Kind of
Member since Mar 2008
11338 posts
Posted on 8/5/15 at 7:34 pm to
hate to bump such an old thread with a question but i figured it was most applicable to this thread:

me and my wife just got married on april 4th 2015, do we have to worry about this income limit regarding ROTH contributions for this current year?

my intial assumption would be yes because we technically got married in the 2014-15 fiscal year(4/15/14-4/15/15)

am i correct? currently we both have been contributing to our ROTH's since the marriage
This post was edited on 8/5/15 at 7:35 pm
Posted by TexasTiger34
Austin, Kind of
Member since Mar 2008
11338 posts
Posted on 8/6/15 at 8:23 am to
bump
Posted by Teddy Ruxpin
Member since Oct 2006
39577 posts
Posted on 8/6/15 at 9:55 am to
Taxes don't work off a fiscal year from April to April. Just calendar. Therefore, if you get married January 1st or Dec 31st this year, you are married for all of 2015.
Posted by TexasTiger34
Austin, Kind of
Member since Mar 2008
11338 posts
Posted on 8/6/15 at 9:56 am to
well shite

next question, do bonuses factor into income limits for ROTH contribution?
Posted by Teddy Ruxpin
Member since Oct 2006
39577 posts
Posted on 8/6/15 at 9:58 am to
Income is income. I'm sure there may be some rules here and there an accountant may know about, but the simple labeling of income as something else doesn't change the fact it's income. IRS covers almost all situations in their regs.
This post was edited on 8/6/15 at 10:00 am
Posted by lynxcat
Member since Jan 2008
24140 posts
Posted on 8/6/15 at 10:01 am to
quote:


next question, do bonuses factor into income limits for ROTH contribution?


Yes. Bonuses are earned income. You AGI is what is subject to the ROTH limitations.

------------

I look at hitting the phaseouts as a great problem to face.
Posted by TexasTiger34
Austin, Kind of
Member since Mar 2008
11338 posts
Posted on 8/6/15 at 10:21 am to
10-4 thanks guys
Posted by Spirit of Dunson
Member since Mar 2007
23111 posts
Posted on 8/6/15 at 3:06 pm to
Bonuses count. Most any benefit from your employer counts. My AGI last year was crazy high because my employer pays my living expenses including tuition for an international school. My AGI was about twice my salary.
first pageprev pagePage 1 of 1Next pagelast page
refresh

Back to top
logoFollow TigerDroppings for LSU Football News
Follow us on Twitter, Facebook and Instagram to get the latest updates on LSU Football and Recruiting.

FacebookTwitterInstagram