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ROTH Income Limits, Recharacterizing, Back Door

Posted on 4/20/15 at 12:53 pm
Posted by Teddy Ruxpin
Member since Oct 2006
39747 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
934 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 geauxbears08
Houston, TX
Member since Jun 2011
224 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
43099 posts
Posted on 4/20/15 at 4:11 pm to
I wish I had your problems...
Posted by StinkBait72
Member since Nov 2011
2058 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
3863 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
32544 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.
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