Recharacterize Roth to traditional IRA?

[texastek76]

Newbie here but I like what I see so far. I tried to search on this question to no avail.

As my wife does not work we have been funding a Roth IRA each year up to the maximum contribution. For 2007 it looks like my income is going to exceed the income limits for Roth's. If so what are my options here? I guess the standard answer is to move (recharacterize?) the 2007 funds (post April 2007) to a traditional IRA. Is that right?

If anyone has any experiece with this I would appreciate some insight? Thanks.

[disneysteve]

I believe you are correct and need to recharacterize. I had to do that once a few years ago though I don't remember exactly why. All I did was called Vanguard and they took care of the whole process. It was no trouble at all. Call your IRA company and they should handle it for you.

[sweeps]

There are three ways to correct the situation. First, you can withdraw the excess contribution and any earnings on that amount. This works in all situations, although it isn't always the best choice. Second, you can recharacterize the excess contribution as a contribution to a traditional IRA. This works if you are over the limit for Roth IRAs without being over the limit for all IRAs in general. Third, you can leave the excess in the Roth and use a deemed contribution to correct it the next year. This choice requires you to pay a penalty for one year, but sometimes that's the lesser of two evils.

Source

[jIM_Ohio]

Recharactorize is the right term. I had to do this last year at tax time. I would NOT do the recharactorization until turbo tax tells you to.

There is a section on IRAs. Answer all questions truthfully. Turbotax will tell you what forms are needed and what needs to be done. It's possible you are eligble for a partial Roth contribution. It's possible your AGI (Adjusted gross income) is under the contribution limits. Gross income and AGI are two different numbers. AGI takes deductions into account (mortgage interest, dependants, child care) where as gross income is just a number. Roth limits are based on AGI.

Consider bumping up 401k contributions in 2008 to allow you to maintain Roth eligibility for 2008.

[texastek76]

Originally Posted by jIM_Ohio

Recharactorize is the right term. I had to do this last year at tax time. I would NOT do the recharactorization until turbo tax tells you to.

There is a section on IRAs. Answer all questions truthfully. Turbotax will tell you what forms are needed and what needs to be done. It's possible you are eligble for a partial Roth contribution. It's possible your AGI (Adjusted gross income) is under the contribution limits. Gross income and AGI are two different numbers. AGI takes deductions into account (mortgage interest, dependants, child care) where as gross income is just a number. Roth limits are based on AGI.

Consider bumping up 401k contributions in 2008 to allow you to maintain Roth eligibility for 2008.

Sounds like a plan. I will wait until I file in February to move any money. I am just estimating now so you are right that I might eek in below the limit for AGI.

I currently max out the yearly 401(k) numbers ($15,500) so I can't use that to help me out.

Thanks.

[jIM_Ohio]

Originally Posted by texastek76

Sounds like a plan. I will wait until I file in February to move any money. I am just estimating now so you are right that I might eek in below the limit for AGI.

I currently max out the yearly 401(k) numbers ($15,500) so I can't use that to help me out.

Thanks.

This is a situation which may call for a comprehensive financial plan. After you do your taxes, consider doing some 2008 tax planning. How can you increase deductions for 2008? Maybe refinance to a 15 year mortgage (from a 30 year) or do some needed home improvements in 2008.

Turbo tax has a tax planning section at the end. I don't use it, because my taxes are relatively the same year in and year out, and we're not near the AGI limits yet (we are 20k short, I think).

Maybe you can contribute to a deductable IRA for your wife (4k) for 2007. This is a spousal IRA, and she does not work, so not exempt because of employer plan.

The deducatable IRA for 2007 could be converted to a Roth in later 2008 if you wanted to... get deduction now, then pay taxes on it later. Those same taxes might lower AGI for 2008 as well.