Message Font: Serif | Sans-Serif
No. of Recommendations: 1

I have recently run into an issue and was hoping for some clarification on my situation and potential option. I recently discovered that we will be above the income limit to contribute to a Roth IRA this year due to a severance pay-out that my wife received. Thus far in 2013, I have contributed $3500 into a Roth IRA that I have had for several years, with the original plan of contributing the maximum of $5500.

I had been reading about options, and it looks as though there is the 'back-door' Roth contribution option of recharacterisation as a non-deductible traditional IRA (tIRA) and conversion back to a Roth IRA after 30 days. However, recently I came across statements that this is complicated when the person already has a traditional IRA - I have a rollover IRA from a previous retirement account with ~$25000 in it.

From my understanding, I would need to recharacterise my Roth contributions and earnings from 2013 into a non-deductible tIRA before the 2013 tax filing deadline to avoid a 6% penalty from the IRS.

If I then wanted to convert the contributions / earnings, these would be combined into a 'pot' with my deductible rollover IRA and the amount from each in a conversion would be based on the relative amounts of each. For example, if my combined amount in the non-deductible tIRA and the deductible rollover IRA were $30000 of which $5000 came from the recharacterisation, and I initiated a conversion of $5000, I would need to pay 2013 federal and state income tax on $4167 (as only 1/6 of the 'pot' was post-tax money).

A few questions related to this:
- Are my assumptions above correct?
- Are there any maximum income restrictions for performing such a recharacterisation?
- Are there any other options / considerations of which I'm unaware?
- Are there any benefits / concerns around the recharacterisation into a non-deductible tIRA?

I appreciate any feedback. I've tried reading up on this issue from various sources, but they are usually extremely high-level or fine-detailed around a specific use case. In general, I see very little value in a non-deductible tIRA, which is why I would want to convert this money, but that may be due to my ignorance on the non-deductible tIRA.

Thanks in advance.
Print the post  


In accordance with IRS Circular 230, you cannot use the contents of any post on The Motley Fool's message boards to avoid tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions.
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.