Roth IRA recharacterize

Forum|Forum|2 years ago
April 4, 2024
3 replies
2 views

I have a rollover IRA account that I rollover 401K from the previous company. I contributed to Roth IRA 2023. Now, I want to recharacterize Roth IRA to rollover IRA account, so I can get the tax deduction - traditional IRA 2023. I plan to convert it back to Roth IRA in 2025 or 2026 when my income will drop. Will I be allowed to convert back to Roth IRA? My friend told me if I recharacterize Roth IRA to IRA, I should select "Yes" to "Choose Not to Deduct IRA Contributions" in TurboTax if I plan to convert back to Roth IRA. If I select "Yes" that means I don't get the tax deduction this year. If I select "No" to "Choose Not to Deduct IRA Contributions", then I can get the tax deduction 2023. Does it mean if I select "No" then I can't convert back to Roth IRA in the future? I'm confused. Thanks.

fanfare

Level 15

"401K from the previous company. "

Generally, once you already have funds in an IRA, you can't do a tax-free backdoor Roth contribution.

You may convert any dollar amount you want from IRA to Roth IRA.

See mandatory Form 8606 to find out the effect of any non-deductible contributions (called basis) made prior to your conversion on the resulting taxable amount.

The actual tax will depend on your tax bracket.

@NN24

NN24Author

Level 2

Thank you.

Opus 17

Level 15

If you recharacterize the 2023 Roth IRA contributions to a traditional IRA and take the tax deduction now, then the entire IRA will be taxable when you convert it to a Roth later. If you don't take the tax deduction now (make the recharacterized contribution non-deductible), then the conversion in the future will be partly non-taxable. It's a matter of deciding when you want to pay the taxes, now or later. (Remember that unless Congress changes the law again, income tax rates will rise for all taxpayers in 2026.)

NN24Author

Level 2

Thanks. If I do recharacterized contribution non-deductible, then I should just leave my contribution in Roth. Since my income is not over the contribution limit, it will be less complicated right? The reason I want to recharacterized Roth IRA, I thought a deduction would be better.

Opus 17

Level 15

@NN24 wrote:

Thanks. If I do recharacterized contribution non-deductible, then I should just leave my contribution in Roth. Since my income is not over the contribution limit, it will be less complicated right? The reason I want to recharacterized Roth IRA, I thought a deduction would be better.

In general, if your income allows you to make contributions to a Roth IRA (and you want your money to end up in the Roth in the end anyway), you should just make the Roth contribution and leave it alone. Making non-deductible contributions to a traditional IRA creates extra paperwork you have to keep track of (the IRS does not keep track for you) and the main reason to do that is if your income disallows Roth contributions.