Author Topic: tIRA Fund Inefficiency  (Read 168 times)

nothing_twisted

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tIRA Fund Inefficiency
« on: January 15, 2018, 06:27:12 AM »
Hey, Jeremy!

First off, thanks for all the amazing content.

This year my wife and my income was in the phase-out range for contributing to our Traditional IRA's. As I expected this, I have been waiting till tax time to figure out exactly how much will be tax deductible, which means we missed out on the stellar gains we saw in 2017.

Is there a more efficient way to do this for 2018? Is it possible to contribute to the tIRA for the full amount and then convert the non-tax deductible portion to a Roth without negative tax consequences? I felt that contributing the funds to a taxable account and then selling them when I found out how much I could contribute would be tax deductible would be counterproductive, as that would increase our income in either 2017 or 2018, reducing the amount that would be deductible in addition to triggering Short-Term Capital Gains.

Likelihood is that we may be in the same situation this year, although I don't want to rule out the possibility that we might make even more money. ;)

Cheers,
NT

gocurrycracker

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Re: tIRA Fund Inefficiency
« Reply #1 on: January 15, 2018, 07:54:07 AM »
Thanks NT, much appreciated.

You can't withdraw the funds tax efficiently, but you can recharacterize a Traditional IRA contribution in whole or part into a Roth IRA.

Let's say you contribute $5,500, but only $3k is tax deductible. You then recharacterize the remaining $2,500 to Roth (basically, a partial backdoor Roth.) You have until your tax filing deadline to do this, up to Oct 15th with extension.

edit: See the boglehead forum post on this for examples and details
https://www.bogleheads.org/wiki/IRA_recharacterization
« Last Edit: January 15, 2018, 06:41:29 PM by gocurrycracker »

nothing_twisted

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Re: tIRA Fund Inefficiency
« Reply #2 on: January 15, 2018, 10:06:36 AM »
Thanks so much for the speedy reply!

- the taxable portion is pro-rated over ALL of your Traditional IRAs. If total pre-tax IRA value is large (perhaps because you transferred an old employer's 401k to a TIRA), then almost all of conversion would be taxable. The way around this is to first transfer the other IRA assets to your employer's 401k (if allowed) or to your side hustle solo 401k.

Could you explain this further for me? If my total tIRA balance is relatively low is there a chance some of it won't be taxable? I'm not completely clear what you mean by the taxable portion being pro-rated.

gocurrycracker

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Re: tIRA Fund Inefficiency
« Reply #3 on: January 15, 2018, 06:44:39 PM »
A little too speedy as I was also answering a question you didn't ask. Sorry for the confusion

You can recharacterize the non-deductible portion of your contribution, without issue. The situation you describe is why recharacterizations exist

See the bogleheads' wiki for full details:
https://www.bogleheads.org/wiki/IRA_recharacterization

nothing_twisted

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Re: tIRA Fund Inefficiency
« Reply #4 on: January 16, 2018, 12:45:54 PM »
Much appreciated!