Author Topic: Considering recharacterizing same year from Roth to TIRA  (Read 4447 times)

mountaintown

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Considering recharacterizing same year from Roth to TIRA
« on: November 25, 2019, 09:17:32 AM »
I am a little on the fence whether I should take the tax deduction or go Roth. Jeremy, I guess from your articles you would never go Roth so maybe this post is a waste of time LOL. Nonetheless what are your thoughts?

2018, last year, was about what I expect this year. We will probably make a little more income so I anticipate the following:

Total income, joint: $85,000 (this is after maxing out employer retirement accounts, FSA, health insurance, etc)

Potential IRA deduction: $12,000

Would bring AGI down to: $73,000

It may be a bit of a hassle to re-characterize so didn't want to do so unless totally useful. Part of the reason I did some Roth was we are thinking of buying a house soon so I liked the idea of some roth funds being more accessible for a down payment. I realize both can be accessed for a first time home buyer but it just seems easier to not pay taxes later in a situation like that.

Thanks for any help!

gocurrycracker

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Re: Considering recharacterizing same year from Roth to TIRA
« Reply #1 on: November 25, 2019, 05:38:11 PM »
I've done Roth the past few years, so not never.

Recharacterization isn't much of a hassle. A form only and some tax docs that are auto-populated by TurboTax...

Most typically you will see this Roth vs Traditional tradeoff analyzed by looking at the marginal rate for contribution / withdrawal.

For MFJ, 73k AGI is in the 12% tax bracket (plus possible State taxes.) Presumably, you get insurance through your employer so ACA subsidies aren't involved.

If your withdrawals in (early) retirement are at a marginal rate less than 12%, then Traditional is better. If not, then Roth is better.

If you retire early and are on ACA health insurance, then the marginal rate will almost always be higher than 12%
https://www.gocurrycracker.com/obamacare-optimization-early-retirement/


mountaintown

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Re: Considering recharacterizing same year from Roth to TIRA
« Reply #2 on: November 25, 2019, 08:51:31 PM »
Thanks Jeremy...part of the reason I'm on the fence is I think that I am super close to qualifying for the saver's credit.

I just ran the math again and it looks like with $12,000 in tIRA contributions I would be down to $64,200. There is a slight chance I over estimated so I am tempted as I would get the max which would be a $2000 credit.

My tax situation is a bit forced right now so I'm not sure there is much I can do. I already maxed out flex, retirement accounts, etc. I have some RMD's from a small inherited IRA. Probably the worse thing is that I have some CD's kicking off interest in a taxable account. Not much I can do about that now.

I don't really have any losses to claim. I only have one taxable investment position and I think it's slightly up.

Aaaaah so close!!

gocurrycracker

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Re: Considering recharacterizing same year from Roth to TIRA
« Reply #3 on: November 26, 2019, 05:48:08 AM »
Check out the table in form 8880 - https://www.irs.gov/pub/irs-pdf/f8880.pdf

If you got your AGI down to $63,999 (MFJ), you could get a credit of 2*$2000*10% = $400. If your AGI went as low as $38,500, you could get the full $2,000.

$400 is nothing to sneeze at, but if you figure that you put an extra $6,000 into Traditional instead of Roth to get there (the tradeoff we were discussing), at 12% marginal income tax rate you would be getting a $720 tax deduction and $400 tax credit for an effective tax rate of 18.7%.

If you later withdraw with 15% ACA tax and 12% Federal tax (27% total), then you lost by chasing the saver's credit. If you get it all out at 12%, then you come out ahead.