Recharacterize a backdoor roth IRA??

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Topic Author
bnast
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Joined: Fri Mar 01, 2019 5:09 pm

Recharacterize a backdoor roth IRA??

Post by bnast »

Hi everyone,

I did something stupid last year and need some help.

I did a backdoor roth IRA like usual last year but my pre-nup lawyer said i need to keep my pre-marital assets separate(also got married in 2021).

I stupidly decided to recharacterize the backdoor roth and than transfer it out of my vanguard account instead of just transferring in-kind. I spoke to vanguard about this and they said i can do this but now come tax season, i dont know if what i did was legal.

Any thoughts?

Thank you(I think i will get a tax accountant for the first time this year to double check my work)
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FiveK
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Re: Recharacterize a backdoor roth IRA??

Post by FiveK »

bnast, welcome to the forum.
bnast wrote: Tue Feb 07, 2023 7:44 am ...recharacterize the backdoor roth....
What exactly did you do? Note that the backdoor Roth is a process that includes more than one step.
Topic Author
bnast
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Re: Recharacterize a backdoor roth IRA??

Post by bnast »

Thank you!. Been reading this site for years so thank you all for your infinite wisdom. First post because im just an idiot :(.

I contributed 6k to traditional IRA
Converted 6K to roth IRA (been doing this for years thanks to you guys)

I basically panicked realizing i combined pre-marital asset with post marital assets and did the following;

I then recharacterized the backdoor roth to traditional and transferred the 6K from vanguard to a new account at fidelity.

Very stupid. Possibly illegal?
tashnewbie
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Re: Recharacterize a backdoor roth IRA??

Post by tashnewbie »

bnast wrote: Tue Feb 07, 2023 12:21 pm Thank you!. Been reading this site for years so thank you all for your infinite wisdom. First post because im just an idiot :(.
You're not an idiot! Many people seem to make mistakes with the backdoor Roth process, including myself the first year I did it.
I contributed 6k to traditional IRA
Converted 6K to roth IRA (been doing this for years thanks to you guys)

I basically panicked realizing i combined pre-marital asset with post marital assets and did the following;

I then recharacterized the backdoor roth to traditional and transferred the 6K from vanguard to a new account at fidelity.

Very stupid. Possibly illegal?
It's still not quite clear to me what you did. Since 2018 (not sure of the exact year), it has been impossible to recharacterize a Roth conversion. That's what it sounds like you're describing.

Did you do a return of excess contributions or withdraw money from the Roth IRA?
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FiveK
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Re: Recharacterize a backdoor roth IRA??

Post by FiveK »

bnast wrote: Tue Feb 07, 2023 12:21 pm I contributed 6k to traditional IRA
Converted 6K to roth IRA (been doing this for years thanks to you guys)
OK, those are the two steps in the backdoor Roth process. So far so good.
I then recharacterized the backdoor roth to traditional and transferred the 6K from vanguard to a new account at fidelity.
The transfer part is irrelevant. Nobody may recharacterize a conversion. Only the brokerage can recharacterize a contribution. What exactly did you and the brokerage do?
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Re: Recharacterize a backdoor roth IRA??

Post by Misenplace »

This thread is now in the Personal Finance (Not Investing) forum (tax question).

Moderator Misenplace
tibbitts
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Re: Recharacterize a backdoor roth IRA??

Post by tibbitts »

bnast wrote: Tue Feb 07, 2023 7:44 am Hi everyone,

I did something stupid last year and need some help.

I did a backdoor roth IRA like usual last year but my pre-nup lawyer said i need to keep my pre-marital assets separate(also got married in 2021).

I stupidly decided to recharacterize the backdoor roth and than transfer it out of my vanguard account instead of just transferring in-kind. I spoke to vanguard about this and they said i can do this but now come tax season, i dont know if what i did was legal.

Any thoughts?

Thank you(I think i will get a tax accountant for the first time this year to double check my work)
This isn't applicable to me, but for the benefit of other people: you're saying that failing to keep a few thousand dollars in pre-marital assets separate will "taint" all your other pre-marital assets? In just this or all other accounts? Are you sure the act of the initial transfer wouldn't have done the damage in a way that wouldn't be possible to undo? Certainly you wouldn't have gone to all this trouble for concern over a few thousand dollars.
toddthebod
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Re: Recharacterize a backdoor roth IRA??

Post by toddthebod »

bnast wrote: Tue Feb 07, 2023 12:21 pm
I then recharacterized the backdoor roth to traditional and transferred the 6K from vanguard to a new account at fidelity.
I highly doubt Vanguard would have let you do that:
Can I recharacterize a rollover or conversion to a Roth IRA?
Effective January 1, 2018, pursuant to the Tax Cuts and Jobs Act (Pub. L. No. 115-97), a conversion from a traditional IRA, SEP or SIMPLE to a Roth IRA cannot be recharacterized.
https://www.irs.gov/retirement-plans/re ... rding-iras
Backtests without cash flows are meaningless. Returns without dividends are lies.
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celia
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Re: Recharacterize a backdoor roth IRA??

Post by celia »

You can recharactize contributions but not conversions. This allows for someone who made more money than expected to change their Roth contribution to tax-deferred.

But you also did a Roth conversion, which can no longer be undone. So we’re not sure what you did. How about telling us what your 1099-R says for the removal from the Roth.


For a couple who wants to keep their pre-marital assets separate, I think they should leave the pre-marital assets where they are and from the wedding going forward, use new custodians for investments and banking. This will be easier for both of you to see his, hers, and ours when the mail arrives or a checkbook is used and help stop co-mingling.

You probably should have opened new IRA and Roth accounts at a different custodian. Do your Backdoor Roth there from now on. If last year’s contribution was removed, you can do a new Backdoor Roth for 2022. While you’re at it, ask your spouse if he/she would like one too and use post-marital money for both. Note that you need to contribute by April 15 and report the contributions on Form 8606 for 2022.

Note that if you each have pre-marital assets that are reported on your joint tax return, you also need to somehow pro-rate how much of the taxes are due to the pre-marital capital gains or dividends and pro rate the tax liability similarly. That part of the tax liability (which assumedly was paid by joint money) should be reimbursed by the pre-marital assets.
Last edited by celia on Tue Feb 07, 2023 2:16 pm, edited 2 times in total.
Topic Author
bnast
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Re: Recharacterize a backdoor roth IRA??

Post by bnast »

To answer a few questions:

The damage might have been done already. But my lawyer said if i quickly removed the assets i just contributed to vangaurd and transferred to a different brokerage she should be able to argue in front of a judge in 30 years that everything in vanguard remains pre-marital

I will check my Tax returns tonight when im home and see what they say.

As always, this group is fantastic! Thank you!
Topic Author
bnast
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Re: Recharacterize a backdoor roth IRA??

Post by bnast »

So you are all right( as usual).

My 1099-R says I took DISTRIBUTION not recharacterization.

So these are the numbers:

6K into traditional and converted it into Roth IRA

At some point it grew to 6151 and than I took a DISTRIBUTION from my backdoor Roth

Does that make more sense? I guess maybe I will just have to pay a penalty for early withdrawal?
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FiveK
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Re: Recharacterize a backdoor roth IRA??

Post by FiveK »

bnast wrote: Tue Feb 07, 2023 7:31 pm 6K into traditional and converted it into Roth IRA
That would be a "nontaxable conversion".
At some point it grew to 6151 and than I took a DISTRIBUTION from my backdoor Roth

Does that make more sense? I guess maybe I will just have to pay a penalty for early withdrawal?
See the Treatment of distributions table. The $6K is your most recent "nontaxable conversion". Do you have direct contributions and/or earlier conversions that would allow the $6151 to be completely tax and penalty free?
toddthebod
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Re: Recharacterize a backdoor roth IRA??

Post by toddthebod »

bnast wrote: Tue Feb 07, 2023 7:31 pm So you are all right( as usual).

My 1099-R says I took DISTRIBUTION not recharacterization.

So these are the numbers:

6K into traditional and converted it into Roth IRA

At some point it grew to 6151 and than I took a DISTRIBUTION from my backdoor Roth

Does that make more sense? I guess maybe I will just have to pay a penalty for early withdrawal?
Since you say you've done backdoor Roth IRAs in prior years, it is possible your distribution is tax- and penalty-free. You can withdraw contributions at any time and conversion amounts after five years.

Where you may have a problem is if you then made a contribution to an IRA at Fidelity for the same calendar year, as now you've made $12,000 in contributions in 2022. You'll need to do a withdrawal of excess contributions from Fidelity (or see if they can just change the contribution year to 2023.)
Backtests without cash flows are meaningless. Returns without dividends are lies.
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