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Feb 2, 2023
12:06:30pm
CosmoTheRaider Walk-on
RE: i could have kept my money instead of putting it in a roth IRA last year.

Are you aware of Roth recharacterizations?  Your ability do recharacterize is based on your 2022 income and whether or not you had access to an employer-sponsored retirement account (401k, etc), but it could be an option for you in this case.

The short-ish version is that you may be able to essentially call a mulligan and classify your 2022 tax year IRA contributions as Traditional instead of the Roth.  If you do not have access to an employer-sponsored retirement account, you could then get a deduction of up to the 2022 IRA contribution limit ($6,000 if under 50, $7,000 if 50 or over), potentially x2 if married. 

If you do have access to an employer-sponsored retirement account then your ability to deduct the recharacterized contribution depends on your tax filing status and your household income (MAGI, for purposes of dotting 'i's and crossing 't's).  Assuming one is using the Married Filing Jointly status, you're looking at the following:

  • If the Roth is yours then your income would have to be below $109,000 to take the full deduction
  • If the Roth is your spouse's, you have access to an employer-sponsored retirement account, and your spouse either doesn't work or doesn't have access to an employer-sponsored retirement account, your income would have to be below $204,000 to take the full deduction*

There is a range above these figures at which you'd be entitled to a partial deduction, but there's extra nuance there and this is getting long as it is.

Now for the fun part--let's assume you're under 50, you put the maximum $6,000 in your Roth IRA, and your household income is below $109,000.  Let's assume those contributions are now worth $5,000 now.  By recharacterizing your contributions you'd get a $6,000 deduction, and then you could convert the $5,000 actually in your account to a Roth and pay taxes on $5,000 instead of effectively paying tax on $6,000 as you essentially did by making a Roth contribution.

You have until 6 months after the filing deadline to decide whether or not to recharacterize, and then the conversion is taxable in the year in which it occurs.  This is to say that if you could recharacterize last year's contributions (per the criteria above), you'd get a $6,000 deduction on your 2022 taxes and then have $5,000 of extra of income on your 2023 taxes.  Whereas if you contributed, recharacterized, and converted entirely in 2022 you'd have a net $1,000 deduction.

Sorry to blow up an innocent gripe, but 'tis the season for taxes and all of that.

*This presents some fun planning opportunities.  Let's assume 2022 is in the past and we're now on to 2023--if your 2023 household income is between $116,000 and $218,000 and you have a spouse that either doesn't work or doesn't have access to an employer-sponsored retirement account, it can make sense to contribute to their Roth IRA towards the beginning of the year, and then look at how those contributions have done towards the end of that calendar year.  If the account value is up then great, there's nothing else to do.  If the account value is down, it could make sense to recharacterize those contributions to a Traditional IRA, and then shortly thereafter convert those funds back to a Roth IRA to maximize the deduction and then take advantage of the funds now being worth less than when the contribution was made.  

If you were to instead contribute to your own IRA and your income fell between these figures...it'd be more of a pain than simply contributing to your spouse's IRA assuming you look at joint finances as one pot of money.  The IRS doesn't care who earns the household's income as long as there is at least as much earned income as there is IRA contributions.

CosmoTheRaider
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CosmoTheRaider
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2/1/23 3:17pm

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