First Person: My IRA Recharacterization Saved Me Thousands

Yahoo Contributor Network

I saved thousands of dollars on my tax bill by making an IRA Recharacterization request. Even though I know it's better to have after-tax accounts when I'm retired, I simply couldn't come up with the more than $5,000 in taxes I'd have to pay after converting money from my regular to my Roth IRA. A recent article by Reuters pointed out that baby boomers are moving into retirement with huge tax liabilities. I'm not sure that's any different than prior generations since the Roth IRA wasn't even introduced until the late 1990s. In fact, I didn't hear financial experts really push the Roth IRA or Roth 401(k) until the last 5 years. Experts say boomers will have to pay income taxes on their Social Security as well as money from tax-deferred retirement accounts including regular IRA and 401(k) plans. As a member of Generation X, I'm torn between the desire to have the after-tax Roth accounts so I can have a "less taxing" retirement and my need to pay bills in the moment.

Converting my regular IRA

I came up with a plan to convert part of my regular IRA to a Roth IRA, but realized I was too optimistic about what I could afford to pay. When I heard about the option to recharacterize by the federal income tax filing deadline (including extensions), I filled out the paperwork with my brokerage firm. Making the IRA Recharacterization request was my chance at a do-over so that I could move money back into a traditional IRA and not owe income taxes.

Bailing out of a losing Roth

I originally decided to recharacterize my conversion into a Roth because I couldn't afford the tax bill. It just turned out that the Roth IRA had also gone done in value since I made the conversion. Now I won't owe taxes on that higher conversion amount. Of course, I'd still like to see the balance grows in the regular IRA even though I'll owe taxes when I withdrawal the contributions and earnings in retirement.

Maxing out my Roth IRA

After a failed attempt to convert my traditional IRA, I have decided to give up on the conversion idea until my circumstances change. Instead, I will contribute money each month to my Roth IRA. My goal is to max out my Roth IRA each year until I'm retired. Even though I will have a large sum of money in tax-deferred retirement accounts, I'll also have the Roth IRA to balance out my tax liability when I'm old.

My plan is to only convert money from my traditional IRA to my Roth if I lose my job and fall into a low tax bracket. For now, it's better to minimize my tax liabilities. I know it's smarter to pay taxes on retirement savings sooner than later, but it's just not always doable. After learning about the different recharacterization options, I am more willing to take a chance with Roth conversions. On the one hand, I don't look forward to the day when I have less income. But on the other hand, I'll know how to make the most of the situation by converting the heck out of my traditional IRA.

More from this contributor:

I Refuse to Fund My Child's Retirement Account

I Regret Over-Saving for Retirement

How I Got Away with Raiding my Retirement Accounts

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