{"id":769,"date":"2012-03-26T00:02:07","date_gmt":"2012-03-26T08:02:07","guid":{"rendered":"http:\/\/www.cultofmoney.com\/?p=769"},"modified":"2015-10-22T09:46:58","modified_gmt":"2015-10-22T17:46:58","slug":"anyone-contributing-directly-to-a-roth-ira-is-stupid","status":"publish","type":"post","link":"https:\/\/www.cultofmoney.com\/anyone-contributing-directly-to-a-roth-ira-is-stupid\/","title":{"rendered":"Anyone contributing directly to a Roth IRA is stupid"},"content":{"rendered":"
\"Roth-Traditional-IRA-Dunce\"<\/a>
Don’t be a dunce when it comes to retirement<\/figcaption><\/figure>\n

You heard me.\u00a0 And this isn\u2019t about whether you should be putting money in a Roth IRA or a Traditional IRA first.\u00a0\u00a0 It is simply that those contributing directly into a Roth IRA are being stupid.<\/p>\n

The reason I say this is because contributing to a Roth IRA are missing out on a great benefit that the IRS has allowed a few years ago.\u00a0 Starting in the 2010 tax year, the IRS allowed all taxpayers, regardless of income, to convert traditional IRAs to Roth IRAs.\u00a0 Besides being a benefit to those that wanted to invest via a Roth IRA but were above the income limits, this also lets everyone else convert traditional IRAs to Roth IRAs, whether the contributions to the traditional IRAs are deductible or non-deductible.\u00a0 So what you ask?\u00a0 That just makes me go through two steps to get what I could have gotten in one.<\/em>\u00a0 Thanks random italicized type, I was getting to that.<\/p>\n

The benefit you get from converting a traditional IRA to a Roth IRA, is that it also allows you to recharacterize that conversion should you want to do so.\u00a0 And what is recharacterization?<\/em>\u00a0 That means that you can essentially undo the conversion from the traditional IRA into the Roth IRA, going back and recharacterizing the IRA back into a traditional IRA.\u00a0 The reason that you would want to do this is perhaps your Roth IRA decreased in value after the conversion.\u00a0 Now you could just sit on those losses and complain about it<\/a>, but I\u2019d rather not pay taxes on money that I don\u2019t have any more.\u00a0\u00a0 This is one of those things that really is a free lunch given the circumstances.<\/p>\n

How about an example?\u00a0 Traditional IRA to a Roth IRA and re-characterized back:<\/h3>\n

Let\u2019s say you\u2019re in the 25% tax bracket (each marginal dollar of income at this point you would have to pay 25% tax on). \u00a0If you had put $5,000 that you’ve already saved<\/a> into a deductible traditional IRA, you would have saved $1,250 in taxes (you income is $5,000 less x 25% tax rate = savings).\u00a0 You immediately convert that traditional IRA into a Roth IRA.\u00a0 Since it was deductible, the conversion to Roth makes you pay taxes on the converted amount, so we\u2019re back to where you started if you had contributed directly to the Roth (which, would have been stupid).\u00a0 The reason is, let\u2019s say your Roth decreased in value because of a downturn in the market.\u00a0 You Roth is down 50% to $2,500 in value.\u00a0 Before the deadline of October 15 of the tax year due (2011 taxes are due April 17, 2012, re-characterizations must be requested by October 15, 2012) you could re-characterize that back into a traditional IRA.<\/p>\n

\"Traditional-IRA-Converted-To-Roth-IRA-Recharacterized\"<\/a>
how much government money are you losing out on? Potentially thousands.<\/figcaption><\/figure>\n

Think ahead when doing taxes!\u00a0 Your 2012 contribution could be made today, and you\u2019d have until Oct 15, 2013 to potentially recharacterize the conversion!\u00a0 That\u2019s 18 months of downside risk protection!\u00a0 Looking at that red bar, who wants to pay that red bar of taxes when you don\u2019t have to?<\/p>\n

Now instead of paying $1,250 in taxes on income that is now only $2,500 because of market losses, you have $2,500 of income that is deductible, which saves you $625, a net savings in taxes of $1,875 using calculator<\/a>.\u00a0 The government almost pays back your losses in tax credits!\u00a0 It’s even better than a government job<\/a>, because you don’t have to work!\u00a0 Even if it was a non-deductible traditional IRA, the benefit is that the recharacterization lets you harvest some of those losses (which you normally can NOT do in IRAs).\u00a0 Non-deductible in the above example still lets you save the $625 in taxes paid on a losing investment.<\/p>\n

You do want to do this immediately and with separate accounts each time.\u00a0 By this I mean set up a new traditional IRA, and convert it into its own Roth IRA.\u00a0 Don\u2019t covert it into an existing Roth IRA.\u00a0 This is a pain, but it gets around IRS rules making you convert or recharacterize taxable and non-taxable portions of an IRA pro-rata, and relieves you of the burden of potentially calculating gains or losses in either account again.\u00a0 You report a re-characterization to your trustee and on form 8606 to the IRS, then file an amended tax return with the additional label of \u201cFiled pursuant to section 301.9100-2\u201d on the return.\u00a0 See IRS publication 590 for more details on recharacterization<\/a>.<\/p>\n

So don\u2019t be stupid, contribute to a Roth IRA via an intermediary traditional IRA, and let the government pay any losses you may incur.\u00a0 If you’d like to see other posts about Roth IRAs, take a look at the Roth IRA Movement<\/a>.\u00a0 There are over a hundred bloggers contributing to this movement.<\/p>\n

 <\/p>\n

Readers, do you think I’m being stupid by suggesting this?\u00a0 What do you think about Roth IRAs as a retirement vehicle?\u00a0 Do you like to pay known taxes today or unknown taxes in the future?<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

You heard me.\u00a0 And this isn\u2019t about whether you should be putting money in a Roth IRA or a Traditional IRA first.\u00a0\u00a0 It is simply that those contributing directly into a Roth IRA are being stupid. The reason I say this is because contributing to a Roth IRA are missing out on a great benefit […]<\/p>\n","protected":false},"author":1,"featured_media":775,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"om_disable_all_campaigns":false,"_genesis_hide_title":false,"_genesis_hide_breadcrumbs":false,"_genesis_hide_singular_image":false,"_genesis_hide_footer_widgets":false,"_genesis_custom_body_class":"","_genesis_custom_post_class":"","_genesis_layout":"","footnotes":""},"categories":[62,63,9,48],"tags":[16,17],"acf":[],"_links":{"self":[{"href":"https:\/\/www.cultofmoney.com\/wp-json\/wp\/v2\/posts\/769"}],"collection":[{"href":"https:\/\/www.cultofmoney.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.cultofmoney.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.cultofmoney.com\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.cultofmoney.com\/wp-json\/wp\/v2\/comments?post=769"}],"version-history":[{"count":0,"href":"https:\/\/www.cultofmoney.com\/wp-json\/wp\/v2\/posts\/769\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.cultofmoney.com\/wp-json\/wp\/v2\/media\/775"}],"wp:attachment":[{"href":"https:\/\/www.cultofmoney.com\/wp-json\/wp\/v2\/media?parent=769"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.cultofmoney.com\/wp-json\/wp\/v2\/categories?post=769"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.cultofmoney.com\/wp-json\/wp\/v2\/tags?post=769"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}