Hi,

New to the forum (though a long time GRS reader!) and hoping someone can help with a couple of queries I have regarding recharacterizing a Roth IRA.

I opened a Roth IRA via T. Rowe Price about three years ago and have been making regular contributions ever since, up to the maximum of $5k per year. I am on track to contribute $5k in 2011 also. However, within the last couple of months I have switched jobs and got married, the combination of which has raised my/our combined MAGI to above the maximum allowed for Roth IRA contributions. I understand that I need to recharacterize my Roth IRA to a traditional IRA in order to avoid the penalties that come with contributing to a Roth IRA when you earn more than is allowed.

I called T. Rowe Price about this today and they emailed me a form to fill out to recharacterize the account. However the person I was speaking to was not particularly knowledgeable on the topic of recharacterization and after reviewing the form I came away with a few questions:

- Do I have to switch the whole balance of my Roth IRA to a traditional IRA, or can I just recharacterize the 2011 contributions (so I would still have a Roth IRA containing my 2009 and 2010 contributions, I just wouldn’t contribute to it any more)
- When I eventually retire and withdraw money from my traditional IRA, am I going to have to pay tax on the whole lot? Or just the earnings?
- On a slightly different note - I’ve read it’s desirable to have a mix of pre-tax and after-tax retirement contributions, and I already max out my 401k at work. Now that I’m ineligible to contribute to a Roth IRA, what other investment vehicles should I consider for after-tax retirement contributions? Should I just keep contributing $5k a year to my new traditional IRA, or are there better options out there?

Thanks in advance for your help!

Rather than converting, can't you just stop contributing to the ROTH, and open up a traditional IRA, instead?

Everything I've ever read talks about the conversion of traditional into ROTH, not the other way around.

ETA: As to your other questions... you will have to pay taxes on the whole lot (contributions and earnings) on a traditional IRA. Which is why most people prefer a ROTH. And as far as other investments... I'm not there yet... sorry. =)

It is my understanding that because I will be filing my 2011 taxes jointly with my husband, and our joint income exceeds the Roth IRA maximum income stipulations, any contributions that I made in 2011 will be considered "excess contributions" and will be taxed at 6% every year (if I fail to correct my excess contribution, I'm required to pay a penalty tax of 6% for each year that the problem remains uncorrected.) So I can't just leave things as they are and just not contribute to the Roth going forward, unfortunately.

Are you going to be above the MAGI limit for the year overall? Marriage is considered as if your status on Dec 31st were your status the whole year. However for the wage income, your job and salary don't matter, what matters is the total income of you and your spouse for the tax year. Also your income is counted after the 401(k) is deducted. So it's possible you might not be above the limit.



I'm sure you don't have to recharacterize the whole account, just the ineligible contributions. I fairly sure I've read that there is a way to calculate how much of the account must be recharacterized, based on investment earnings since the contribution was made.

You might also be able to resolve the situation by withdrawing the excessive contributions.

I am surprised the brokerage couldn't be more helpful. Perhaps you should call back and ask to be transferred to someone who has experience with the process.



Just the earnings. Good luck keeping track of that for a few decades!



Yes, definitely desirable. There is a way you can still contribute to your Roth IRA though, regardless of your income. What you have to do is contribute to a non-deductible traditional IRA (which as far as I know, anyone can do regardless of income). And then, convert the account to a Roth IRA, which you can do regardless of income (since 2010). You have to pay tax on any earnings but you can minimize that easily enough by converting the account quickly and investing in a money market fund temporarily.

The biggest wrinkle is that your conversion has to come proportionally from all traditional IRAs. So if you have a tax-deferred traditional IRA, it gets more complicated.

Leave as much money in the Roth as you can, re-characterize whatever is over the MAGI. Someone at T. Rowe Price really should be helping you with this... do they have a tax department representative you can speak to? I think really you should be able to just pay taxes on what you put in to the account for the year you became ineligible and then stop contributing to that particular account from then on.

You can always re-characterize a traditional IRA into a Roth; that process is fairly easy and straightforward.