Back door Roth--can I just directly contribute?

[Rotish]

I have a Roth IRA through fidelity. This is my first year I'll be over the income limit.

My question is--can I just transfer 5500 directly into the Roth IRA from my bank account? I know I physically can do this through fidelitys account, but are there any tax implications by going this way instead of the traditional Ira-->roth Ira conversion?

[The White Coat Investor]

If you're over the income limit you can't contribute directly. It has to go through a traditional IRA.

The tax implications are it is illegal and the IRS will have a problem with it whether Fidelity lets you do it or not. Fidelity doesn't know your income. The IRS does.

[Rotish]

Thank you. In that case, I messed up and already put 1500 into my roth, is there a way to undo this come tax season?

[The White Coat Investor]

recharacterize it to a traditional IRA. Wait the required period. Then convert it.

[Rotish]

Ok, thanks again, new to all this.

So if I'm reading this right, the waiting period looks like the following year. If I recharacterize this to a traditional Ira, and max out that contribution to 5500 for the 2017 tax year. Can I then contribute another 5500 in 2018 to the traditional and do an 11k traditional to roth conversion?

[The White Coat Investor]

Yes, you can do that. I'm not sure you're reading the recharacterization waiting period rule right though:

https://www.irs.gov/publications/p590a/ch01.html#en_US_2016_publink1000230671

Reconversions

You cannot convert and reconvert an amount during the same tax year or, if later, during the 30-day period following a recharacterization. If you reconvert during either of these periods, it will be a failed conversion.

Example 1 — The same tax year.

On June 2, 2016, Darron converts an amount from his traditional IRA to a Roth IRA. In October 1, 2016, he decides to transfer back (recharacterize) that amount from the Roth IRA to a traditional IRA. He will not be able to move (reconvert) that amount from the traditional IRA to a Roth IRA until January 1, 2017.

Example 2 — The 30-day period from recharacterizations.

Same facts as in Example 1 above except Darron transfers back that amount from the Roth IRA to a traditional IRA in March 2, 2017 for tax year 2016. See Designating year for which contribution is made for more background information about this transaction. He will not be able to move (reconvert) that amount from the traditional IRA to a Roth IRA until April 1, 2017.

 It's not entirely clear to me whether you have to wait until next year or not. You certainly CAN wait, but might not have to. Hopefully someone else can clarify whether it applies to the calendar year or the tax year of the initial contribution.

[jfoxcpacfp]

The White Coat Investor wrote:

It’s not entirely clear to me whether you have to wait until next year or not. You certainly CAN wait, but might not have to. Hopefully someone else can clarify whether it applies to the calendar year or the tax year of the initial contribution.

Click to expand...

If the $1,500 you contributed is for the 2016 tax year, you have to wait 30 days. If it is for the current tax year (2017) you have to wait until 2018 to recharacterize.

You could also treat this as an overcontribution, put $5,500 directly into a TIRA and have the custodian remove the original $1,500 along with any earnings by 4/18. You will owe tax on any earnings. This close to the deadline, it may not be possible, of course.

The important consideration is that you max out all of your IRA space annually. The fact that you have to wait to reconvert is only a minor annoyance. Just keep the IRA in a MMA until you can reconvert.

[DMFA]

If it was made for the 2016 tax year, recharacterize now and re-convert in 30 days.

If it was for 2017, then withdraw the excess (entire) Roth contribution, pay tax on its earnings (prob minimal), and start over with a $5,500 non-deductible traditional IRA contribution.