Roth overcontribution - recharacterize then back-door to Roth again?

Roth overcontribution - recharacterize then back-door to Roth again?
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#1

It looks like my 2017 Roth IRA contributions made early in the year are not going to be allowed due to higher than usual taxable income. I remember plenty of warnings on FWF to delay contributions until all the numbers were in and thought it would never happen to me. I guess to avoid temptation and still make my purchases early, I’ll add to a non-retirement account early in the year and then move that money after I know for sure our eligibility.

But I think 2017 will be a little more complicated, and these issues are new to me. I’ve got a 401k at work and now expect our magi to exceed the roth eligibility limits for 2017. One consistently recommended option is to recharacterize the Roth contributions as Traditional. That couldn’t be the end of it for me, as I understand my maxed 401k contributions make me also ineligible for a tradtional IRA. But could I take that step and then do a back door conversion right back to the Roth?

It sounds a bit silly, but I’ve seen stupider tax rules. I’ve only started researching it, but it sounds like it would even let me deal with the gains currently made on the Roth contributions I made in early 2017 - recharacterize the total as over the eligibility limit, then convert the total via back-door, where there are no applicable income or amount limits.

Have any of you got any experience or advice for a similar situation?


#2

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#3

No one is ineligible for a traditional Ira as long as they or their spouse worked and have that much earned income. You can’t deduct it if you make too much, and having a 401k lowers that threshold a lot, but you can still make a nondeductible contribution and convert that to a Roth.


#4

It’s a loophole someone found that many are driving a bus through every year.


#5

I don’t think it’s a “loophole” in the traditional sense of unintended effect. It was intentionally instituted to generate more cash for the government at the expense of potentially losing tax revenue in the future.

You’d have to pay income taxes on the earnings when converting from traditional to roth.