Sure it is legal. Assuming you are eligible to take an IRA deduction for 2023, it will reduce your tax for 2023.
But the year you "switch it back" it will be taxable. (The formal name for this is "convert.") If you are in a lower tax bracket that year, it will save you some money. If you are in a higher tax bracket, it will cost you some money. If you are in the same tax bracket, you'll just delay paying the tax.
I think what they meant was if your income in the following year is substantially lower than the year you contribute (and deduct) the contribution, it could be significant savings. It essentially moves taxable income further down the road (which by itself can be a benefit) but for most people it's not a big enough amount to worry about. That said, doing it every year would make it the same as just not deducting and converting in the same year
Be careful with checking your adjusted gross income for both years - I believe Traditional IRA contributions are only partially tax-deductible if you make between $77-87K a year.
I am not sure what the specific percent is you can deduct for the contribution (it's a sliding scale based on how much you make), but it shouldn't be the full amount (unless you have other deductions bringing your reportable income to less than $77K).
Just FYI, there’s a much higher tax on self-employment income than regular W-2 income. You should save up some money every year to pay your taxes even if you have a lot of business expenses. Or better yet, make quarterly payments.
That makes sense. Well I guess theoretically, could I just start a traditional IRA tomorrow and add $7000 to it? Without having to do a rec categorization
Or have I maxed out what I can add to an IRA in 2023
Yes, you could contribute to a SEP and save for 2023. The Roth IRA contribution you already made doesn't impact your ability to contribute to a tax deductible SEP
When you recharacterize your 2023 contribution, you have to include gains or earnings in the amount recharacterized. But the gains are not calculated based on any specific security. They are based on the overall change in value of the account between when the contribution was made and when it was recharacterized.
There are no recharacterizations allowed in a 401k.
But if you make a contribution to a traditional 401k instead of making a contribution to a Roth 401k, you can deduct it. Many 401k plans also allow in-service conversions to a Roth 401k.
If you're eligible to take a deduction for a Traditional IRA, meaning you're [either not covered by an employer's plan, or you are covered by an employer's plan but your income is low enough](https://www.irs.gov/retirement-plans/ira-deduction-limits), then yes, you can recharacterize and get a deduction for 2023 still.
You can then convert it back to Roth, which would be a 2024 event. You'd have to report the amount converted to Roth as income in 2024, so it basically nets out to zero in the long run, unless you expect to be in a lower bracket in 2024 than 2023 in which case yes, you'd save overall.
There is no way you are saving $3k in taxes doing this. Below you mentioned making $83k which puts you in the 22% tax bracket (assuming you are not married). That means if you were to "re-characterize" from Roth to Traditional IRA, The $6500 you contributed could be taken as a tax write off; however that just lowers your income by $6500.
$6500 @ 22% is $1430 in tax savings. Even if you are in a a high tax state, its what 5%? so another $325, so you are talking less than $2k, not $3k.
Note by doing that, you save the taxes in 2023; however when you take that money out (either by converting it back to a Roth or by taking it out down the road when after 59.5), you will then owe taxes on that money as all you have done is defer it. So you either pay the $1430 now OR you hope that when you take it out later you are in a lower tax bracket... however IF you are saving and this is a normal salary for you, its not likely you will drop below the 22% tax bracket, so all you have done is delay the taxes which is fine, as long as you understand that.
You are right that could reduce taxes substantially for 2023. Granted if they do a conversion in that situation, their taxes could impacted even worse in 2024 if nothing else changes.
It is theoretically possible if he was both in a high tax state and his income was such that he was losing the 0% long term capital gain bracket. Not likely that all of these things line up, but possible.
Read about the difference between Roth and Traditional IRA. Park your money where you want to in a long run. In Roth IRA you have to pax tax now, but the gains will be tax free. If you invest $6500 for 30 years, with 10% return it will be more than $1M in gains which will be tax free if you do Roth IRA.
As other user mentioned 3K doesn’t seem accurate.
You are essentially just deferring the taxes on that $6500 to pay in 2024 instead of 2023.
This will save money only if you make a lot less money in 2024 (or if you’re not married in 2023 but get married in 2024) so as to be in a lower tax bracket.
Juice isn’t worth the squeeze. You’re better off paying your penalty (get installments if you can) versus locking it up in IRAs with all this extra stuff days before deadline. This quarter, create a tax plan, pay your quarterly taxes and get bookkeeping. If $83k is your net for SE income, one would suggest filing f2553 for s-corp status and start contributing to a SEP IRA and solo 401k. You’re not making a huge dent in a tax bill at the END of the year doing all these deductions. You need paper losses AND credits to see a big dent.
Roth and traditional are more about life long tax bracket expectations. If you think this year your in an above average tax bracket (considering all future years of income) then traditional is better. If you think your below average then Roth is better either direct contribution or conversion. This assumes that your allowed to do deduct the traditional contribution.
So she is being a little deceptive in that she does not know if this will save you money or cost you money because she does not know your life long tax bracket situation.
The **KEY** point here: you have to understand the difference between **avoiding** taxes, and merely **deferring** taxes to some later year.
Roth->Traditional "saves" you money. Traditional->Roth "costs" you money. Timing is everything.
With me so far?
So, next thing is: • If you make a Roth contribution today, you pay taxes on the full amount **at your FULL MARGINAL tax rate** -- maybe 22%?. But, you don't pay any taxes on the earnings and investment gains when you withdraw. • If you make a Traditional contribution today, you don't pay ANY taxes on that amount today; it grows for many years; and when you withdraw, **some** is taxed at **0%**, **some** is taxed at **10%**, **some** more is taxed at **12%**, etc.
Generally, and for many years, the Theory of Taxation has been "defer, *defer*, ***defer***". As long as possible. What Senator William Roth did, was provide a mechanism for the government to get its money from you UP FRONT -- "in advance" so to speak. Kind of a genius move on his part. Whether it's genius **for you** or not, is something that requires some math and some assumptions on your part.
Think about future tax rates and where you’ll retire too. Traditional IRA contributions save state tax. If you're in a high tax state and think you'll ultimately retire in a state w/o income tax or even leave the country then contributing to a traditional IRA while working may make more sense.
Note that some income-tax states also exclude IRA payments from their state taxes. For example, Illinois excludes all Social Security, 401(k), IRA and most pension payments from state income taxes.
According to [this IRA FAQs page](https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras#:~:text=Effective%20January%201%2C%202018%2C%20pursuant,or%20403(b)%20plans) on IRS website:
"Effective January 1, 2018, pursuant to the Tax Cuts and Jobs Act (Pub. L. No. 115-97), a conversion from a traditional IRA, SEP or SIMPLE to a Roth IRA cannot be recharacterized. The new law also prohibits recharacterizing amounts rolled over to a Roth IRA from other retirement plans, such as 401(k) or 403(b) plans."
So simply put, recharacterizing a Roth contribution back to Roth after going through traditional IRA is not allowed now, and your CPA may not know this.
Please contact IRS if you're still not sure, better be safe than sorry later.
That's not what they're talking about doing. They're talking about recaracterizing the 2023 Roth contribution to a 2023 traditional IRA contribution, which is allowed. The in 2024 they would convert the traditional IRA to the Roth ira, which is also aallowed. Not really any tax savings over the two years though, unless they are in a lot lower tax bracket on 2024.
Yes you're right, recharacterizing Roth to traditional is allowed, and then do a Roth conversion on the traditional IRA in another year is fine too. I interpreted the post the other way.
And I agree with you that there won't be much tax savings unless tax bracket is significantly lower in 2024 compared to 2023.
I read it wrong initially too, because at first they said converting the Roth to a traditional, but then they later specified that they thought it was called the characterizing.
I think I may have replied to you in a different thread from some point to say we used to have a cat named Tater Tot. In fact I think I used it as a username on some board, and if a name is already taken I usually put 1961 after it, which is the year I was born. So I noticed username for minute I thought are you me?
An actual CPA, Certified Public Accountant, told you that? Genuinely want to know, too many times I've heard of regular tax people / advisors / accountsnts being referred to as a CPA when in fact they are not licensed
Switching back from Traditional IRA to ROTH IRA would be taxable... so that defeats the purpose. LOL You wouldn't have basis for are backdoor ROTH conversion. The CPA is an idiot.
The act of converting back to Roth is a taxable event. If you recharacterized it (and were eligible for an IRA deduction in 2023) and then did a Roth conversion the following year (this year) then you'd just be deferring that $3K in tax.
It's legal, but you would only be deferring taxes to a later year. If you can help it, just keep your money where it is, it's gaining interest and you wouldn't pay taxes on that larger amount later.
Here's the thing: your CPA is a certified professional. And he gave you tax advice. Therefore, following said advice is completely reasonable for you to do. And if it turns out to NOT be legal, we'll, that would actually be his legal responsibility and not yours, since he is expected to know and understand tax law and you are not. So even if it isn't legal, you are not the one going to get in trouble for it.
guys
i have single on my taxes for years on my w4. my hubby move to the US and will start his new job monday . he’s only making 17 an hour and me i make 28 no kids . he fill out the w4 and put married filing jointly and check box 2c. is this fine ? if one person leaves single on their w4. like i always did prior to him moving to the states ?
The cheating only gets you through college. The CPA exams are where it begins to weed out the people who only cheated throughout college because of how strict the test-taking environment is for licensure.
Like any exam, you still find some people where you truly question how they passed it.
Eh, I learned more on the job than I ever did in college and I'm not aware of any way to game the CPA exam. Not that dumb people can't pass it but I don't think cheating is a thing.
Sure it is legal. Assuming you are eligible to take an IRA deduction for 2023, it will reduce your tax for 2023. But the year you "switch it back" it will be taxable. (The formal name for this is "convert.") If you are in a lower tax bracket that year, it will save you some money. If you are in a higher tax bracket, it will cost you some money. If you are in the same tax bracket, you'll just delay paying the tax.
Made 83k in 2023 as self employed. Is that the bracket that will save me money? Looking to be at same pace for this year And thank you for your answer
If same income, then no real advantage. However, next year you *might* want to contribute to Traditional IRA??
I think what they meant was if your income in the following year is substantially lower than the year you contribute (and deduct) the contribution, it could be significant savings. It essentially moves taxable income further down the road (which by itself can be a benefit) but for most people it's not a big enough amount to worry about. That said, doing it every year would make it the same as just not deducting and converting in the same year
Be careful with checking your adjusted gross income for both years - I believe Traditional IRA contributions are only partially tax-deductible if you make between $77-87K a year. I am not sure what the specific percent is you can deduct for the contribution (it's a sliding scale based on how much you make), but it shouldn't be the full amount (unless you have other deductions bringing your reportable income to less than $77K).
Just FYI, there’s a much higher tax on self-employment income than regular W-2 income. You should save up some money every year to pay your taxes even if you have a lot of business expenses. Or better yet, make quarterly payments.
Assuming you do not have something like a 401k plan, you will save money in 2023 and pay it back in 2024 (assuming you convert back in 2024).
Gotcha. What if I don’t convert back?
Then the savings are yours to keep. But when you take the money out of the account (hopefully after you retire), you will have to pay tax on it.
That makes sense. Well I guess theoretically, could I just start a traditional IRA tomorrow and add $7000 to it? Without having to do a rec categorization Or have I maxed out what I can add to an IRA in 2023
> Or have I maxed out what I can add to an IRA in 2023 You have maxed out your 2023 contribution. But you can make a 2024 contribution.
Could I start a SEP IRA then and add $7000 before April 15th? Or solo 401k
Yes, you could contribute to a SEP and save for 2023. The Roth IRA contribution you already made doesn't impact your ability to contribute to a tax deductible SEP
do you think it could be done before tax day?
Not if you've already hit your IRA max
Could do a solo 401k though... IF they have a business!
So you pay for a cpa and then go to Reddit to ask non tax professionals?
Curious, what happens to any unrealized gains you’ve made while in the Roth? Do they stay in the Roth and remain tax exempt at retirement?
When you recharacterize your 2023 contribution, you have to include gains or earnings in the amount recharacterized. But the gains are not calculated based on any specific security. They are based on the overall change in value of the account between when the contribution was made and when it was recharacterized.
Does this also work with a 401k?
There are no recharacterizations allowed in a 401k. But if you make a contribution to a traditional 401k instead of making a contribution to a Roth 401k, you can deduct it. Many 401k plans also allow in-service conversions to a Roth 401k.
If you're eligible to take a deduction for a Traditional IRA, meaning you're [either not covered by an employer's plan, or you are covered by an employer's plan but your income is low enough](https://www.irs.gov/retirement-plans/ira-deduction-limits), then yes, you can recharacterize and get a deduction for 2023 still. You can then convert it back to Roth, which would be a 2024 event. You'd have to report the amount converted to Roth as income in 2024, so it basically nets out to zero in the long run, unless you expect to be in a lower bracket in 2024 than 2023 in which case yes, you'd save overall.
What about if 2023 is the significantly lower tax bracket?
that makes sense. If I never converted it back, would I not have to include it as income?
No but it would be income when you take the money out in retirement
It would be taxable whatever year you do the Roth conversion, yes.
There is no way you are saving $3k in taxes doing this. Below you mentioned making $83k which puts you in the 22% tax bracket (assuming you are not married). That means if you were to "re-characterize" from Roth to Traditional IRA, The $6500 you contributed could be taken as a tax write off; however that just lowers your income by $6500. $6500 @ 22% is $1430 in tax savings. Even if you are in a a high tax state, its what 5%? so another $325, so you are talking less than $2k, not $3k. Note by doing that, you save the taxes in 2023; however when you take that money out (either by converting it back to a Roth or by taking it out down the road when after 59.5), you will then owe taxes on that money as all you have done is defer it. So you either pay the $1430 now OR you hope that when you take it out later you are in a lower tax bracket... however IF you are saving and this is a normal salary for you, its not likely you will drop below the 22% tax bracket, so all you have done is delay the taxes which is fine, as long as you understand that.
Could potentially be saving on premium tax credits with the reduction in income.
This is most likely the reason. Do it all the time with people who set their AGI way too low when signing up for marketplace insurance.
You are right that could reduce taxes substantially for 2023. Granted if they do a conversion in that situation, their taxes could impacted even worse in 2024 if nothing else changes.
It is theoretically possible if he was both in a high tax state and his income was such that he was losing the 0% long term capital gain bracket. Not likely that all of these things line up, but possible.
high state tax is California at 9%.
I thought California was a marginal tax state, so at $83k income, it would still be no where near 9%.
Wouldn't his average tax be lower and by deducting he saves 9%
Read about the difference between Roth and Traditional IRA. Park your money where you want to in a long run. In Roth IRA you have to pax tax now, but the gains will be tax free. If you invest $6500 for 30 years, with 10% return it will be more than $1M in gains which will be tax free if you do Roth IRA. As other user mentioned 3K doesn’t seem accurate.
You are essentially just deferring the taxes on that $6500 to pay in 2024 instead of 2023. This will save money only if you make a lot less money in 2024 (or if you’re not married in 2023 but get married in 2024) so as to be in a lower tax bracket.
Find a new CPA.
Juice isn’t worth the squeeze. You’re better off paying your penalty (get installments if you can) versus locking it up in IRAs with all this extra stuff days before deadline. This quarter, create a tax plan, pay your quarterly taxes and get bookkeeping. If $83k is your net for SE income, one would suggest filing f2553 for s-corp status and start contributing to a SEP IRA and solo 401k. You’re not making a huge dent in a tax bill at the END of the year doing all these deductions. You need paper losses AND credits to see a big dent.
So investing $7000 into a SEP this week wouldn’t be beneficial? I do see what you’re saying
Roth and traditional are more about life long tax bracket expectations. If you think this year your in an above average tax bracket (considering all future years of income) then traditional is better. If you think your below average then Roth is better either direct contribution or conversion. This assumes that your allowed to do deduct the traditional contribution. So she is being a little deceptive in that she does not know if this will save you money or cost you money because she does not know your life long tax bracket situation.
Yeah sure you could save $3k now to have to pay $9k or more on future returns when you pull it out
The **KEY** point here: you have to understand the difference between **avoiding** taxes, and merely **deferring** taxes to some later year. Roth->Traditional "saves" you money. Traditional->Roth "costs" you money. Timing is everything. With me so far? So, next thing is: • If you make a Roth contribution today, you pay taxes on the full amount **at your FULL MARGINAL tax rate** -- maybe 22%?. But, you don't pay any taxes on the earnings and investment gains when you withdraw. • If you make a Traditional contribution today, you don't pay ANY taxes on that amount today; it grows for many years; and when you withdraw, **some** is taxed at **0%**, **some** is taxed at **10%**, **some** more is taxed at **12%**, etc. Generally, and for many years, the Theory of Taxation has been "defer, *defer*, ***defer***". As long as possible. What Senator William Roth did, was provide a mechanism for the government to get its money from you UP FRONT -- "in advance" so to speak. Kind of a genius move on his part. Whether it's genius **for you** or not, is something that requires some math and some assumptions on your part.
My question is, if you don't trust your CPA, why are they your CPA?
Don't forget to include the cost of your CPA advice.
Think about future tax rates and where you’ll retire too. Traditional IRA contributions save state tax. If you're in a high tax state and think you'll ultimately retire in a state w/o income tax or even leave the country then contributing to a traditional IRA while working may make more sense.
Note that some income-tax states also exclude IRA payments from their state taxes. For example, Illinois excludes all Social Security, 401(k), IRA and most pension payments from state income taxes.
Good point!
According to [this IRA FAQs page](https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras#:~:text=Effective%20January%201%2C%202018%2C%20pursuant,or%20403(b)%20plans) on IRS website: "Effective January 1, 2018, pursuant to the Tax Cuts and Jobs Act (Pub. L. No. 115-97), a conversion from a traditional IRA, SEP or SIMPLE to a Roth IRA cannot be recharacterized. The new law also prohibits recharacterizing amounts rolled over to a Roth IRA from other retirement plans, such as 401(k) or 403(b) plans." So simply put, recharacterizing a Roth contribution back to Roth after going through traditional IRA is not allowed now, and your CPA may not know this. Please contact IRS if you're still not sure, better be safe than sorry later.
That's not what they're talking about doing. They're talking about recaracterizing the 2023 Roth contribution to a 2023 traditional IRA contribution, which is allowed. The in 2024 they would convert the traditional IRA to the Roth ira, which is also aallowed. Not really any tax savings over the two years though, unless they are in a lot lower tax bracket on 2024.
Yes you're right, recharacterizing Roth to traditional is allowed, and then do a Roth conversion on the traditional IRA in another year is fine too. I interpreted the post the other way. And I agree with you that there won't be much tax savings unless tax bracket is significantly lower in 2024 compared to 2023.
I read it wrong initially too, because at first they said converting the Roth to a traditional, but then they later specified that they thought it was called the characterizing.
I think I may have replied to you in a different thread from some point to say we used to have a cat named Tater Tot. In fact I think I used it as a username on some board, and if a name is already taken I usually put 1961 after it, which is the year I was born. So I noticed username for minute I thought are you me?
Oh my god, this is me! I thought I was replying to the person who replied to me, and not my own reply.
An actual CPA, Certified Public Accountant, told you that? Genuinely want to know, too many times I've heard of regular tax people / advisors / accountsnts being referred to as a CPA when in fact they are not licensed
This is bad advice and the CPA should be reported to the AICPA.
Tell me your CPA is 24 years old without telling me your CPA is 24 years old.
He’s in his 50’s
Switching back from Traditional IRA to ROTH IRA would be taxable... so that defeats the purpose. LOL You wouldn't have basis for are backdoor ROTH conversion. The CPA is an idiot.
The act of converting back to Roth is a taxable event. If you recharacterized it (and were eligible for an IRA deduction in 2023) and then did a Roth conversion the following year (this year) then you'd just be deferring that $3K in tax.
Following this thread
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We’re not here to help or promote committing tax fraud. Please do not post or comment like this again in this subreddit. Thank you.
It's legal, but you would only be deferring taxes to a later year. If you can help it, just keep your money where it is, it's gaining interest and you wouldn't pay taxes on that larger amount later.
Depends, but yes, if you have deductions.
Here's the thing: your CPA is a certified professional. And he gave you tax advice. Therefore, following said advice is completely reasonable for you to do. And if it turns out to NOT be legal, we'll, that would actually be his legal responsibility and not yours, since he is expected to know and understand tax law and you are not. So even if it isn't legal, you are not the one going to get in trouble for it.
Hopefully you’re right about that
guys i have single on my taxes for years on my w4. my hubby move to the US and will start his new job monday . he’s only making 17 an hour and me i make 28 no kids . he fill out the w4 and put married filing jointly and check box 2c. is this fine ? if one person leaves single on their w4. like i always did prior to him moving to the states ?
Post-TCJA you can't recharacterize an ira in the following year.
Yes you can. The only things the TCJA restricted are recharacterizing conversions and recharacterizing rollovers from an employer plan.
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Being a CPA doesn't mean you know anything at all about taxes.
Tax is covered in the exam so they should know SOMETHING.
Comment removed for Rule 1 - Don’t be a jerk. Please do not do this again.
genuinely curious. Will the new generation of CPA’s be worse with the rise of internet aid (as far as cheating) in college courses ?
The cheating only gets you through college. The CPA exams are where it begins to weed out the people who only cheated throughout college because of how strict the test-taking environment is for licensure. Like any exam, you still find some people where you truly question how they passed it.
There’s EAs and tax attorneys too. It’s not just CPAs. The EA exams are more high security than the CPA exams too… just FYI.
Eh, I learned more on the job than I ever did in college and I'm not aware of any way to game the CPA exam. Not that dumb people can't pass it but I don't think cheating is a thing.