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I switched jobs in February of 2013 and rolled over my 401(k) to a Rollover IRA, which as I understand it, is equivalent to a Traditional IRA.

Over 2013, I contributed $4125 to the Rollover IRA and planned on making the final $1375 before April 15, 2014. My contributions have already been used to buy mutual funds.

But after preparing my tax return, I realized our MAGI exceeded the income limit for making deductible contributions. I am married, filing jointly, and my wife's employer has a retirement plan. As far as I understand it, that income limit is $115,000. My wife and I made more than that.

My wife has also contributed the maximum ($5500) to a Roth IRA.

What should I do? Do I move the money into a Roth IRA instead? How does form 8606 apply in this circumstance?

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  • Note for the future. Don't commingle funds. The rolled over 401K was clean money. Mixing money that you thought would be regular IRA but depending on MAGI might be Roth IRA muddied the situation. – mhoran_psprep Feb 14 '14 at 12:27
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What you should do is re-characterize contributions from being a Traditional IRA contributions to Roth IRA contributions. Call your broker that holds the account and ask how to do that.

Note: re-characterize means you don't move the money to Roth account, you retroactively say that it was a Roth account to begin with. By re-characterization you're saying that your contribution, and all the earnings on it, are Roth from the start. This is different from moving (rolling over), and moving is not advised if you have significant Rollover IRA sums.

If your MAGI is over the limit for Roth IRA as well (see table 2-1 in pub 590) then you keep it as non-deductible IRA contribution and report it on form 8606. In this case your wife's Roth IRA contribution should be recharacterized as traditional and reported as non-deductible on form 8606 as well.

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  • If I recharacterize my contributions, do I still need to report it on an 8606? – Sam Jones Feb 14 '14 at 3:03
  • No, form 8606 is only used to report non-deductible Traditional IRA contributions and Roth IRA conversions (rollover from Traditional to Roth). – littleadv Feb 14 '14 at 3:22
  • Just spoke to an accountant. It sounds like another option I have is to leave the money where it is and submit form 8606 to establish basis for the non-deductible contributions. I have to keep track of that basis on my own going forward. – Sam Jones Feb 15 '14 at 16:39
  • @SamJones I'd advise against it. non-deductible basis for a traditional IRA is much less advantageous than Roth IRA - you pay taxes (as ordinary income) on earnings and you still have to withdrawal RMD, so you don't get any benefit essentially. – littleadv Feb 15 '14 at 20:34
  • After doing some more research, I more or less came to the same conclusion. I think it's going to be messy to recharacterize, but much better in the long run. – Sam Jones Feb 15 '14 at 20:42
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You don't need to recharacterize. If you are married and your spouse is covered under a work retirement plan and you are not the AGI limit in 2013 for folks that are married and filing jointly is $178,000 before the phase out begins. That was raised to $181,000 for 2014. A quick call to the broker/bank where your IRA is should confirm this.

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  • The OP mentioned he had 401k at the old job, i.e.: he was covered as well at least during part of the year, so the AGI limit you stated doesn't apply to him. – littleadv Feb 14 '14 at 9:12

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