Financial markets were closed on New Year’s Day but I was eager to put in my IRA contribution for the new year. Because my income is likely over the limit for a direct contribution to a Roth IRA, I have to first contribute to a traditional IRA and then convert to Roth later, in a move known as a backdoor Roth.
I have my IRAs with Vanguard. A bug on the Vanguard website made my contribution more complicated but it also gave me an opportunity to demonstrate how to recharacterize an IRA contribution.
When you log in to Vanguard, you first see a list of your accounts and their balances, with a link to each account. However, no matter which account you click on, the next screen always puts your position at the first account. If you’d like to transact in a different account you will have to scroll down and find the right account.
This bug tricked me. My Roth IRA is listed first, before my Traditional IRA. I guess that’s because the letter R comes before the letter T in the alphabet. Even though I clicked on the Traditional IRA in the list on the first page, I was positioned at the Roth IRA on the second page. I then went along and ended up entering the contribution to the Roth IRA.
I realized the mistake soon after I finished entering the contribution. Even though the order wouldn’t be executed until the next day because it was New Year’s Day, there was no way to cancel the order (I’m on the classic “mutual funds only” platform, not the new brokerage account platform). Vanguard doesn’t have customer service on holidays or weekends. Even if I could call customer service, from my past experience, customer service can’t cancel a pending order either. The final order entry page warns that any order entered can’t be canceled or changed, and they really mean it.
My only choice was to wait until the contribution goes into the Roth IRA and then recharacterize the contribution as a contribution to the Traditional IRA. The new tax law disallowed recharacterizing a Roth conversion. Recharacterizing a contribution is still allowed.
If you also find yourself in this situation, here’s how to recharacterize an IRA contribution at Vanguard:
Click on the Forms link on the top right.
There is a field to enter a title or phrase to search for the form you need.
But it didn’t work when I searched for “recharacterize.”
Click on the “View all” link under “Update your account.” I wouldn’t think recharacterizing an IRA contribution is updating my account but that’s where Vanguard has the form.
Toward the bottom there is an entry for “Authorization to Recharacterize IRA Assets.” You can click on the “View and Print” link to print the PDF form or click on the “Complete online” button.
I was expecting that “Complete online” would be a series of interactive steps to identify which contribution in which account should be recharacterized to which other account, but it’s just the same PDF form except you can fill out and submit online with an e-signature through a third-party service called DocuSign. You still need to copy and paste the relevant account numbers.
After I submitted the form through DocuSign, I got a “session expired” message when it sent me back to Vanguard. Fortunately it didn’t affect the form. A few days later I received confirmation from Vanguard that the recharacterization had been completed. I saw in the accounts some fund shares were moved from the Roth IRA to the traditional IRA.
Lessons learned: when you use the Vanguard website, double check which account you are entering the transaction in. It may not be the one you expected. If you contributed to the wrong IRA, you still have one chance to fix it.