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.
Vanguard used to have an online form you can fill out for the recharacterization request. I guess because too many people fill out that from wrong, now Vanguard removed that online form. They still have a paper form but it’s not listed anywhere in the Forms section on their website. They want you to call their retirement specialists and they can recharacterize for you over the phone.
How to request a recharacterization
Start by calling us at 800-205-6189—one of our experienced retirement specialists may be able to complete your recharacterization in a single phone call.
If it can’t be done over the phone, you’ll be instructed to complete and return this form instead:
Source: IRA recharacterizations, vanguard.com
I’m wary of recharacterizing over the phone. It’s too easy to misunderstand each other when you are giving instructions verbally. You can say something wrong because you misunderstood the rep. The rep can do it wrong because they misunderstood you. If you said convert when you meant recharacterize, the transaction can’t be undone afterwards. It’s much better to have your intention clearly documented in writing on a paper form. If you have questions about the paper form you can ask them, but in the end you are still better off if you fill out the paper form and mail it in.
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.