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Last Chance to Recharacterize Roth IRA Conversions

September 21, 2018

If you made a Roth IRA conversion in 2017 and now regret that, have no fear. If you act by October 15, you can unwind that transaction.

There are a lot of tax-savvy reasons to convert a regular IRA into a Roth IRA. But if you made a Roth IRA conversion in 2017 and you now regret it, you have until October 15, 2018, to unwind that transaction. But regular-to-Roth IRA conversions made in 2018 and beyond will no longer be eligible for that privilege under the Tax Cuts and Jobs Act (TCJA).

2017 Roth Conversion Do-Overs

Under prior law, you could rewind a Roth conversion if the market value of the account dropped before the recharacterization deadline (October 15 of the tax year following the conversion). For example, suppose you converted a regular IRA with a market value of $100,000 in early 2017. Now, the value of the underlying assets is only $70,000. If you do nothing, you’ll have effectively paid tax on $30,000 of forgone value.

If you act by October 15, 2018, however, you can rewind the ill-fated 2017 conversion. You also might want to reverse a Roth conversion that pushed you into a higher income tax bracket for 2017 — or it might make sense to postpone your conversion from 2017 to 2018, if your marginal tax rate will be lower in 2018 under the TCJA.

Recharacterizations are done via a trustee-to-trustee transfer of the converted amount (plus earnings, or minus losses) from the Roth IRA back to a regular IRA.

Future Roth Conversions

Under the TCJA, you can no longer reverse regular-to-Roth IRA conversions made after December 31, 2017. The TCJA also prohibits recharacterizing amounts rolled over after 2017 to a Roth IRA from other retirement plans, such as 401(k) or 403(b) plans.

Although recharacterization can’t be used to rewind a Roth conversion after 2017, it’s still permitted with respect to other contributions. For example, you can still make a contribution for 2018 to a Roth IRA and, recharacterize it as a contribution to a regular IRA before the due date of your 2018 income tax return (April 16, 2019, for residents of Maine and Massachusetts due to Patriot’s Day and April 15, 2019, for all others).

Look Before You Leap

To clarify, the TCJA does not prohibit eligible taxpayers from 1) contributing directly to a Roth IRA account, 2) contributing to a regular IRA and later converting the regular IRA to a Roth IRA, or 3) making an annual contribution to one type of IRA and then reversing it by Tax Day. It just permanently eliminates the option of rewinding a Roth conversion from a regular IRA or other retirement plans.

Roth IRAs still make good sense for many people. But, thanks to the TCJA, it’s more important than ever to discuss the pros and cons of Roth IRA conversions with an experienced tax professional. Contact our private client services group for more information.

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