Now that the Senate and the House of Representatives have both passed versions of the new tax reform law, one of the things that got the ax was Roth IRA recharacterizations after December 31, 2017.
Well, maybe a better description is that the Roth recharacterization is on the chopping block and is hanging on by a thread, however, it’s our opinion that it’s highly likely that it will be gone.
If you’re unfamiliar with the Roth recharacterization, it basically gives taxpayers the ability for a “do-over” in case a Traditional IRA was converted to a Roth and then the value took a nosedive. This situation then forces the IRA owner to pay income tax on a converted amount that now exceeds the value of the IRA. Recharacterizing allowed the IRA owner to reverse the transaction in order to eliminate the excess tax.
A common issue is that the December 31st date was problematic for some IRA owners because it was just too soon for them to have all the information they needed to warrant making a solid decision. Until now, this law allowed the reversal to be made as late as October 15th of the year following the year the original Roth conversion was made. However, in both the Senate and House versions of the new law, they eliminate this extra time and December 31, 2017, is the “do it or lose it” date for any recharacterizations of any conversions made in 2017.
So now the question is, should you be making any “last chance” recharacterizations of your Roth IRA conversions by year-end? In our opinion, making a last-minute recharacterization may be the safest course since it can always be effectively reversed by reconverting those funds at issue into a Roth IRA later. But if the new law is put into place as written, then failure to make a recharacterizations by year-end will be final.
While this law will reduce some of the flexibility of Roth conversions it does not mean the Roth conversion planning is off the table. Roth conversion strategies will continue to be a great tax planning tool for most people. What it does mean is that before you do Roth conversions you should have a very solid understanding of what that conversion means to your overall tax situation for the current year as well as the years ahead. It is likely that the majority of the Roth conversion decisions will need to be made during the final months of the year.
If you have any questions regarding your recharacterizations, please do not hesitate contacting a member of your Modern Wealth Management advisor team while there is still time (albeit not much) to discuss the best course of action you could take during the last few weeks of the year.
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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.