Roth Conversion Changes

The Roth IRA has been around for 20 years now.  This seemingly simple retirement savings vehicle allows you to accumulate tax free retirement savings. The Tax Cuts and Jobs Act (TCJA) of 2017 made a significant change to these vehicles, which alters some planning strategies.  Previously, a Roth conversion could be “undone” if changing conditions warranted it.  This was called a recharacterization.

For example, assume you converted your IRA account to a Roth IRA at a time that you thought the market was going to continue to rise.  As it turned out, the market took a steep plunge instead.  Under the old rules, you had until October 15th of the following year to undo that conversion as if it never happened.  Thirty-one days later, you could have reconverted the IRA to a Roth IRA paying a lower tax amount on the conversion as the IRA account would have lost value in the market drop.

The TCJA removed Roth recharacterization as of January 1, 2018.  Therefore, October 15th of 2018 is the last date that you can recharacterize a 2017 Roth IRA conversion. Roth IRA conversions made in 2018 and beyond now become permanent.

From this point on, planning of Roth IRA conversions must be done very carefully.  As you can see, in the past the planning could be less precise because you always had the ability to undo the conversion (either fully or partially).  Now, when trying to keep the conversion amount within a tax bracket, it is wise to wait until near the end of the year. This will give you the advantage of having a more accurate estimate of earnings for the year.

There are many other good tax planning reasons to do Roth IRA conversions.  The tax-free nature of withdrawals can be compelling for many higher middle-income families to help them avoid other tax surprises in retirement.  

It is wise to consult your financial advisor in conjunction with your accountant to determine the precise amount of any Roth conversion.

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Please do so, provided you do not alter the content or embedded links. Also, please include the following information: Robin Delaney is a Tampa Bay wealth manager with Concierge Financial Organization. To learn more about her investment and consulting services, visit www.ourcfoteam.com. Securities and Advisory Services offered through Signator Investors, Inc.  Member FINRA/SIPC.

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