Legal Blog
The Weekly Scenario: “Tax Cuts and Jobs Act” and the Ability to Re-characterize Roth IRA Conversions
Question: Has the ability to re-characterize Roth IRA conversions changed under the “Tax Cuts and Jobs Act”?
Answer: The Tax Cuts and Jobs Act eliminated the ability to re-characterize Roth IRA conversions (starting January 1, 2018). 2018 will be the last year that an individual can undo a Roth IRA conversion (Roth IRA conversions after December 31, 2017 will not be permitted). To successfully re-characterize, the taxpayer must transfer the converted funds and the income or loss attributable, by October 15.
Why would a taxpayer wish to reverse a 2017 Roth IRA conversion?
Of the many reasons why a taxpayer would reverse a 2017 Roth conversion, here is my take:
- The value of the investments in the converted Roth IRA has gone down since the date of the conversion;
- The taxpayer does not have the funds to pay the taxes from the conversion;
- The taxpayer earned more income than originally thought and the additional income from the Roth IRA conversion put the taxpayer into a higher federal income tax bracket (which means no Roth IRA conversion is permitted as Roths have an income threshold).
Comment: I believe the IRS decided to eliminate the ability to re-characterize Roth IRA conversions because taxpayers were increasingly playing games with these conversions. As noted above, it became easy to do a Roth conversion and then take a “wait to see” approach. If the value of the account dropped in the meantime (before October 15), then the taxpayer could simply return the funds (and the earned income) and go back to the non-Roth account (and not have to pay the tax on the converted assets).
As always, if you have any questions or would like to learn more, please contact Steve Shane at sshane@offitkurman.com or .
ABOUT STEVE SHANE
Steve Shane provides strategic counseling to clients in need of estate administration, charitable giving and business continuity planning while minimizing estate, gift, and generation-skipping transfer tax exposure. He offers legal guidance to clients on asset protection and the proper disposition of assets in accordance with the client’s objectives, while employing tax planning techniques such as the use of irrevocable trusts, life insurance planning, lifetime gifts and charitable trust. He is also experienced with drafting documents for business planning, the incorporation and application for exemption for Private Foundations and the administration of decedents’ estates.
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