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Recharacterize in 2018?


OxLobber

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On 12/13/2017 at 2:37 PM, card said:

Good article by Ed Slott from Dec. 4. Don't think anything has changed yet.

https://www.onwallstreet.com/news/new-tax-bill-no-more-roth-ira-do-overs

Thanks, Card - the following paragraph from the article essentially answered my question:

"Some of those following this legislation have commented that this repeal may only be for 2018 Roth conversions, so in that case you would still have until October 15, 2018 to undo a 2017 Roth conversion. I don’t see it that way and wouldn’t risk taking that position with a client. The provision states that recharacterizations are repealed after this year, meaning that the recharacterization option no longer exists in 2018. Even if this is not perfectly clear yet, I still would not take a chance. Advisors should protect clients and assume that recharacterizations of 2017 Roth conversions will no longer be available after year-end."

I am concerned that waiting until the legislation is finalized/clarified will not afford sufficient time to convert in 2017.

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Right. Here's the final language in the just-released Conference Report, on page 304:

(b) EFFECTIVE DATE.—The amendments made by

13 this section shall apply to taxable years beginning after

14 December 31, 2017.

However, the Conference bill applies the new anti-recharacterization rule only to Roth conversions (i.e., converting a traditional IRA to a Roth), not to a Roth rollover from an employer plan.

 

 

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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Here's the Conference Committee explanation. No clarification of effective date:

Conference Agreement: The conference agreement follows the House bill and the Senate amendment with a modification. Under the provision, the special rule that allows a contribution to one type of IRA to be recharacterized as a contribution to the other type of IRA does not apply to a conversion contribution to a Roth IRA. Thus, recharacterization cannot be used to unwind a Roth conversion. However, recharacterization is still permitted with respect to other contributions. For example, an individual may make a contribution for a year to a Roth IRA and, before the due date for the individual’s income tax return for that year, recharacterize it as a contribution to a traditional IRA.
 
Effective date.
The provision is effective for taxable years beginning after December 31, 2017.
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Right. So any trustee-to-trustee transfer of a converted amount from a Roth IRA to a traditional IRA that actually takes place in 2018 (e.g., the request to transfer is made after 12/31/2017, the custodian actually makes the transfer after 12/31/2017) will not be good.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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 I disagree with both of Luke Bailey's posts. The second one first:

Conversions will still be allowed after 2017, they just cannot be recharacterized. 

Now for the first one: Both conversions from traditional to Roth and qualified rollovers from employer-sponsored plans to Roth IRAs will not be eligible for recharacterization. Section 408(A)(d)(3) specifically mentions eligible retirement plans under Section 402(c)(8)(B), which includes all qualified employer plans that can have rollovers done to Roth IRAs. Therefore, a qualified rollover to a Roth IRA from such a plan will not be eligible for recharacterization to a traditional IRA beginning in 2018. The pertinent text of the law::

(a) IN GENERAL. — Section 408A(d)(6)(B) is amended by adding at the end the following new clause:

(iii) CONVERSIONS. — Subparagraph (A) shall not apply in the case of a qualified rollover contribution to which subsection (d)(3) applies (including by reason of subparagraph (C) thereof).

(b) EFFECTIVE DATE. — The amendments made by this section shall apply to taxable years beginning after December 31, 2017.

 

 

 

 

 

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As far as Ed Slott's article, it is fine as far as it goes. We have no guidance from IRS addressing this issue, and probably won't get any before year-end. I believe conversions done in taxable year 2017 can still be recharacterized by the October 15, 2018 deadline, as that transaction applies to taxable year 2017 - not 2018. In fact, the taxpayer must attach an explanation of the transaction to his/her 2017 return. However,  if there is no IRS guidance before year end, and if there is a significant amount of money involved, taxpayers will have to decide whether to take a chance that the law will be interpreted that way. This can be a catch-22 for some individuals, because they may very well want to convert in 2017 for tax reasons, but still have the option to recharacterize in 2018 if their converted assets lose value.

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  • 3 weeks later...

PenServ which publishes an IRA newsletter came out yesterday and indicated that they'd been informed by "an official IRS source" that 2017 conversions can be recharacterized until October 15, 2018.  This only applies to conversion made during 2017 and will not extend to conversions done on or after January 1, 2018.

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  • 2 weeks later...

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