Broker Check

603-471-0900

IRA Tips, Part II

| August 17, 2018

In July’s post we covered changes to deductions for IRAs resulting from the 2017 Tax Cuts and Jobs Act. For this month’s, we’ll look at the change to the “do-over” option on Roth Conversions.

Prior to 2018, those who converted money from a traditional IRA to a Roth IRA, paying applicable income taxes on this untaxed money, had the option to recharacterize (or reverse) this decision up until October 15th of the year following conversion.  Unfortunately, for conversions in 2018 and going forward, this will no longer be an option. 

But there’s potentially good news for those of you who initiated a conversion in 2017:  you can still recharacterize until October 15th this year.  It may make sense to take advantage of the lower 2018 tax rates by recharacterizing a 2017 Roth Conversion, which would replace the presumably higher 2017 rates from prior to the Cuts and Jobs Act.  

That said there are specific caveats to this and it is important to review your specific situation and/or discuss with your tax professional.  For example, the returns on the invested funds in the Roth would need to be considered.  If there are significant gains since the conversion, it may not make sense to recharacterize. 

Here are a few tips for those considering a Roth Conversion now or in the future, though again, it’s always smart to consult a professional before moving forward:

  1. Consider making the conversion toward the end of the year when your income tax situation is a little clearer. It may decrease the potential need for a do-over.
  2. Make the conversion during a dip in market performance to help maximize its value.
  3. Look at smaller, partial conversions to manage brackets year-by-year. This may be especially useful for those who are concerned about future tax increases and want to take advantage of the lower rates now, but don’t want to bump into the next bracket in doing so.

 

Content in this material is for general information only and not intended to provide specific financial, tax advice or recommendations for any individual. Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.