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Recharacterization of Roth conversion

The last published bill (Available at

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or
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addresses Roth Recharacterization. It basically eliminates any strategy that would undo any conversion, leaving only the ability to reverse a deposit that one might not be permitted to make in the first place.

The wording from P639 of PDF or 116 page numbering -

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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. ______________________________________________________________________

I read this to mean that we have one last opportunity, to recharacterize any 2017 conversions in the usual way, up till filing 2017 taxes, given the wording "effective...... after 12/31/17"

The response I got from Jeff Levine, a former partner of Ed Slott, was that he read this as saying the recharacterization could not occur after the end of this year.

If Jeff is correct, anyone using any of the many variations of this strategy are in for a painful surprise when the broker rejects the form in April.

Reply to
JoeTaxpayer
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I'm with you. If you recharacterize a 2017 conversion before 4/15/18, it affects the 2017 tax year.

Reply to
Barry Margolin

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

I translate that to mean backdoor conversions can not be made to any tax year that commences after 2017. One is allowed to make a 2017 tax year recharacterization on or up to the due date including extensions.

Therefore, I also see no issue with accomplishing a 2017 recharacterization in calendar year 2018.

Reply to
Alan

What was the ROTH recharacterization advantage anyway that was eliminated?

Reply to
bh2os62

When you convert an IRA to a Roth, presumably (at least for this discussion) the IRA was pretax money and tax is due on the amount converted.

The simplest issue is that you might not know what tax bracket you are in when you convert, and only realize at tax time that the $20K converted has pushed you $10K into the next bracket. The recharacterization lets you back out the exact amount you wish, so your taxable income is the number that keeps you from that bracket. This example assumes cash conversion, and no real "gaming the system."

The other opportunity, which is what I suspect was part of why this is getting written out of the code is the impact on stock conversion.

Say I own 2 stocks, and some cash. I convert (to 3 separate Roth accounts) in January. Now it's 15 months later. And from $20K value each, stock A is worth $40K, stock B, $10K, and the cash, $20001. I'd recharacterize Stock B and the cash. And I'd pay tax on the $20K stock A I converted, but I'd have a $40K asset in my Roth.

This second example can be used for anyone who had either multiple stock or asset classes. And could be made as simple as conversions of just 2, keeping the positive results or recharacterizing the negative, all the way to a dozen target Roth accounts to just take advantage of the assets that were up quite a bit.

Disclosure - I used the former strategy to convert my MIL's IRA to Roth over nearly 15 years, and just topping off her 15% bracket each year.

Reply to
JoeTaxpayer

I should not have said "backdoor conversions" in my reply. That rule still exists. It is the unraveling of a Roth Conversion (recharacterization) that was repealed. So, you have until the due date of your 2017 tax return to recharacterize a Roth Conversion you made in

2017.
Reply to
Alan

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