New Tax Law: No more recharacterization by 10/15 of next year
I figured some on this forum would find this interesting:
https://www.financial-planning.com/news/new-tax-bill-no-more-roth-ira-do-overs
A quote from the article:
As a reminder, here’s how a Roth conversion cycle usually works under current tax law.
- First, there's a Roth conversion, in which the client converts a traditional IRA into a Roth IRA and pays income tax on the amount converted.
- If the value of the converted funds declined or there was a change in the client’s financial circumstances, however, they may have wanted to reverse the conversion. Current tax law allowed for a recharacterization, or reversal of the conversion up to October 15 of the year following the conversion. It was one of the rare second chances or do-overs allowed in the tax code.
- Then, after a time limit, those same funds could be re-converted to the Roth. This “cycle” allowed clients to maximize the value of the Roth conversion well after the fact.
The new tax law eliminates the ability to recharacterize a Roth conversion, so going forward Roth conversions will be permanent, even though the true income for the year may not be known by year-end.
Congress seems to believe that many taxpayers were using the recharacterization to game the system, moving in and out of the Roth IRA using certain investment strategies. But I have found that the reason some clients wanted to undo their Roth conversion was usually due to a change in their circumstances like a job loss, big medical bill or other expenses they did not see coming. The recharacterization gave them the flexibility to change their mind for a limited time. Now that window has closed for good.