IRS Ruling: Recharacterizations of 2017 Conversions

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On January 18, 2018, the IRS updated their Frequently Asked Questions page “IRA FAQs – Recharacterization of Roth Rollovers and Conversions” to come into line with the new Tax Cuts and Jobs Act.

The new updated text includes explicit clarification that “A Roth IRA conversion made in 2017 may be recharacterized as a contribution to a traditional IRA if the recharacterization is made by October 15, 2018.”

After these 2017 conversions are finalized though, the only recharacterizations that will be allowed are those undoing a regular Roth IRA contribution. This means that both Roth conversions and backdoor Roth conversions will be final in 2018 and beyond.

Here’s the full FAQ Page:

What is a recharacterization of a contribution to a traditional or Roth IRA?

A recharacterization allows you to treat a regular contribution made to a Roth IRA or to a traditional IRA as having been made to the other type of IRA. A regular contribution is the annual contribution you’re allowed to make to a traditional or Roth IRA: up to $5,500 for 2018, $6,500 if you’re 50 or older (see IRA Contribution Limits for details). It does not include a conversion or any other rollover.

How do I recharacterize a regular IRA contribution?

To recharacterize a regular IRA contribution, you tell the trustee of the financial institution holding your IRA to transfer the amount of the contribution plus earnings to a different type of IRA (either a Roth or traditional) in a trustee-to-trustee transfer or to a different type of IRA with the same trustee. If this is done by the due date for filing your tax return (including extensions), you can treat the contribution as made to the second IRA for that year (effectively ignoring the contribution to the first IRA).

Can I recharacterize a rollover or conversion to a Roth IRA?

Effective January 1, 2018, pursuant to the Tax Cuts and Jobs Act (Pub. L. No. 115-97), a conversion from a traditional IRA, SEP or SIMPLE to a Roth IRA cannot be recharacterized. The new law also prohibits recharacterizing amounts rolled over to a Roth IRA from other retirement plans, such as 401(k) or 403(b) plans.

How does the effective date apply to a Roth IRA conversion made in 2017?

A Roth IRA conversion made in 2017 may be recharacterized as a contribution to a traditional IRA if the recharacterization is made by October 15, 2018. A Roth IRA conversion made on or after January 1, 2018, cannot be recharacterized. For details, see “Recharacterizations” in Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs).

Page Last Reviewed or Updated: 18-Jan-2018

Roth conversions still remain a very valuable tax strategy, even if you accidentally convert more than the presumed ideal amount. However, this ruling will allow you to get your 2017 conversions fixed at the precise amount that you want.

Photos by Patrick Fore on Unsplash

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Megan Russell has worked with Marotta Wealth Management most of her life. She loves to find ways to make the complexities of financial planning accessible to everyone. She is the author of over 800 financial articles and is known for her expertise on tax planning.