No Roth Recharacterizations After 2017?

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Newer Updates on the Tax Cuts and Jobs Act

For the latest updates on the Tax Cuts and Jobs Act, read New 2018 Tax Law (Tax Cuts and Jobs Act).

We’ve been waiting to see what our congressmen and women are going to decide for our 2018 tax law. As we’ve already entered the holiday season and can see the new year in sight, they are certainly cutting it close. Unfortunately, they could drag this out into the New Year and retroactively change how we are all being taxed. All we can do is wait and see.

This so-called tax reform has a lot of unfavorable proposals. There are many differences between the House and Senate bills, but so far the two bills agree on repealing the state and local tax deduction, doubling the standard deduction, eliminating exemptions, redoing the income tax brackets, and lowering the corporate tax rate. Many other details have not been settled between the House and the Senate.

Sadly, they both agree on eliminating Roth Recharacterizations.

House Bill:

Subtitle F—Simplification and reform of savings, pensions, retirement

SEC. 1501. Repeal of special rule permitting recharacterization of Roth IRA contributions as traditional IRA contributions.

(a) In general.—Section 408A(d) is amended by striking paragraph (6) and by redesignating paragraph (7) as paragraph (6).

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

Senate Bill:

Subpart B–Retirement Plans


(a) In General.–Section 408A(d) is amended by striking paragraph (6) and by redesignating paragraph (7) as paragraph (6).

(b) Effective Date.–The amendments made by this section shall apply to taxable years beginning after December 31, 2017.

This means that the Roth Segregation strategy, where multiple conversion accounts are converted and then all but the best performing ones are recharacterized before the filing deadline, is no longer a viable strategy.

Instead, conversions will be a much more straight forward process. Select the target conversion amount, convert, and file on that conversion. (This is how our custom tax analysis estimates value anyway.)

Although the repeal of recharacterizations takes away the bit of extra value of the segregation strategy, all of the benefit of conversions remains. Roth conversions are still a wise way to protect your retirement assets from the termites of taxation.

The main thing that changes going forward is that the process is simpler, something I imagine our clients will appreciate.

For 2017 segregations, it is probably safest to recharacterize down to your target before December 31, 2017 (rather than April or October as you are normally accustomed) just in case they interpret “taxable years beginning after December 31, 2017” to apply to 2018 recharacterizations of  2017 conversions.

If you aren’t sure the precise amount you’d like to keep, I’d err on the side of keeping too much for three reasons.

First, Roth conversion targets tend to favor going over your current bracket anyway.

Second, in general, people’s incomes tend to trend upward over time, so this year is almost always a better year to convert than next year.

Third, if they allow recharacterizations for 2017 conversions, then you’ll have enough conversion left to get the precise amount you want.

It is an inconvenience during the holiday season to say the least, but Roth conversions are worth the effort.

Photo by Jennifer Pallian on Unsplash

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Chief Operating Officer, CFP®, APMA®

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 700 financial articles. Her most popular post is "The Complete Guide to Your Washing Machine" while one of her favorites is "Funding a 3-Year-Old’s Roth IRA."