Navigating Tax Reform: Restriction on Unwinding Roth Conversions
01 Aug 2018
For months on end, news reports and politicians have repeated ad infinitum the major provisions of the Tax Cuts and Jobs Act of 2017 (the “Act”), such as the reductions in corporate and individual income tax rates and the deductions available to pass through entities. But many provisions in the law that have received much less publicity are nonetheless extremely important to the millions of people and businesses such provisions affect. In this series, “Navigating Tax Reform,” I will explore some of these obscure provisions, and their implications for businesses and individuals. My intention is to arm you with information and resources so you can make the best decisions possible regarding your tax strategy.
Restriction on Unwinding Roth Conversions
The Act limits the ability of IRA holders to unwind certain conversions of traditional IRAs into Roth IRAs.
Holders of IRAs can recharacterize contributions to traditional IRAs as Roth contributions, and can recharacterize Roth contributions as traditional contributions. Under pre-Act law, IRA holders could also recharacterize the conversion of a traditional IRA into a Roth IRA. This allowed individuals to unwind conversions if they determined that the conversions were undesirable. When a recharacterization occurred, the individual was treated, for all tax purposes, as if he or she had not made the conversion. Such recharacterizations were required to include any net earnings related to the conversion.
Under the Act, conversions from traditional IRAs to Roth IRAs can no longer be recharacterized. This method of unwinding an IRA Roth conversion is no longer available. Therefore, IRA holders should now carefully confirm that IRA Roth conversions are in their best interests before making such conversions. This change is effective for plan years beginning after December 31, 2017.
Note that the change in the law does not prohibit the recharacterization of specific contributions. An IRA holder can still recharacterize Roth contributions as traditional and vice versa. The change in law just prevents unwinding the conversion of an entire IRA from a traditional to a Roth IRA.
About the Author
Eric R. Benson is a business law attorney with Ireland Stapleton Pryor & Pascoe. His practice focuses on advising businesses on legal matters throughout the life cycle of the business. He also advises nonprofit organizations regarding formation, qualification for tax exempt status, mergers and acquisitions, and general matters related to their operations. You can reach him at 303-628-3605 or firstname.lastname@example.org.
What is written here is intended as general information, and is not to be construed as legal advice. If legal advice is needed, you should consult an attorney.