Do You Know About the TCJA Reform Attack on IRA Recharacterizations?

A tax and retirement planning tool used by some individuals has been eliminated with the passage of the Tax Cuts and Jobs Act (TCJA). However, even though we may be losing an effective tax planning opportunity, all is not lost. There are still some ways to use IRA recharacterizations that comply with the TCJA. 

Below are some of the things that you need to know about IRA recharacterizations under the TCJA. If you have additional questions, it may be a good idea to contact a Maryland tax attorney for more information.

IRA Recharacterization is Prohibited

If you convert your traditional IRA to a Roth IRA in 2018 and beyond, the conversion is permanent. You can no longer recharacterize (reverse) the Roth IRA back to a traditional IRA. Roth IRAs can be a useful retirement planning tool because you can withdraw funds tax-free as opposed to paying taxes on withdraws from a traditional IRA. 

You Have A Little Time to Reverse 2017 Conversions

You have until October 15, 2018, to recharacterize 2017 Roth IRA conversions back to traditional IRAs. In other words, you can reverse a conversion you did in 2017 as long as you complete the reversal by October 15, 2018. The reversal is performed as a trustee-to-trustee transaction. One other thing to keep in mind - if you do recharacterize a 2017 Roth account back to a traditional IRA before the deadline, you must wait at least 30 days after the recharacterization date to reconvert the traditional IRA back to a Roth IRA permanently.

The TCJA Does Not Prohibit All IRA Recharacterizations

The TCJA did not do away with all IRA recharacterizations. For instance, you can still recharacterize a regular annual contribution to a Roth IRA as a regular annual contribution to a traditional IRA and vice versa. In other words, the contribution to the first account is ignored as if you made the original contribution to the second account. The recharacterization must be performed by the date your individual income tax return is due for that year.

Are You Confused? Call a Maryland Tax Attorney for Help

Many of the provisions of the TCJA are still being considered by the IRS and guidance is being posted on the IRS website to clarify certain provisions of the tax bill. The provision regarding IRA recharacterizations seems clear. The two major takeaways to remember are:

·      Your ability to reverse the conversion of a traditional IRA to a Roth IRA disappeared as of 2018; BUT,

·      You can perform other types of IRA recharacterizations if they are performed before the date that your individual income tax return is due for that year.

However, you need to be very careful when performing a recharacterization of a traditional IRA account to a Roth IRA account because you must consider the long-term impact since the conversion is now permanent. 

In addition, other types of IRA recharacterizations can be tricky. Maryland tax attorney Steve Thienel is dedicated to assisting clients in Maryland, Virginia, and throughout the DC Metro area. Contact Thienel Law, LLC today to discuss how recharacterizing IRA contributions may impact your short-term and long-term tax planning goals.