Roth Recharacterizations Repealed

December 20, 2017

This is the second in our series Last Minute Actions for the New Tax Law.

We’re pleased to say that the strict interpretation of the effective date for this change in the law, which we initially thought was most likely, will not apply. We have confirmed that the IRS will be taking the position that 2017 Roth conversions can be recharacterized until October 15, 2018.

Moving money from a traditional retirement account to a Roth IRA can be a smart move, but sometimes it backfires due to a change in personal circumstances or, more often, investment losses in the converted account. We haven’t had to worry too much about this possibility, though, because we could recharacterize a Roth conversion — in other words, undo it — at any time up until October 15 of the following year. The new law does away with this opportunity. As of 2018, we’re no longer allowed to reverse these transactions.

It would make sense to have this provision apply to conversions after 2017, so that people who did conversions before the law was enacted late in 2017 would still be able to undo them. Yet the law simply says this change takes effect in 2018, creating ambiguity on this point. We initially believed the strict interpretation was more likely, but are pleased to learn that the IRS will permit 2017 Roth conversions to be recharacterized (undone) until October 15, 2018.

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