The IRS has issued new guidance on recharacterization of Roth conversions, and it is good news for taxpayers who converted in 2017.
As discussed in a previous post entitled “Last Chance for Risk-Free Roth Conversions,” taxpayers can longer reverse unsuccessful Roth IRA conversions. A conversion would normally be deemed unsuccessful if the value of the account at the date of conversion was more than the value at the extended due date of the taxpayer’s income tax return. In other words, the account decreased in value after the conversion. The new rule comes courtesy of the Tax Cuts and Jobs Acts and is effective for “taxable years beginning after December 31, 2017.”
The rule is clear for conversions occurring in 2018 and thereafter, but what about conversions that occurred in 2017? Normally, a taxpayer would have until October 15, 2018 to “recharacterize” (i.e., undo) a 2017 conversion. Some commentators interpreted the new law to say that any attempted recharacterization of a Roth conversion in 2018 will be barred by the Tax Cuts and Jobs Act. Under this theory, if a taxpayer converted a traditional IRA to a Roth IRA in 2017 and did not reverse the transaction by the end of the same year, he is stuck with the conversion for better or worse.
Fortunately, the IRS’ position is more generous. The new guidance states as follows:
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).
Thus, taxpayers who converted a traditional IRA to a Roth IRA in 2017 will have an opportunity to reverse the transaction if the account does not perform as expected.
For more on the Tax Cuts and Jobs Act, click here.
Posted by Joel D. Roettger, JD, LLM, EPLS