Sometimes we take risks and make financial decisions anticipating stability or changes in economic factors impacting the outcome of our decisions. Taxpayers who made a regular-IRA-to-Roth-IRA conversion in 2017 may regret their decision due to factors such as market declines. Fortunately, such taxpayers may recharacterize (unwind) their conversions, but they must act no later than October 15, 2018. We have experienced professionals at Gramkow, Carnevale & Seifert & Co., LLC who understand the opportunities and challenges when converting or recharacterizing contributions to a Roth IRA.
Taxpayers who believe Roth IRAs are a better choice for them than regular IRAs may convert funds from regular IRAs to Roth IRAs within 60 days of the distribution. Additionally, a distribution from a qualified retirement plan can be contributed to a Roth IRA through a direct rollover or received by the distributee and contributed (rolled over) to a Roth IRA within 60 days.
Unlike the usual IRA rollover, however, a switch from regular IRA or qualified plan to Roth IRA is not income-tax-free. Rather, it is subject to tax as if it were distributed from the regular IRA or qualified plan and not recontributed to another IRA. It generally isn’t subject to the 10% premature distribution tax.
Many taxpayers who made a 2017 regular-IRA-to-Roth-IRA conversion may find the move was not to their advantage. An example may be because the Roth IRA account has declined in value because of a stock market slump or because the effective income tax rate on the conversion was higher in 2017 than it would otherwise be in 2018 (as a result of new tax law lower income tax rates).
Taxpayers in this situation, may unwind the 2017 transaction by recharacterizing the regular-IRA-to-Roth-IRA conversion no later than October 15, 2018. This involves transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a regular IRA via a trustee-to-trustee transfer.
In addition to a very small window to act upon, there are many complicated factors that need to be considered in making a 2017 recharacterization, including the timing, the age of the taxpayer, considerations of reconverting in 2018 and the time frame for reconverting in 2018, not to mention the reporting aspects of a recharacterization. We have experienced tax professionals and financial planners who understand the multiple aspects of the Roth recharacterization decision and the various planning opportunities that come with it. Please contact us to discuss this issue or any other issues as we look to offer solutions designed to help meet your financial needs