October 15 Marks the Final Day for Recharacterizations

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As part of the Tax Cuts and Jobs Act signed into law in the waning weeks of 2017, recharacterizations of Roth conversions will no longer be allowed effective later this year. Per IRS.gov, any cash or assets converted from a Traditional IRA (or another such pre-tax plan) to a Roth IRA prior to December 31, 2017 may be recharacterized to a pre-tax status until October 15, 2018. Any conversions that occurred on or after January 1, 2018 may not be recharacterized as such.

Furthermore, you may not recharacterize balances converted via transfer or rollover (i.e. pre-tax 401(k) funds to a Roth IRA) regardless of when said transfer or rollover occurred. Parameters surrounding conversions of direct contributions will remain unchanged; if you make a $5,500 (for account holders below age 50) or $6,500 (for account holders age 50 and above) contribution to a Roth IRA but would like to recharacterize it for your Traditional IRA, you may still do so prior to that year’s tax filing deadline.

Always remember that earnings attributed to recharacterized balances—be they contributions or conversions prior to 2018—must be accounted for. For example, if you converted $10,000; your Roth IRA earned $5,000 from the resulting investment; and you elect to recharacterize the full $15,000 balance, the $5,000 in earnings may be subject to taxes. Consult with your accountant or tax professional for more detailed information if your upcoming recharacterization is subject to these conditions.

If you intend to take advantage of the October 15 deadline, we recommend submitting your recharacterization requests as promptly as possible. However, if you intend to do so, bear in mind that any subsequent conversions of those holdings may no longer be reverted to a pre-tax status.

For more information about recharacterizations or self-directed IRAs in general, please don’t hesitate to contact New Direction IRA.

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