Recharacterization of Roth conversion

[JoeTaxpayer]

The last published bill (Available at
http://docs.house.gov/billsthisweek/20171218/CRPT-115HRPT-466.pdf
or http://tinyurl.com/2017taxbill

addresses Roth Recharacterization. It basically eliminates any strategy
that would undo any conversion, leaving only the ability to reverse a
deposit that one might not be permitted to make in the first place.

The wording from P639 of PDF or 116 page numbering -

_________________________________________________________________

The conference agreement follows the House bill and the Senate amendment
with a modification. Under the provision, the special rule that allows a
contribution to one type of IRA to be recharacterized as a contribution
to the other type of IRA does not apply to a conversion contribution to
a Roth IRA. Thus, recharacterization cannot be used to unwind a Roth
conversion. However, recharacterization is still permitted with respect
to other contributions. For example, an individual may make a
contribution for a year to a Roth IRA and, before the due date for the
individual’s income tax return for that year, recharacterize it as a
contribution to a traditional IRA.

Effective date.−The provision is effective for taxable years beginning
after December 31, 2017.
______________________________________________________________________


I read this to mean that we have one last opportunity, to recharacterize
any 2017 conversions in the usual way, up till filing 2017 taxes, given
the wording "effective...... after 12/31/17"

The response I got from Jeff Levine, a former partner of Ed Slott, was
that he read this as saying the recharacterization could not occur after
the end of this year.

If Jeff is correct, anyone using any of the many variations of this
strategy are in for a painful surprise when the broker rejects the form
in April.

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[Barry Margolin]

In article <p15t22$6pf$1...@dont-email.me>,

JoeTaxpayer <JoeTa...@comcast.net> wrote:

> The last published bill (Available at
> http://docs.house.gov/billsthisweek/20171218/CRPT-115HRPT-466.pdf
> or http://tinyurl.com/2017taxbill
>
> addresses Roth Recharacterization. It basically eliminates any strategy
> that would undo any conversion, leaving only the ability to reverse a
> deposit that one might not be permitted to make in the first place.
>
> The wording from P639 of PDF or 116 page numbering -
>
> _________________________________________________________________
>
> The conference agreement follows the House bill and the Senate amendment
> with a modification. Under the provision, the special rule that allows a
> contribution to one type of IRA to be recharacterized as a contribution
> to the other type of IRA does not apply to a conversion contribution to
> a Roth IRA. Thus, recharacterization cannot be used to unwind a Roth
> conversion. However, recharacterization is still permitted with respect
> to other contributions. For example, an individual may make a
> contribution for a year to a Roth IRA and, before the due date for the
> individual’s income tax return for that year, recharacterize it as a
> contribution to a traditional IRA.
>

> Effective date.-The provision is effective for taxable years beginning

> after December 31, 2017.
> ______________________________________________________________________
>
>
> I read this to mean that we have one last opportunity, to recharacterize
> any 2017 conversions in the usual way, up till filing 2017 taxes, given
> the wording "effective...... after 12/31/17"
>
> The response I got from Jeff Levine, a former partner of Ed Slott, was
> that he read this as saying the recharacterization could not occur after
> the end of this year.
>
> If Jeff is correct, anyone using any of the many variations of this
> strategy are in for a painful surprise when the broker rejects the form
> in April.

I'm with you. If you recharacterize a 2017 conversion before 4/15/18, it
affects the 2017 tax year.

--
Barry Margolin
Arlington, MA

[Alan]

On 12/17/17 9:17 AM, Barry Margolin wrote:
> In article <p15t22$6pf$1...@dont-email.me>,
> JoeTaxpayer <JoeTa...@comcast.net> wrote:
>
>> The last published bill (Available at
>> http://docs.house.gov/billsthisweek/20171218/CRPT-115HRPT-466.pdf
>> or http://tinyurl.com/2017taxbill
>>
>> addresses Roth Recharacterization. It basically eliminates any strategy
>> that would undo any conversion, leaving only the ability to reverse a
>> deposit that one might not be permitted to make in the first place.
>>
>> The wording from P639 of PDF or 116 page numbering -
>>
>> _________________________________________________________________
>>
>> The conference agreement follows the House bill and the Senate amendment
>> with a modification. Under the provision, the special rule that allows a
>> contribution to one type of IRA to be recharacterized as a contribution
>> to the other type of IRA does not apply to a conversion contribution to
>> a Roth IRA. Thus, recharacterization cannot be used to unwind a Roth
>> conversion. However, recharacterization is still permitted with respect
>> to other contributions. For example, an individual may make a
>> contribution for a year to a Roth IRA and, before the due date for the

>> individual’s income tax return for that year, recharacterize it as a

>> contribution to a traditional IRA.
>>
>> Effective date.-The provision is effective for taxable years beginning
>> after December 31, 2017.
>> ______________________________________________________________________
>>
>>
>> I read this to mean that we have one last opportunity, to recharacterize
>> any 2017 conversions in the usual way, up till filing 2017 taxes, given
>> the wording "effective...... after 12/31/17"
>>
>> The response I got from Jeff Levine, a former partner of Ed Slott, was
>> that he read this as saying the recharacterization could not occur after
>> the end of this year.
>>
>> If Jeff is correct, anyone using any of the many variations of this
>> strategy are in for a painful surprise when the broker rejects the form
>> in April.
>
> I'm with you. If you recharacterize a 2017 conversion before 4/15/18, it
> affects the 2017 tax year.
>

Section 13611 of the Tax Bill contains the repeal of the backdoor
conversion. It does this by adding a new clause to IRC Section
408A(d)(6)(B). That clause effectively says you can not do it. Then it
says:

"(b) EFFECTIVE DATE.—The amendments made by this section shall apply to

taxable years beginning after December 31, 2017."

I translate that to mean backdoor conversions can not be made to any tax
year that commences after 2017. One is allowed to make a 2017 tax year
recharacterization on or up to the due date including extensions.

Therefore, I also see no issue with accomplishing a 2017
recharacterization in calendar year 2018.

[bh2...@gmail.com]

What was the ROTH recharacterization advantage anyway that was eliminated?

[JoeTaxpayer]

On 12/28/17 10:35 AM, bh2...@gmail.com wrote:
>
> What was the ROTH recharacterization advantage anyway that was eliminated?
>

When you convert an IRA to a Roth, presumably (at least for this
discussion) the IRA was pretax money and tax is due on the amount
converted.

The simplest issue is that you might not know what tax bracket you are
in when you convert, and only realize at tax time that the $20K
converted has pushed you $10K into the next bracket. The
recharacterization lets you back out the exact amount you wish, so your
taxable income is the number that keeps you from that bracket. This
example assumes cash conversion, and no real "gaming the system."

The other opportunity, which is what I suspect was part of why this is
getting written out of the code is the impact on stock conversion.

Say I own 2 stocks, and some cash. I convert (to 3 separate Roth
accounts) in January. Now it's 15 months later. And from $20K value
each, stock A is worth $40K, stock B, $10K, and the cash, $20001.
I'd recharacterize Stock B and the cash. And I'd pay tax on the $20K
stock A I converted, but I'd have a $40K asset in my Roth.

This second example can be used for anyone who had either multiple stock
or asset classes. And could be made as simple as conversions of just 2,
keeping the positive results or recharacterizing the negative, all the
way to a dozen target Roth accounts to just take advantage of the assets
that were up quite a bit.

Disclosure - I used the former strategy to convert my MIL's IRA to Roth
over nearly 15 years, and just topping off her 15% bracket each year.

[Alan]

I should not have said "backdoor conversions" in my reply. That rule
still exists. It is the unraveling of a Roth Conversion
(recharacterization) that was repealed. So, you have until the due date
of your 2017 tax return to recharacterize a Roth Conversion you made in
2017.