Any time there’s major tax reform, there are major questions on how it will affect certain strategies—and individuals. One strategy impacted by the most recent tax reform was the ability to do a Roth IRA “recharacterization.”
Most of the confusion lies with the terminology being used when discussing the Roth conversion strategy. First, let’s make clear what is still available as part of the new tax law:
- Individuals can still do a Roth conversion. None of the new tax law language has taken away an investor’s ability to convert a traditional IRA to a Roth IRA.
- Any Roth contributions that are made can be “recharacterized” to a traditional IRA. This means an individual who “contributes” to a Roth IRA and later realizes the amount of money they make is above the Roth IRA contribution guidelines can “recharacterize” the contributions to a traditional IRA.
- Any Roth “conversions” done in the 2017 tax year can still be “recharacterized” back to a traditional IRA by April 15, 2018.
Let’s discuss what has changed based upon the new tax law:
- Any Roth “conversion” done after 2017 can’t be “recharacterized” back to a traditional IRA.
It’s important to note the language used when discussing Roth conversion strategies. You can still “convert” a traditional IRA to a Roth IRA, you just can’t recharacterize it back to a traditional IRA going forward. You can still “recharacterize” any Roth “contributions” made.
It’s always important to discuss these strategies with your CPA. He or she can keep you up-to-date on any IRS clarifications to the new law and discuss how these strategies may or may not impact your current taxable situation.
The subject matter in this communication is provided with the understanding that Principal® is not rendering legal, accounting, or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.
Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc.