The new tax bill has some important changes impacting IRAs and Rollovers that we wish to share with you. We’ve already received some client questions which we are certain you also may have pondered.
Q: For 2018 and future years, are “backdoor” Roth IRA conversions still available to traditional IRA holders under the Tax Cuts and Jobs Act?
A: Yes, the “Backdoor” Roth IRA strategy is a way to move money into a Roth IRA that can be used by persons who have too much income to be eligible to make a direct contribution to a Roth IRA. The new tax law does NOT change or limit conversions to Roth IRAs, so “backdoor” transfers to Roth IRAs remain available as before. In 2018, married couples with Modified Adjusted Gross Income (MAGI) of $199,000 or more, and single persons with MAGI of $135,000 or more, are ineligible to make any direct contributions to a Roth IRA. No income limitation applies to persons converting Traditional IRAs or 401Ks to Roth IRAs, or making contributions to a nondeductible Traditional IRA followed by a rollover/conversion to a Roth IRA.
CAUTION: There may be income tax consequences to any Roth IRA conversions, so check with your tax advisor prior to initiating the rollover.
Q: What are the new rules on recharacterizing an IRA rollover?
A: This is important so pay attention. The new tax law eliminates the ability to use “recharacterization” to reverse a conversion of a Traditional IRA or 401(k) funds into a Roth IRA if you later decide doing so was a mistake. Beginning in 2018, when you make a backdoor conversion (whether this occurred in 2017 or in 2018) it will be final. There’s no longer the ability to “undo” it later regardless of the reason. So look before you leap!
Q: What if I made a 2017 or 2018 Roth IRA contribution and later determine my income was too high such that I was ineligible to make a Roth IRA?
A: The new law preserves, as before, the option to convert an annual contribution made to a Roth IRA into one made to a Traditional IRA, and likewise to convert a contribution to a Traditional IRA into one made to a Roth IRA. This option is especially beneficial for individuals who misjudge their actual income for the year at the time they make a contribution — and so misjudge their ability to contribute to a Roth IRA under income-level eligibility rules, with the result that they contribute to the wrong type of IRA. The new law preserves the ability to fix this type of IRA mistake later.