What if Tax Reform Passes? Convert Your IRA to Soon?


Did you convert your Traditional IRA to a Roth IRA? Do you worry you may have done it too soon if Tax Reform Passes?

A lot of people are asking the question, “What if tax reform passes? What will happen since I When you convert a traditional IRA to a Roth IRA, you have to pay the tax on the conversion. However, individuals frequently do that so they can take advantage of future tax-free accumulations. Distributions from Roth IRAs are generally tax free, including any earnings (accumulations) while the account is a Roth account.

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Tax Law Allows Individiduals to Undo an IRA Transfer and Reconvert

Sounds like religion doesn’t it? But it is not. It is common tax practice. Tax law allows individuals who convert in one year to undo that conversion by a procedure known as recharacterization. The procedure has been in use for years, primarily by individuals whose invest IRA funds into stocks.  An individual converts from their traditional IRA funds to a Roth IRA only to see the value of their Roth IRA decline after the conversion. This is usually due to stock market fluctuations. Recharacterizations are also used by individuals who convert their traditional IRA to a Roth IRA and then found they could not or did not want to pay the conversion tax.
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What If Tax Reform Passes? What is the wait period to undo an IRA?

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Example: For years, Jack has been making deductible traditional IRA contributions. Then, during the summer of 2017, Jack decided to convert $25,000 of those traditional IRA funds into a Roth IRA. After the conversion is doen, late in 2017, Congress passes and the President signs a tax reform bill. The tax reform fill reduces Jack’s marginal tax rate in 2018. To take advantage of the lower tax rate, Jack recharacterizes (undoes) the conversion back to a traditional IRA for 2017. He then reconverts the funds back to a Roth IRA in 2018. To do that, Jack first transfers the $25,000 (plus earnings or minus losses since the original conversion) back to a traditional IRA by way of a trustee-to-trustee transfer (it’s OK for the transfer to be with the same financial institution). He could make the recharacterization as late as October 15, 2018, but chooses to do so on January 15, 2018. Then, after making the transfer back to the traditional IRA, Jack reconverts the amount back to a Roth IRA on Feb. 20, 2018.

Questions About Conversions and Recharacterizations After Tax Reform?

Phew, that’s quite the example isn’t it? So that is basically what happens when you ask, “What if Tax Reform passes? For more information on recharacterizations and conversions, and how they might fit into your tax planning, please give Alex Franch, BS EA  a call at 781.849.7200 or email us at contactus@worthtax.com.

Tax Reform and IRA Conversion Sources and Resources

For more information, call Alex Franch at 781.789.7200. WorthTax has locations in Norwell, Dedham, and Weymouth, Massachussetts.
Alex Franch

Mr. Franch is a Tax Specialist and Partner at Joseph Cahill & Associates / WorthTax. He has a diverse background including a Bachelor of Science from Boston College in Mathematics and extensive military service. Mr. Franch is an Enrolled Agent and has eight years of tax preparation experience. He has been serving individuals, families, and businesses for several years with tax and financial planning strategies and is a junior partner with the firm. Mr. Franch is licensed by the Financial Industry Regulatory Authority (FINRA) with a Series 6, 63, 65, and 7, and by the Commonwealth of Massachusetts Division of Insurance.

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