The New Tax Law Gives Roth Converters A Little Less Wiggle Room

Published Friday, January 26, 2018 at: 7:00 AM EST

Retirement savers, give thanks! The recently passed tax plan doesn't harm you - much. Congress, for instance, did not lower maximum contributions for tax-deferred plans, like traditional 401(k)s and individual retirement accounts. Nor did Congress tinker with moving your money from a traditional plan into a Roth, where you pay the taxes up front and appreciation grows tax-free and your withdrawals won't ever be taxed.

With one small exception. Until Congress changed the law right before the holidays, some people who did a Roth conversion could decide they wanted to un-do it, which the tax experts call a recharacterization. Not anymore.

Backing out of a Roth conversion was a convenient deal. Maybe at year's end, you discovered that other unanticipated deductions, income or market conditions made the conversion look like a boneheaded idea. Maybe it turned out you lacked the money you thought you'd have to pay the Roth tax. Maybe the stock mutual fund you converted had slid since you moved the fund into a Roth IRA. Why pay taxes on higher-cost stock when you can make the conversion disappear - and maybe later convert at the lower level?

Under the new law, for tax year 2018, you can't have that flexibility anymore. Once you make the switch, you are stuck with your choice. The good news: if you want to recharacterize a 2017 Roth conversion, you have until Oct. 15, 2018 to do it.

This article was written by a professional financial journalist for Preferred NY Financial Group,LLC and is not intended as legal or investment advice.

An individual retirement account (IRA) allows individuals to direct pretax incom, up to specific annual limits, toward retirements that can grow tax-deferred (no capital gains or dividend income is taxed). Individual taxpayers are allowed to contribute 100% of compensation up to a specified maximum dollar amount to their Tranditional IRA. Contributions to the Tranditional IRA may be tax-deductible depending on the taxpayer's income, tax-filling status and other factors. Taxed must be paid upon withdrawal of any deducted contributions plus earnings and on the earnings from your non-deducted contributions. Prior to age 59%, distributions may be taken for certain reasons without incurring a 10 percent penalty on earnings. None of the information in this document should be considered tax or legal advice. Please consult with your legal or tax advisor for more information concerning your individual situation.

Contributions to a Roth IRA are not tax deductible and these is no mandatory distribution age. All earnings and principal are tax free if rules and regulations are followed. Eligibility for a Roth account depends on income. Principal contributions can be withdrawn any time without penalty (subject to some minimal conditions).

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