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Last November, Kingdom Trust discussed how Roth recharacterizations were on the chopping block in the tax bill under consideration. This impactful tax legislation went through several forms and revisions before passing both chambers of Congress. President Trump signed the final version, the Tax Cuts and Jobs Act, into law on December 22.
A provision of the law that could directly affect IRA holders is the repeal of recharacterizations of conversions. As a result, many wonder when this provision will go into effect—or if it already has.
A 2017 conversion can still be recharacterized, but only until October 15, 2018.
Why October 15? The reversal process must be completed by the last date, including extensions, for filing or refiling a prior-year tax return. This date is typically on or about October 15.
This is good news for IRA holders unaware of the repeal of conversion recharacterizations starting this year. This also helps those unable to recharacterize prior to year’s end.
However, the ability to recharacterize IRA conversions applies only to conversions made during 2017.
This allowance will not extend to conversions made on or after January 1, 2018. So, to be clear, the tax bill prohibits any recharacterization of a 2018 conversion.
Also, the tax law’s final draft preserves one’s ability to recharacterize as a method for fixing some IRA contribution mistakes. Earlier versions of the bill threw out recharacterizations altogether. However, regular contributions to Traditional and Roth IRAs may still be recharacterized as before.
If you’re considering a recharacterization of a 2017 conversion, consult with your team of professionals right away. If you choose to recharacterize a 2017 conversion of your Kingdom Trust account, you must complete our Recharacterization Notice and Transfer Direction form.