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Recharacterization of 2017 Conversions under the New Tax Law

Susan Diehl

This article will be outlined a little different than some others! We are starting with the answer and then describing what occurred in December 2017 for those who know the history and have been waiting…waiting…and waiting for some sort of IRS guidance!

What We Just Found Out!

We recently were informed by an official IRS source that 2017 conversions can be recharacterized until Oct. 15, 2018. This is good news for participants who were unaware of the repeal of conversion recharacterizations starting in 2018, or who were unable to recharacterize before year-end.

This is also good news for financial organizations who decided to permit them in 2018 pending some sort of IRS guidance. Those institutions will not have to unwind their reporting!

2018 Conversions

Proceed with caution, as the ability to recharacterize conversions applies only to conversions made during 2017, and will not extend to conversions made on or after Jan. 1, 2018. Once a conversion is made in 2018 it cannot be recharacterized! This includes conversions from Traditional IRAs; and conversions from employer plans from sources other than a designated Roth to a Roth IRA. Taxpayers should make sure that they talk over the conversion strategy with their tax advisors to make sure that what they are doing makes sense!

Regular Traditional and Roth IRA Contributions Remain Unchanged

Regular contributions to Traditional and Roth IRAs may still be recharacterized as before to the other type of IRA. This is good news as well since a recharacterization of a traditional IRA contribution to a Roth contribution (or vice versa) is one method of correcting an excess or moving an ‘unwanted’ contribution to the other IRA.

For example, Emily, age 55 is an unmarried active participant in her employers’ 403(b) Plan. For 2017 Emily’s Modified Adjusted Gross Income (MAGI) for IRA deduction purposes is $65,000. The IRA threshold for 2017 is $72,000. Therefore Emily can deduct $4,550 (see below** or deduction worksheet in the IRS Publication 590-A). If Emily contributed the full contribution amount of $6,500 and she doesn’t want to leave the $1,950 in the traditional IRA and track the nondeductible IRA contribution she can recharacterize the $1,950 into a Roth IRA which is nondeductible! This deadline does not change — it is still the tax filing deadline for the year for which the contribution was made — so the following Oct. 15, 2018 would be the recharacterization deadline.

**Ceiling MAGI for 2017      $72,000
 Minus Emily's MAGI     $65,000
 Difference       $7,000
 Adjust by 0.65 ($6,500/$10,000
(The max contriub/spread in the
IRA thresholds ($62,000-$72,000
     x 0.65
 Result     $4,550
 No need to round up to nearest $10     $4,550
 Deductible Contribution     $4,550
 Nondeductible Contribution     $1,920



Susan D. Diehl, CPC, QPA, ERPA, is President, PenServ Plan Services, Inc. and Chair of the NTSA Communications Committee.

Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA or its members.

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