On 12/22/17 I sent out an update regarding the changes in the new tax law that eliminate the ability to recharacterize (undo) a Roth conversion. The short version is that the bill eliminated the recharacterization provision starting in 2018 but it was unclear whether conversions that occurred in 2017 would still have the option to recharacterize up to what would have been the normal deadline of 10/15/2018. The bill was ambiguous at best with respect to this issue because it stated that there would be no more recharacterizations in 2018. This has been up for debate but now we have clarification from the IRS.
I read several opinions on this matter and the consensus seemed to be that there just wouldn’t be any recharacterizations in 2018. This didn't sit well with me in particular because the language used stated, "…conversion contribution establishing a Roth IRA during a taxable year can no longer be recharacterized…" and the effective date is "…for taxable years beginning after December 31, 2017." My interpretation was that it would apply to conversions starting in 2018 and thus a conversion from 2017 would retain the ability to be recharacterized up to the normal deadline of 10/15/2018. Anything other than this would simply be unreasonable because anyone who did a conversion in 2017 wouldn't have had enough time to do a recharacterization before the end of the year because the law was passed so late in the year. Well, the verdict is in and the IRS said that I was right!
Well the IRS didn't say specifically that "I" was right, rather my interpretation was right. On the IRS website under the FAQs for Roth IRA recharacterizations (https://www.irs.gov/retirement-plans/ira-faqs-recharacterization-of-ira-contributions) is the question "How does the effective date apply to a Roth IRA conversion made in 2018?" The answer is:
A Roth IRA conversion made in 2017 may be recharacterized as a contribution to a traditional IRA if the recharacterization is made by October 15, 2018.
So let me just take a moment to gloat a little bit for being right when all the experts seemed wrong….ok I'm done. So if you did a conversion in 2017 and were worried that you might need to recharacterize, you can rest easy now because you do in fact still have this option. It is important to note, that this does not affect 2018 Roth conversions, which will not be able to be recharacterized. From the same FAQ:
A Roth IRA conversion made on or after January 1, 2018, cannot be recharacterized. For details, see “Recharacterizations” in Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs).
This is a great example of how things can and do change and often times aspects of changes may be up to interpretation. Usually, when this happens, we get a pronouncement or clarification from IRS, but that is not always the case. There have been and still are many things in the tax code and specifically in the IRA realm that are ambiguous. If you have any questions on how this may apply to you, give us a call.