Traditional IRA to Roth IRA conversions

The new tax laws say “yes” to conversions from traditional IRAs to Roth IRAs but “no” to reversing all Roth conversions made in 2018 and going forward.

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Talli Sperry: Well, while we’re waiting for more questions to come in, let’s actually go to another one of our presubmitted questions. So this one is for you, Jackie, as well. And this is David from South Carolina, and he’s asking, “Are IRA to Roth IRA conversions impacted?”

Jacklin Youssef: So, yes they are. And, in general, I would say converting from a traditional to Roth IRA, which means, again, you take the funds out of the IRA and move them to a Roth IRA and have that considered as taxable income, that is still available. What’s unavailable and has been repealed is undoing that conversion after the fact.

Talli Sperry: Which got popular with many people, right?

Jacklin Youssef: Absolutely. So a lot of the clients, again, that we work with generally had the ability to complete a conversion during a calendar year and come back and reassess after the end of the calendar year well into mid-October of the following year. So that essentially equated with the tax return due date including extensions. The rules clearly say you can’t undo a conversion that you’ve completed already in that case.

One little nuance, again, that we were debating, a number of tax experts really were debating, which is what about 2017 conversions that were completed? There was a lot of debate as would that be impacted by those rules or not?

Talli Sperry: And that’s because things were signed right at the end of 2017, right?

Jacklin Youssef: Exactly. And the language of the provision itself was not clear as to what would be the ultimate effective date for this. So hot off the press, it looks like the IRS was gracious to update their Q&A on their website to ultimately clearly indicate that 2017 Roth conversions could still be undone through mid-October of 2018. So for a lot of our clients who have completed conversions in that case, they still do have the ability to go back and reassess. So it ultimately will come down to does it make sense again for them to undo and potentially come back and redo? I mean, keep in mind, tax brackets are lower; but, of course, the various itemized deductions look drastically different than what they looked like in 2017. So it’ll ultimately come down to crunching the numbers to see whether it would make sense for someone to undo this. Keep in mind also the markets have done tremendously well.

Tony Giordano: Well, I was just going to say, Jackie, too the reason to undo it or to redo it would be because a lot of people who convert from a traditional IRA into a Roth want to put that into stocks or very heavy to stocks because now that money, they’ve paid the taxes on it, it’s growing tax-deferred and ultimately tax-free for their beneficiaries. So that’s really the reason to undo it. And now we’ve had such a remarkable runup in the equity markets. We haven’t seen really a negative stock market since 2008. We had a couple flat years for 2011 and 2015, but I’m not predicting we’re going to see a crash, but we’re certainly due for a negative number at some point. And that would be the reason. So I think investors in 2018 have to proceed with caution on the conversions, even though their rates are going to be lower, because the reason to undo it would be because the value of your account goes down.

Jacklin Youssef: And that’s a very good point. So in 2018 and beyond, any conversion someone is contemplating, there’re really clearly two main questions that they need to ask themselves: is this truly appropriate for me? And the second one is, is the amount ultimately appropriate as well? Because there’s no way back out of it.

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