Bloomberg: Traditional to Roth IRA Do-Overs Could Prove Costly

Written by Eric L. Barnes - - Aggregated on Tuesday March 13, 2018
Tags: life, investment, ira

Ellen Stark writing about the new tax laws for IRA conversions:

The trouble with switching a traditional deductible IRA to a Roth is that you owe income taxes on the entire amount you convert. And while you have to make the move by Dec. 31, you likely won’t know that year’s full tax picture until you prepare your return. In the past, if the conversion pushed you into a high tax bracket or made your bill so high you couldn’t pay it, you could reverse the conversion, in what’s called a recharacterization. Same was true if the market dropped sharply after you converted, leaving you with a tax bill on investment gains you no longer enjoy. Starting with 2018 conversions, that escape route is gone.

Why the change? For one, over the next 10 years, the federal government expects to collect another half-billion dollars in taxes as a result. What’s more, this shuts down a strategy that exploited the grace period: converting multiple IRAs to Roths early in the year, investing each in different asset classes, giving all the accounts up to 21 months to rise or fall, and then recharacterizing the ones that lost money. Essentially, you could cherry-pick winners to save on taxes. “Congress didn’t want to discourage converting,” says Jamie Hopkins, associate professor of taxation at the American College of Financial Services. “What they really wanted to shut down was this tax-planning strategy.”

I’ve never heard of this conversion strategy before, and it still remains crazy to me that we have all these loopholes in our tax system and the only way to know about them is to have a highly​ engaged advisor or to spend hours upon hours researching how to best utilize the existing system.

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