The end is near: If you want to reverse a 2017 Roth conversion, you have until October 15. After that date, the recharacterization move for Roth conversions is not only done for this year, it’s done for good.
The Tax Cuts and Jobs Act nixed this mulligan—removing the ability to undo Roth conversions done in 2018 and future years. But the IRS confirmed that 2017 Roth conversions still qualify for recharacterization.
So if you did a Roth conversion anytime in 2017, you have a fast-closing window to ask your IRA custodian to put that money back into a traditional IRA. Do so and—poof!—the conversion and its accompanying tax bill disappear.
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Why bother? If the account value fell after the conversion, recharacterization could make sense. Otherwise, you’d owe tax on the higher conversion-date amount. Given the extended bull market, however, it’s less likely you may be in that situation.
The other big reason to undo a conversion is to manage your tax bill for the year. Conversions are taxed at your ordinary income rate. If a 2017 conversion pushed you into a higher tax bracket, then you might want to recharacterize.
And because tax rates were higher across the board last year, compare your conversion tax bill under your 2017 tax rate to what the bill may be under the lower rates effective this year. Even if the value of the conversion stayed steady, you might save money by undoing the 2017 conversion and reconverting the money at today’s lower rates, depending on your personal tax situation. You can reconvert money 30 days after the recharacterization or the year following the original conversion—whichever comes later.
If you requested a six-month extension to file and you recharacterize by October 15 before you file your 2017 return, then you should be all set. You don’t owe tax on the conversion or report it on your tax return.
But if you already filed your 2017 tax return, then you need to file an amended return. File a Form 1040X to remove the conversion and its tax bill from your 2017 return, and you’ll get a refund of the tax you paid on the conversion. You generally have up to three years to file an amended return, but there’s little reason to wait if Uncle Sam owes you money.
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