Advertisement
taxes

Tax Bill in Congress Threatens Retirement Savers

A major change could be coming to Roth IRA conversion rules, and the end of the year could be your deadline to capitalize.

Tucked inside the tax legislation making its way through Congress is a simple line that would erase Section 408A(d)(6) of the Internal Revenue Code.

Don’t let your eyes glaze over ... particularly if you converted traditional IRA funds to a Roth IRA in 2017. The threatened section of the law is the one that gives you a chance to change your mind and reverse the conversion. If the proposal becomes law, Roth conversions will become irreversible, one-and-done decisions.

A quick refresher: When you convert funds from a traditional IRA to a Roth IRA, you generally must pay tax on the full amount in the year of the conversion. The price of admission is high, but so is the reward. Once your money is in the Roth, withdrawals in retirement – including all future earnings – are tax-free. Money coming out of a traditional IRA is taxed in your top tax bracket.

Advertisement - Article continues below

As it stands now, the law includes a special “do-over” opportunity. You have until October 15 of the following year to undo the conversion and reclaim the tax you paid on it in the first place. You may want to do this, say, if the value of your account has declined or you have fallen into a lower tax bracket. If you’re in either situation, undoing the conversion and then reconverting later would save you money.

Advertisement
Advertisement - Article continues below

But tax legislation working its way through the House and Senate would eliminate the do-over opportunity, effective at the end of this year.

Action alert: If you made a Roth conversion earlier this year, watch this issue carefully. If the change becomes law, you would have only until December 31, 2017, to undo a 2017 Roth conversion ... not next October 15 as permitted under current law.

If you choose to recharacterize (as the law calls it) a 2017 conversion, call your IRA sponsor for details. If you do transfer your money back into a traditional IRA, you won’t need to report the amount as income on your 2017 tax return filed next spring.

Advertisement

Most Popular

HSAs Get Even Better
Financial Planning

HSAs Get Even Better

Workers have more options with flexible spending accounts, too.
July 2, 2020
Find a Great Place to Retire
happy retirement

Find a Great Place to Retire

Our cities provide plenty of space to spread out without skimping on health care or other amenities.
July 2, 2020
What Are the Income Tax Brackets for 2020 vs. 2019?
tax brackets

What Are the Income Tax Brackets for 2020 vs. 2019?

The IRS unveiled the 2020 tax brackets, and it's never too early to start planning to minimize your future tax bill.
June 20, 2020

Recommended

Stars Align for Some Special Wealth Planning Opportunities
Roth IRAs

Stars Align for Some Special Wealth Planning Opportunities

A confluence of special tax, interest rate and market circumstances makes this a great time to execute income and wealth planning strategies that can …
June 26, 2020
Tax Changes and Key Amounts for the 2020 Tax Year
tax law

Tax Changes and Key Amounts for the 2020 Tax Year

Americans are facing a long list of tax changes for the 2020 tax year...and it's never too early to start thinking about next year's return.
June 22, 2020
12 Ways to Get Your Retirement Plan Back on Track
retirement planning

12 Ways to Get Your Retirement Plan Back on Track

If your financial situation hits a rough spot, there are a number of things you can do to get your retirement plan moving in the right direction again…
June 19, 2020
Why 2020 Is an 'Unprecedented Opportunity' for a Roth IRA Conversion
retirement

Why 2020 Is an 'Unprecedented Opportunity' for a Roth IRA Conversion

Tax advisors say you can reduce your tax bill by 30% to 40% in this unprecedented time.
June 17, 2020