What's the impact of no more Roth recharacterization?

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tadamsmar
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What's the impact of no more Roth recharacterization?

Post by tadamsmar » Tue Feb 20, 2018 11:48 pm

Has anyone tried to quantify the impact of this tax law change which came into effect on Dec 31, 2017 for Roth conversions after that date.

I think Roth conversions have been kind of borderline worthwhile for some of us anyway.

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whodidntante
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Re: What's the impact of no more Roth recharacterization?

Post by whodidntante » Tue Feb 20, 2018 11:52 pm

Some people enjoyed earning a risk free return by performing a Roth conversion at the start of the year, seeing what the market did all year, and then possibly reverting the conversion. If the market moved down, you would recharacterize so you don't pay tax on money that was converted to the Roth. If it moved up, you whistled and carried on with your day.

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Re: What's the impact of no more Roth recharacterization?

Post by celia » Wed Feb 21, 2018 12:30 am

tadamsmar wrote:
Tue Feb 20, 2018 11:48 pm
Has anyone tried to quantify the impact of this tax law change which came into effect on Dec 31, 2017 for Roth conversions after that date.
The changed rules primarily impact those who did multiple Roth conversions in the same year, with the intent to recharacterize some of them. It doesn't stop anyone from doing Roth conversions, but it makes them think twice if this is what they really want to do (and pay taxes on).
I think Roth conversions have been kind of borderline worthwhile for some of us anyway.
I strongly disagree. Roth conversions are very useful for those who have low/no income during their working years (unpaid familiy leave, unemployment, going back to school,...) and for those in early retirement who will have large RMDs when they turn 70 and start SS. The situation can cause their tax rate to increase if they haven't brought down the value of their tax-deferred account since they stopped working.

user5027
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Re: What's the impact of no more Roth recharacterization?

Post by user5027 » Wed Feb 21, 2018 7:13 am

I always did my conversion early in the year. Now I am waiting to do it later in the year.

lazyday
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Re: What's the impact of no more Roth recharacterization?

Post by lazyday » Wed Feb 21, 2018 7:34 am

Vanguard and probably some other brokers let you do same day conversions online with no human interaction needed, no forms, no faxes. So you could wait until mid or even late December.

If you don't have a Roth yet, it might be a good idea to have the account opened ahead of time.

Has anyone had a delay in their online Roth conversion at Vanguard?

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Re: What's the impact of no more Roth recharacterization?

Post by rkhusky » Wed Feb 21, 2018 7:58 am

user5027 wrote:
Wed Feb 21, 2018 7:13 am
I always did my conversion early in the year. Now I am waiting to do it later in the year.
The stock market has had more up years than down years. If that continues, it would be better to convert early in the year. If it doesn't continue, you might not want to be in the stock market.

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Re: What's the impact of no more Roth recharacterization?

Post by cherijoh » Wed Feb 21, 2018 8:47 am

rkhusky wrote:
Wed Feb 21, 2018 7:58 am
user5027 wrote:
Wed Feb 21, 2018 7:13 am
I always did my conversion early in the year. Now I am waiting to do it later in the year.
The stock market has had more up years than down years. If that continues, it would be better to convert early in the year. If it doesn't continue, you might not want to be in the stock market.
The change has definitely made it more difficult to stay within a specific marginal tax bracket. For example, under old tax law the transition from 15% to 25% was expensive if you missed it, since additional dollars of ordinary income bumped from being taxes at 15 to 25% for federal PLUS an equal dollar amount of capital gains went from being taxed at 0% to being taxed at 15%. With the ability to recharacterize your Roth conversion, you had an easy out if your capital gains were larger than you anticipated when you did your conversion earlier in the year. You could trim your conversion amount with laser precision after the fact.

Rhusky - you are right about their being more up than down years. But Roth conversions are not the same as buying stocks during the accumulation phase. You aren't going from a cash position (with negative real return) to a stock position. So you aren't deciding if stocks are too risky for you as the last sentence of your post implies. In many (most?) cases you are replicating what you had in your traditional IRA to the exact same funds in the Roth. In that case, your before-tax returns on a particular investment are the same in Traditional and Roth - it is the taxes due on the conversion which vary.

I was planning to take advantage of the recharacterization feature to minimize taxes by doing multiple conversions if the stock market dropped as it inevitably will at some point (if even only for short periods of time). Now I am considering just using a DCA strategy. If there is a major correction, I would consider accelerating my conversions or exceeding my target conversion for the year depending on the amount of capital gains that would get pushed from 0% to 15% taxes.

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Re: What's the impact of no more Roth recharacterization?

Post by rkhusky » Wed Feb 21, 2018 9:31 am

cherijoh wrote:
Wed Feb 21, 2018 8:47 am
Rhusky - you are right about their being more up than down years. But Roth conversions are not the same as buying stocks during the accumulation phase. You aren't going from a cash position (with negative real return) to a stock position. So you aren't deciding if stocks are too risky for you as the last sentence of your post implies. In many (most?) cases you are replicating what you had in your traditional IRA to the exact same funds in the Roth. In that case, your before-tax returns on a particular investment are the same in Traditional and Roth - it is the taxes due on the conversion which vary.
I agree. For example, suppose stocks go up 10% during the year and your Roth conversion is taxed at 15%. Then you are only losing out on 1.5% by waiting until the end of the year, not the full 10% that you would have missed out on by waiting to contribute to an IRA.

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Re: What's the impact of no more Roth recharacterization?

Post by Epsilon Delta » Wed Feb 21, 2018 12:21 pm

cherijoh wrote:
Wed Feb 21, 2018 8:47 am

The change has definitely made it more difficult to stay within a specific marginal tax bracket. For example, under old tax law the transition from 15% to 25% was expensive if you missed it, since additional dollars of ordinary income bumped from being taxes at 15 to 25% for federal PLUS an equal dollar amount of capital gains went from being taxed at 0% to being taxed at 15%. With the ability to recharacterize your Roth conversion, you had an easy out if your capital gains were larger than you anticipated when you did your conversion earlier in the year. You could trim your conversion amount with laser precision after the fact.
Painful as it may be to be taxed at 50% on a few hundred or thousand dollars, various cliffs are much worse. Missing the ACA cut off could result in marginal rates of 10,000% on a few hundred. Missing by one dollar would put the marginal rate in the 2 comma club.

The ability to recharacterize Roth contributions, and to fund IRA after the end of the year may still help some.

In theory you could also take a tIRA distribution in the last week of December and have 60 days to do a indirect rollover into either a Roth or tIRA.

Any other ideas for fine tuning income after the end of the year?

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Re: What's the impact of no more Roth recharacterization?

Post by DrGoogle2017 » Wed Feb 21, 2018 12:25 pm

Simplification. I never recharacterize anyway.

user5027
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Re: What's the impact of no more Roth recharacterization?

Post by user5027 » Wed Feb 21, 2018 1:58 pm

rkhusky wrote:
Wed Feb 21, 2018 7:58 am
user5027 wrote:
Wed Feb 21, 2018 7:13 am
I always did my conversion early in the year. Now I am waiting to do it later in the year.
The stock market has had more up years than down years. If that continues, it would be better to convert early in the year. If it doesn't continue, you might not want to be in the stock market.
Which is why I always did my conversion early in the year.

Now undoing a conversion is not an option and I am avoiding being in a situation where I may be forced into a circumstance that increases my income and I regret having made the conversion. :shock: Waiting until later in the year reduces that risk.

I love being in the stock market. :D

Your circumstances may be different. :sharebeer

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Re: What's the impact of no more Roth recharacterization?

Post by Peter Foley » Wed Feb 21, 2018 3:29 pm

Regarding the comment about some conversions being borderline. I agree, especially if one's tax situation with RMD's will not change substantially. I've run the number through both i-orp and the Retiree Portfolio Model and payback is about 20 years based on the returns I projected for tax deferred accounts (mostly in bonds) and Roth accounts (100% stocks). My plan included maintaining the same total portfolio AA by rebalancing.

I think that new strategies will be applied. A couple posting here mentioned doing the conversion late in the year rather than early in the year. In my mind that really makes no difference because a market downturn can take place at any time - the most likely time always seeming to be after just having invested. Perhaps better approaches would be to convert only when the market is down, or dollar cost averaging a conversion over four quarters. There are downsides to any strategy, of course. The pluses or minuses of any strategy will not known until well after the fact.

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Re: What's the impact of no more Roth recharacterization?

Post by klneutral » Wed Feb 21, 2018 4:04 pm

In theory you could also take a tIRA distribution in the last week of December and have 60 days to do a indirect rollover into either a Roth or tIRA.
Does anyone have any thoughts about this? Typically, to hit a target tax bracket, one would take a tIRA distribution in late December. Then after taxes are calculated, one would rollover a portion back to the original tIRA and the remainder to a Roth IRA. Might this be considered two rollovers in one year due to the two trips back to IRA's?

I have read that if one takes a distribution from company A and rolls part of it back to company A and the rest to company B, it is considered a violation of the once-per-year rule due to rolling over to two companies rather than just one. Is the scenario above too similar to this?

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Epsilon Delta
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Re: What's the impact of no more Roth recharacterization?

Post by Epsilon Delta » Wed Feb 21, 2018 4:16 pm

klneutral wrote:
Wed Feb 21, 2018 4:04 pm
In theory you could also take a tIRA distribution in the last week of December and have 60 days to do a indirect rollover into either a Roth or tIRA.
Does anyone have any thoughts about this? Typically, to hit a target tax bracket, one would take a tIRA distribution in late December. Then after taxes are calculated, one would rollover a portion back to the original tIRA and the remainder to a Roth IRA. Might this be considered two rollovers in one year due to the two trips back to IRA's?
A rollover from a tIRA to a Roth IRA is not subject to (and does not affect) the one indirect rollover per year rule. Only indirect rollovers from a tIRA to a tIRA or from a Roth IRA to a Roth IRA count. Of course if you do do a tIRA to tIRA rollover one year you may not do it the next year (or maybe you could but you'd have to get the timing just right)

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Re: What's the impact of no more Roth recharacterization?

Post by ThrustVectoring » Wed Feb 21, 2018 4:47 pm

It's a good thing, it closes a pretty major loophole. You can buy and write covered options in retirement accounts. This opens up some tax sheltering strategies that are pretty significant - specifically, buying one leg of an options strategy in a recharacterizable Roth IRA account, and concentrating gains or losses in there.

Suppose for simplicity's sake your investment strategy is 100% in S&P 500. You have an IRA and a taxable account balance. Sell 100 shares of SPY in your taxable account, write a put option, and buy a call option in a newly Roth converted IRA account. If the call option expires worthless, recharacterize it back to traditional and pay no taxes. If the call option expires in the money, you've now put a bunch of money in your Roth IRA, with the same overall portfolio risk, and paying taxes on a portion of your effective contribution. Do this every month, with options prices to be in-the-money roughly half the time. You'll end up paying roughly half of the taxes you ought to for the conversion, since half your options expired worthless and in aggregate, they end up worth what you paid for them.

So yeah, the overall impact is that people willing to get in the weeds with options strategies are no longer able to pay a fraction of what they ought to on tax-deferred retirement accounts. Good. The alternative is some annoyingly complicated rules (like the Wash Sale rule) that governs offsetting positions across multiple accounts, which would likely have large unintentional tax consequences for folks. And the strategy I gave isn't even the most egregious one.

tl;dr - with Roth recharacterizations, you could legally pay a fraction of your deferred income taxes

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Re: What's the impact of no more Roth recharacterization?

Post by cherijoh » Wed Feb 21, 2018 9:37 pm

Epsilon Delta wrote:
Wed Feb 21, 2018 12:21 pm
Painful as it may be to be taxed at 50% on a few hundred or thousand dollars, various cliffs are much worse. Missing the ACA cut off could result in marginal rates of 10,000% on a few hundred. Missing by one dollar would put the marginal rate in the 2 comma club.

The ability to recharacterize Roth contributions, and to fund IRA after the end of the year may still help some.
Not for retirees who are doing Roth Conversions in early retirement. No wage income = No direct Roth contribution.
Epsilon Delta wrote:
Wed Feb 21, 2018 12:21 pm
In theory you could also take a tIRA distribution in the last week of December and have 60 days to do a indirect rollover into either a Roth or tIRA.
I have no clue what your intention was in posting this. What does this have to do with the elimination of Roth recharacterizations?

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Re: What's the impact of no more Roth recharacterization?

Post by FIREchief » Wed Feb 21, 2018 10:24 pm

To answer the OP's original question: the impact of no more Roth recharacterization is that it has already cost me money. I did my 2018 conversion on Jan 2 and, had the tax law not changed, would have done an identical (value) conversion when the market dropped 3% from the Jan 2 close in order to have converted more shares for the same tax cost. This was a formal plan that I would have followed. Thresholds were 3, 6, 9, 14 and 21.

Oh well, the fed came out ahead on me on this one, but I certainly do enjoy the lower rates and wouldn't trade them to get my recharacterization option back! 8-)
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Epsilon Delta
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Re: What's the impact of no more Roth recharacterization?

Post by Epsilon Delta » Wed Feb 21, 2018 11:30 pm

cherijoh wrote:
Wed Feb 21, 2018 9:37 pm
Epsilon Delta wrote:
Wed Feb 21, 2018 12:21 pm
In theory you could also take a tIRA distribution in the last week of December and have 60 days to do a indirect rollover into either a Roth or tIRA.
I have no clue what your intention was in posting this. What does this have to do with the elimination of Roth recharacterizations?
It accomplishes some of the same things as a conversion and (possible) recharacterization. In mid-February you get to choose how much Roth conversion you did in the prior year. This lets you fine tune your income after the end of the year; after you've got most, if not all, of your tax documents and have a much better handle on the years income.

The indirect rollover into a Roth is a taxable event in the year of the distribution.
The indirect rollover back into a tIRA is not a taxable event.
You can rollover part to the Roth and part to a tIRA if that seems good to you,

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Re: What's the impact of no more Roth recharacterization?

Post by Earl Lemongrab » Thu Feb 22, 2018 12:57 pm

A separate effect is the removal of the fail-safe for backdoor Roth.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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Re: What's the impact of no more Roth recharacterization?

Post by essbeer » Thu Feb 22, 2018 1:07 pm

cherijoh wrote:
Wed Feb 21, 2018 8:47 am
The change has definitely made it more difficult to stay within a specific marginal tax bracket. For example, under old tax law the transition from 15% to 25% was expensive if you missed it, since additional dollars of ordinary income bumped from being taxes at 15 to 25% for federal PLUS an equal dollar amount of capital gains went from being taxed at 0% to being taxed at 15%. With the ability to recharacterize your Roth conversion, you had an easy out if your capital gains were larger than you anticipated when you did your conversion earlier in the year. You could trim your conversion amount with laser precision after the fact.
You can still do this by originally contributing to Roth and then recharacterizing the contribution to a tIRA, right? If that option isn't available I think I made a big mistake.

mhalley
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Re: What's the impact of no more Roth recharacterization?

Post by mhalley » Thu Feb 22, 2018 1:24 pm

Recharacterization remains for the backdoor roth CONTRIBUTIONS, but not for Roth CONVERSIONS. See irs faq.
https://www.irs.gov/retirement-plans/ir ... tributions

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Re: What's the impact of no more Roth recharacterization?

Post by LeeMKE » Thu Feb 22, 2018 1:26 pm

We are dismayed with this change. Our business income has been too volatile to correctly predict taxable income until after the close of the tax year. So, to thread between ACA maximum and maximum conversion to Roth, we converted early in the year (best odds for the market rising since conversion) and then trimmed it back once we had actual numbers. For us, it won't matter much longer because we are closing DH's business. But I'm sorry the option is gone for others.
by essbeer » Thu Feb 22, 2018 1:07 pm

cherijoh wrote: ↑Wed Feb 21, 2018 8:47 am
The change has definitely made it more difficult to stay within a specific marginal tax bracket. For example, under old tax law the transition from 15% to 25% was expensive if you missed it, since additional dollars of ordinary income bumped from being taxes at 15 to 25% for federal PLUS an equal dollar amount of capital gains went from being taxed at 0% to being taxed at 15%. With the ability to recharacterize your Roth conversion, you had an easy out if your capital gains were larger than you anticipated when you did your conversion earlier in the year. You could trim your conversion amount with laser precision after the fact.
You can still do this by originally contributing to Roth and then recharacterizing the contribution to a tIRA, right? If that option isn't available I think I made a big mistake.
This is an idea that is new to me. If this would work, I'd be interested in seeing confirmation. It might work for 2018 for us.
The mightiest Oak is just a nut who stayed the course.

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Re: What's the impact of no more Roth recharacterization?

Post by essbeer » Thu Feb 22, 2018 1:34 pm

LeeMKE wrote:
Thu Feb 22, 2018 1:26 pm
We are dismayed with this change. Our business income has been too volatile to correctly predict taxable income until after the close of the tax year. So, to thread between ACA maximum and maximum conversion to Roth, we converted early in the year (best odds for the market rising since conversion) and then trimmed it back once we had actual numbers. For us, it won't matter much longer because we are closing DH's business. But I'm sorry the option is gone for others.
by essbeer » Thu Feb 22, 2018 1:07 pm

cherijoh wrote: ↑Wed Feb 21, 2018 8:47 am
The change has definitely made it more difficult to stay within a specific marginal tax bracket. For example, under old tax law the transition from 15% to 25% was expensive if you missed it, since additional dollars of ordinary income bumped from being taxes at 15 to 25% for federal PLUS an equal dollar amount of capital gains went from being taxed at 0% to being taxed at 15%. With the ability to recharacterize your Roth conversion, you had an easy out if your capital gains were larger than you anticipated when you did your conversion earlier in the year. You could trim your conversion amount with laser precision after the fact.
You can still do this by originally contributing to Roth and then recharacterizing the contribution to a tIRA, right? If that option isn't available I think I made a big mistake.
This is an idea that is new to me. If this would work, I'd be interested in seeing confirmation. It might work for 2018 for us.
It HAS worked for me for years. If you hold multiple asset types in the Roth you could even choose which asset types to recover, i.e. re-categorize the loser. I'll be seriously distressed if this option isn't still available, but it looks like it is.

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Re: What's the impact of no more Roth recharacterization?

Post by cherijoh » Thu Feb 22, 2018 7:58 pm

mhalley wrote:
Thu Feb 22, 2018 1:24 pm
Recharacterization remains for the backdoor roth CONTRIBUTIONS, but not for Roth CONVERSIONS. See irs faq.
https://www.irs.gov/retirement-plans/ir ... tributions
The IRS specifically prohibits the recharacterization of Roth IRA Conversions.

A backdoor Roth is a 2-step process of (1) making a non-deductible tIRA contribution and (2) doing a Roth Conversion in the amount of your contribution. So how did you interpret the linked article to mean that you could recharacterize a Backdoor Roth? :confused

What is a recharacterization of a contribution to a traditional or Roth IRA?
A recharacterization allows you to treat a regular contribution made to a Roth IRA or to a traditional IRA as having been made to the other type of IRA. A regular contribution is the annual contribution you’re allowed to make to a traditional or Roth IRA: up to $5,500 for 2018, $6,500 if you’re 50 or older (see IRA Contribution Limits for details). It does not include a conversion or any other rollover.

You are always eligible to make a tIRA contribution provided you have earned income. Whether or not it is deductible is income dependent. You have to meet income limits in order to make a direct Roth contribution. The law still allows you to recharacterize your annual contribution if you choose the wrong type initially:
  • Traditional to Roth - you end up over the limit to make a deductible tIRA contribution so you recharacterize to a Roth because your income is still below that limit (Remember Backdoor Roths only come into play when you are over the limit to contribute directly!)
  • Roth to traditional - you are over the limit to make a direct Roth contribtion so you recharaterize it to a non-deductible tIRA
In the latter case you can still do a Roth Conversion (step 2 of the backdoor Roth). But you can't change your mind and recharacterize that conversion. Therefore if you can't undo step 2 then you can't recharacterize a Backdoor Roth.

Can I recharacterize a rollover or conversion to a Roth IRA?
Effective January 1, 2018, pursuant to the Tax Cuts and Jobs Act (Pub. L. No. 115-97), a conversion from a traditional IRA, SEP or SIMPLE to a Roth IRA cannot be recharacterized. The new law also prohibits recharacterizing amounts rolled over to a Roth IRA from other retirement plans, such as 401(k) or 403(b) plans.

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Re: What's the impact of no more Roth recharacterization?

Post by cherijoh » Thu Feb 22, 2018 8:05 pm

LeeMKE wrote:
Thu Feb 22, 2018 1:26 pm
We are dismayed with this change. Our business income has been too volatile to correctly predict taxable income until after the close of the tax year. So, to thread between ACA maximum and maximum conversion to Roth, we converted early in the year (best odds for the market rising since conversion) and then trimmed it back once we had actual numbers. For us, it won't matter much longer because we are closing DH's business. But I'm sorry the option is gone for others.
by essbeer » Thu Feb 22, 2018 1:07 pm

cherijoh wrote: ↑Wed Feb 21, 2018 8:47 am
The change has definitely made it more difficult to stay within a specific marginal tax bracket. For example, under old tax law the transition from 15% to 25% was expensive if you missed it, since additional dollars of ordinary income bumped from being taxes at 15 to 25% for federal PLUS an equal dollar amount of capital gains went from being taxed at 0% to being taxed at 15%. With the ability to recharacterize your Roth conversion, you had an easy out if your capital gains were larger than you anticipated when you did your conversion earlier in the year. You could trim your conversion amount with laser precision after the fact.
You can still do this by originally contributing to Roth and then recharacterizing the contribution to a tIRA, right? If that option isn't available I think I made a big mistake.
This is an idea that is new to me. If this would work, I'd be interested in seeing confirmation. It might work for 2018 for us.
LeeMKE- Why? If your objective is to do Roth Conversions, then why would you be interested in taking your regular (i.e., direct) Roth contribution and turning it back into a tIRA contribution? The same income limits apply for having it be tax-deductible. In any case, you can wait until you know your income before making your regular contribution (i.e., Apri Tax filing deadline). It is the Roth Conversions that adhere to the calendar year which is where the challenge now comes in.

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Re: What's the impact of no more Roth recharacterization?

Post by cherijoh » Thu Feb 22, 2018 9:14 pm

klneutral wrote:
Wed Feb 21, 2018 4:04 pm
In theory you could also take a tIRA distribution in the last week of December and have 60 days to do a indirect rollover into either a Roth or tIRA.
Does anyone have any thoughts about this? Typically, to hit a target tax bracket, one would take a tIRA distribution in late December. Then after taxes are calculated, one would rollover a portion back to the original tIRA and the remainder to a Roth IRA. Might this be considered two rollovers in one year due to the two trips back to IRA's?

I have read that if one takes a distribution from company A and rolls part of it back to company A and the rest to company B, it is considered a violation of the once-per-year rule due to rolling over to two companies rather than just one. Is the scenario above too similar to this?
From IRS Publication 590A
Application of one-rollover-per-year limitation. You can make only one rollover from an IRA to another (or the same) IRA in any 1-year period regardless of the number of IRAs you own. The limit will apply by aggregating all of an individual's IRAs, including SEP and SIMPLE IRAs as well as traditional and Roth IRAs, effectively treating them as one IRA for purposes of the limit. However, trustee-to-trustee transfers between IRAs are not limited and rollovers from traditional IRAs to Roth IRAs (conversions) are not limited.
You are suggesting 1 outgoing rollover splitting into 2 incoming rollovers. My guess is that what you are suggesting is verboten, but I am not a tax professional.

But it may not yet have been tested in tax court since (1) up until the new tax law, recharacteriztions of Roth conversions have been legal and (2) there has been (and still is) no limit on the number of Roth conversions you can make in a year. So if your objective was to move money from traditional to Roth, why would you have wasted your once per year rollover doing it under the old tax law? (Unless of course you needed the use of your money in the 60 days too).

Plus, direct IRA rollovers (where they send you a check) are subject to 20% withholding which means you'd have to come up with the difference out of your pocket to complete the rollover or else have the withholding treated as a distribution (and therefore subject to taxes and potentially a penalty).

I think it would be legal to take a distribution late in the year and then decide whether to roll the whole amount either back into a traditional or into a Roth IRA. But you'd still be stuck with the withholding issue and making up for the difference.

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Re: What's the impact of no more Roth recharacterization?

Post by cherijoh » Thu Feb 22, 2018 9:44 pm

Epsilon Delta wrote:
Wed Feb 21, 2018 11:30 pm
cherijoh wrote:
Wed Feb 21, 2018 9:37 pm
Epsilon Delta wrote:
Wed Feb 21, 2018 12:21 pm
In theory you could also take a tIRA distribution in the last week of December and have 60 days to do a indirect rollover into either a Roth or tIRA.
I have no clue what your intention was in posting this. What does this have to do with the elimination of Roth recharacterizations?
It accomplishes some of the same things as a conversion and (possible) recharacterization. In mid-February you get to choose how much Roth conversion you did in the prior year. This lets you fine tune your income after the end of the year; after you've got most, if not all, of your tax documents and have a much better handle on the years income.

The indirect rollover into a Roth is a taxable event in the year of the distribution.
The indirect rollover back into a tIRA is not a taxable event.
You can rollover part to the Roth and part to a tIRA if that seems good to you,
Not clear what you mean by "indirect" rollover, but if it means you get cut a check then you are subject to 20% withholding which means you have to come up with the difference or else the withholding is considered a distribution. Plus, it isn't clear to me that splitting it between two accounts doesn't run afoul of the maximum one rollover per year rule since you have 1 outgoing rollover and two incoming ones.

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Re: What's the impact of no more Roth recharacterization?

Post by Epsilon Delta » Fri Feb 23, 2018 1:05 am

cherijoh wrote:
Thu Feb 22, 2018 9:44 pm
Not clear what you mean by "indirect" rollover, but if it means you get cut a check then you are subject to 20% withholding which means you have to come up with the difference or else the withholding is considered a distribution.
That is what I mean by an indirect rollover.

The 20% mandatory withholding applies to 401(k) distribution. (and probably a few other employer plans).

The default withholding for IRA distribution is 10%, but the account owner can elect a different withholding rate. 0% withholding is a valid election.

https://www.irahelp.com/slottreport/wit ... -need-know
https://personal.vanguard.com/pdf/s166.pdf?2210105563

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Epsilon Delta
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Re: What's the impact of no more Roth recharacterization?

Post by Epsilon Delta » Fri Feb 23, 2018 1:48 am

cherijoh wrote:
Thu Feb 22, 2018 9:14 pm
klneutral wrote:
Wed Feb 21, 2018 4:04 pm
In theory you could also take a tIRA distribution in the last week of December and have 60 days to do a indirect rollover into either a Roth or tIRA.
Does anyone have any thoughts about this? Typically, to hit a target tax bracket, one would take a tIRA distribution in late December. Then after taxes are calculated, one would rollover a portion back to the original tIRA and the remainder to a Roth IRA. Might this be considered two rollovers in one year due to the two trips back to IRA's?

I have read that if one takes a distribution from company A and rolls part of it back to company A and the rest to company B, it is considered a violation of the once-per-year rule due to rolling over to two companies rather than just one. Is the scenario above too similar to this?
From IRS Publication 590A
Application of one-rollover-per-year limitation. You can make only one rollover from an IRA to another (or the same) IRA in any 1-year period regardless of the number of IRAs you own. The limit will apply by aggregating all of an individual's IRAs, including SEP and SIMPLE IRAs as well as traditional and Roth IRAs, effectively treating them as one IRA for purposes of the limit. However, trustee-to-trustee transfers between IRAs are not limited and rollovers from traditional IRAs to Roth IRAs (conversions) are not limited.
You are suggesting 1 outgoing rollover splitting into 2 incoming rollovers. My guess is that what you are suggesting is verboten, but I am not a tax professional.
Consider the bit I've bolded in your quote. You are probably correct that this particular act with this particular motivation has never been tested in court. It is possible that splitting a rollover to a tIRA and Roth has been for some other reason. Converting and re-characterizing if needed was unambiguously better. Somebody who pulled this maneuver in a prior year is clearly not making the best choices and their advice is suspect. But we can no longer re-characterize so other options are on the table.

The text of the law is quite unambiguous.
section 408(d)(3)(B) wrote: (B) Limitation
This paragraph [i.e. 408(d)(3) which defines a Rollover contribution] does not apply to any amount described in subparagraph (A)(i) received by an individual from an individual retirement account or individual retirement annuity if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in that subparagraph from an individual retirement account or an individual retirement annuity which was not includible in his gross income because of the application of this paragraph.
Section 408A(E)(1)(b)(ii) wrote: For purposes of section 408(d)(3)(B), there shall be disregarded any qualified rollover contribution from an individual retirement plan (other than a Roth IRA) to a Roth IRA.
I am not a tax professional. I am floating this and hoping some of them chime in. They have most of a year to do so before this becomes of practical interest. It seems to me that there are no legal issues with what I propose. The main difficulty is tight 60 day deadline and the consequences of getting the timing wrong. The IRS is quite strict about this, and I can't imagine you would get any lenience if you're a day late.

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Re: What's the impact of no more Roth recharacterization?

Post by House Blend » Fri Feb 23, 2018 11:08 am

Epsilon Delta wrote:
Fri Feb 23, 2018 1:48 am
I am not a tax professional. I am floating this and hoping some of them chime in. They have most of a year to do so before this becomes of practical interest. It seems to me that there are no legal issues with what I propose. The main difficulty is tight 60 day deadline and the consequences of getting the timing wrong. The IRS is quite strict about this, and I can't imagine you would get any lenience if you're a day late.
In my similarly amateur eyes it looks kosher, and I agree that the main risk is the added transactional complexity (cf. the many threads here from folks who mis-execute the backdoor Roth).

I personally have no interest in being on the leading edge of this idea, but then I know I won't ever face an ACA cliff (given the particular access to health care insurance I have). I might someday face an IRMAA (medicare) cliff, but the cost of crossing one of those inadvertently is perhaps only ~$1K.

On the other hand, a Roth conversion between existing accounts at VG (for example) takes only a couple of minutes. How hard is it to estimate AGI and taxable income towards the end of the tax year?

Individual circumstances will vary. For me, once the fourth quarter distributions have been announced, the biggest unknowns are foreign taxes paid (I can probably guess that to within $100), and non-qualified dividends (that's a bit harder, maybe a $250 error bar for me?). The latter would be an issue if one is trying to hit a targeted level of Taxable Income minus QDI.

So for me, perhaps the best hindsight solution would have been to not put international stocks in taxable, and to avoid funds that distribute less than 100% QDI.

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Re: What's the impact of no more Roth recharacterization?

Post by Alan S. » Fri Feb 23, 2018 11:01 pm

tadamsmar wrote:
Tue Feb 20, 2018 11:48 pm
Has anyone tried to quantify the impact of this tax law change which came into effect on Dec 31, 2017 for Roth conversions after that date.

I think Roth conversions have been kind of borderline worthwhile for some of us anyway.
Most of the discussion has been on restrictions to "perfecting" the conversion itself through the recharacterization process. So here are a couple of other less obvious consequences of the loss of conversion recharacterizations:

1) Assume you mistakenly converted in an RMD year before completing your RMD. Before, you could recharacterize the conversion, remove your RMD and then reconvert after the required waiting period. If this happens now your only option is to treat the conversion as your RMD AND as an excess regular Roth contribution, which results in a distribution of the excess with earnings. The earnings get taxed and are no longer in a retirement account. Here's where this gets really bad. Your RMD has been satisfied by the converted amount, but then you took a later distribution that you thought was your RMD because you were not aware that the RMD had to be done first. If you don't detect the error before the 60 days expires to roll back the second distribution, you are stuck with it and you end up taxed on TWO RMDs but you have no conversion.

2) Case 2 - you are not sharp on the latest IRS interpretation of the one rollover rule for 12 months, and you take 2 distributions from your IRA a week apart intending to roll them over. You then find out about the limit before the 60 day rollover period runs out. Before, you could roll one of them over, convert the other and then recharacterize your conversion which puts the second distribution back in your TIRA. This was a work around for the one rollover limitation. With no more recharacterizations, you cannot convert now unless you want to and retain that conversion because you were going to be taxed on the second distribution anyway. This is sort of a forced conversion to prevent loss of the money from your IRA.

3) Case 3 - You know you cannot recharacterize your conversion, so you get defensive and convert less than you should because you over estimate the effect of a post conversion loss by thinking of it as a permanent loss instead of a temporary blip. You are always more aggressive if you know you can undo the transaction, but now that you cannot you get defensive.

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