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Ed Slott On Roth IRA Conversions Becoming Permanent: Text & Audio Presentation
There are parts I agree with, and parts where I see things differently.
I agree that the intent was likely, at least in part, to prevent gaming the system. I make multiple/excess conversions in a year. Then after I see how each investment has done and how much I need to roll back to stay within a tax bracket, I select which investments and how much of each to undo. I'm sure there are others here who do something similar.
All perfectly legal, and all gaming the system. Heads I win, tails the IRS loses.
A simplified version of this is: if the market goes up, keep the conversion. If the market goes down, back it all out. Ed Slott doesn't see this as gaming. I disagree. Still, heads I win, tails the IRS loses.
Ed Slott thinks that if this provision passes, you won't be able to undo your 2017 conversions after December 31, 2017. I read the proposal differently. He's certainly being more conservative, and that's probably good, especially for an advisor.
What the proposed legislation says is: "EFFECTIVE DATE.—The amendments made by this section [removing the ability to recharacterize] shall apply to taxable years beginning after December 31, 2017."
I take that as meaning that you will not be able to recharacterize anything for tax year 2018. Recharacterizing your 2017 conversions, whenever it is done, applies to tax year 2017.
As supporting evidence, I point to the wording in the current code (which would be deleted):
if, on or before the due date for any taxable year, a taxpayer transfers in a trustee-to-trustee transfer any contribution to an individual retirement plan made during such taxable year from such plan to any other individual retirement plan, such contribution shall be treated as having been made to the transferee plan
A bit of a mouthful, but basically saying that if you undo your tax year 2017 Roth conversion by Oct 15, 2018, it's treated as if you'd just moved the money from your traditional IRA back into a traditional IRA in tax year 2017.
Of course this isn't advice, Ed could be right, or the law might not be changed at all.
Comments
I agree that the intent was likely, at least in part, to prevent gaming the system. I make multiple/excess conversions in a year. Then after I see how each investment has done and how much I need to roll back to stay within a tax bracket, I select which investments and how much of each to undo. I'm sure there are others here who do something similar.
All perfectly legal, and all gaming the system. Heads I win, tails the IRS loses.
A simplified version of this is: if the market goes up, keep the conversion. If the market goes down, back it all out. Ed Slott doesn't see this as gaming. I disagree. Still, heads I win, tails the IRS loses.
Ed Slott thinks that if this provision passes, you won't be able to undo your 2017 conversions after December 31, 2017. I read the proposal differently. He's certainly being more conservative, and that's probably good, especially for an advisor.
What the proposed legislation says is: "EFFECTIVE DATE.—The amendments made by
this section [removing the ability to recharacterize] shall apply to taxable years beginning after December 31, 2017."
I take that as meaning that you will not be able to recharacterize anything for tax year 2018. Recharacterizing your 2017 conversions, whenever it is done, applies to tax year 2017.
As supporting evidence, I point to the wording in the current code (which would be deleted): A bit of a mouthful, but basically saying that if you undo your tax year 2017 Roth conversion by Oct 15, 2018, it's treated as if you'd just moved the money from your traditional IRA back into a traditional IRA in tax year 2017.
Of course this isn't advice, Ed could be right, or the law might not be changed at all.