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Roth IRA do-overs done after Oct. 15, 2018

IRA nest egg retirement
IRAs come in two forms, traditional and Roth. You can convert a traditional individual retirement arrangement to a Roth account, but reversing that hits a roadblock under the new tax law.

There are lots of good reasons to convert a traditional IRA to a Roth retirement account.

There also are lots of good reasons to change your mind about that IRA conversion and switch the account back to its traditional form.

But time to recharacterize your Roth IRA, as the reversal is known, is running out.

And it will be gone forever, or at least through 2025 under the new law's temporary, so far, time frame.

Roth changes changed in new tax law: The Tax Cuts and Jobs Act (TCJA) eliminated the option to recharacterize a conversion after Dec. 31, 2017.

If in 2018 you decide or already opted to move retirement money in a traditional IRA, SEP or SIMPLE to a Roth IRA, that money cannot be recharacterized.

The TCJA also prohibits effective with the 2018 tax year the recharacterizing of amounts rolled over to a Roth IRA from other retirement plans, such as 401(k) or 403(b) plans.

But if you converted an eligible retirement account to a Roth IRA during the 2017 tax year, you still have until this Oct. 15th to recharacterize that transaction under the previous tax rules.

Returning to old IRA account: So why go back to a traditional IRA?

Most folks reverse a Roth conversion because their account value has fallen.

Remember, when they originally made the switch, they had to pay tax on the value of the tax-deferred account at that time. But if the Roth IRA is worth less, that means they've overpaid taxes.

Recharacterization of the Roth will erase its accompanying tax bill.

But that reason isn't so pressing now, thanks to the recent run-up in the equity markets.

Tax rate implications: Your tax bracket, however, could be another reason to recharacterize.

If the amount you moved from a traditional IRA pushed you into a higher tax bracket, you might want to reduce that bill by putting the money back into its previous tax-deferred status.

That's definitely something to think about if that happened with your conversion last year, since you'll owe tax at 2017's generally higher ordinary tax rates. It could be better to reverse the 2017 move and then convert the amount to a Roth IRA now that the TCJA's lower 2018 rates apply.

The tax rate differential between this and last year could make a 2017 recharacterization worth considering even if your converted retirement account's value held steady.

Extended filing double deadline: The Oct. 15 deadline is doubly important if you converted a traditional IRA to a Roth in 2017 and also got a six-month extension to file your 2017 tax return.

The extra time means you can recharacterize before you file and not worry about owing/reporting the due tax on your extended filing.

But if you already filed for the 2017 tax and decide(d) to recharacterize last year's retirement account conversion, then you'll have to file an amended return.

Form 1040X will let you remove the conversion and its tax bill from your 2017 return. And that will get you a refund of the tax you paid on the conversion.

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