A Roth IRA conversion is an appealing prospect to many people. If this applies to you, it is possible to do this in 2017, without fretting about tax code changes. If the rate of tax ends up being lower in 2018, after tax reform, the recharacterize/reconvert method described below will move the conversion's tax ramifications into 2018.
In the event that Congress does not pass an overhaul of the tax code, or if reforms do not reduce your marginal rate for 2018 - and you want to do Roth IRA conversion now -- just record this transaction on your tax return for 2017. However, if the tax reforms go through - and your marginal rate for 2018 will be less than it is in 2017 - you can move income from the conversion to 2018 by following a two-step strategy:
Conversions from conventional IRAs to Roth IRAs can be canceled out or reversed (recharacterized). This is done through a transfer between trustees in different financial organizations, or between accounts of the same organization. Recharacterized conversions (i.e. Roth IRA rollovers from conventional IRAs) are treated as if the rollover or conversion has not happened. Recharacterized contributions are regarded as being initially contributed to second IRAs, rather than first IRAs. Transfer amounts have to include associated funds or are reduced appropriately by any losses.
Preferably, recharacterizations should be performed on the deadline date (taking extensions into account) for the taxpayer's report for the relevant year. These transactions should be shown on that year's tax return.
Nonetheless, recharacterizations can be done after returns are filed for the year in which a Roth IRA conversion was completed. Essentially, there is a window of half a year from a return's due date (unextended), in which a recharacterization can be made for the amount you initially converted to your Roth IRA.
After funds are converted to Roth IRAs from conventional IRAs, they can be transferred back to conventional IRAs via recharacterization, and then subsequently reconverted to Roth IRAs again if desired. If you follow the above steps, the income you make will be determined when the reconversion is completed. It is vital to remember that reconversions cannot be done prior to:
-The start of the new tax year after the year when the Roth IRA conversion was performed.
Or (if it is later):
-The conclusion of the thirty-day timeframe, starting when the owner of the IRA transfers the Roth IRA funds back to a conventional IRA, using recharacterization.
This rule about timing applies, irrespective of whether recharacterization happens in the tax year that the Roth IRA conversion was done, or the subsequent tax year.
If you want to benefit from the best strategies for Roth IRA conversions, contact the Lone Star Tax Group today on (806) 300 8903. We can prepare all types of tax returns, including Corporate S & C, 1040 personal, Trust returns, Partnerships and other federal forms, along with Multi-State, State, Rita, City and local.
