FEDweek

Tax Law Removes Ability to Undo Roth Conversions

The new tax law, the Tax Cuts and Jobs Act (TCJA), largely avoided changes in regard to retirement savings, but one that stands out for those preparing for retirement is an end to the ability to “re-characterize” Roth conversions.

The tax code allows individuals to move untaxed money from a traditional IRA to taxed money in a Roth IRA. TCJA eliminates the ability to move it back, or re-characterize the Roth conversion. Going forward, conversions to your Roth account can’t be undone, something that had some savers scrambling to re-characterize their conversions by December 31. Typically, savers have had until October 15 in the year following their conversion to undo it – but it appears that’s off the table.

There were various reasons that folks have until now re-characterized their conversions, chief among them was a change in investment value, market swings, and so on.

However, the law still allows savers to change Roth contributions to traditional contributions before the due date of the tax return. If, for example, you contributed to a Roth IRA and then found out that your income was over the limit for contributing to a Roth, you could still change that contribution from Roth to traditional and avoid the 6% excise tax for “excess contributions.”

Lookout for 2017 TSP forms on TSP.gov

The Thrift Board will soon post 2017 forms 1099-R in the My Account section of the tsp.gov (and/or mail them to the address on record) by January 31, 2018. These forms will include and TSP withdrawals up to and including December 27, 2017 and any taxable distributions on TSP loans up to and including December 29, 2017.

Any withdrawals taken on December 28 and 29, 2017 are considered income for 2018 and will be included in the 1099-R for 2018, which will be issued by January 31, 2019.