Conversations with family over New Year's brunch led me to compile the following analyses of the Tax Cuts and Jobs Act of 2017 and it's impact on the ability of taxpayers to recharacterize contributions to their Traditional IRAs any time prior to tax day.
Internal Revenue Code Section 408A governing Individual Retirement Accounts (IRAs) (last amended in 2008) provided:
(a) General rule
Except as provided in this section, a Roth IRA shall be treated for purposes of this title in the same manner as an individual retirement plan.
(6) Taxpayer may make adjustments before due date
(A) In general
Except as provided by the Secretary, 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, then, for purposes of this chapter, such contribution shall be treated as having been made to the transferee plan (and not the transferor plan).
(B) Special rules
(i) Transfer of earnings
Subparagraph (A) shall not apply to the transfer of any contribution unless such transfer is accompanied by any net income allocable to such contribution.
(ii) No deduction
Subparagraph (A) shall apply to the transfer of any contribution only to the extent no deduction was allowed with respect to the contribution to the transferor plan."
(there's a lot more, but that's the operative part of the old law).
Here's the 2017 language amending that Internal Revenue Code provision:
SEC. 13611. REPEAL OF SPECIAL RULE PERMITTING RECHARACTERIZATION OF ROTH CONVERSIONS.
(a) IN GENERAL.—Section 408A(d)(6)(B) is amended by adding at the end the following new clause:
‘‘(iii) CONVERSIONS.—Subparagraph (A) shall not apply in the case of a qualified rollover contribution to which subsection (d)(3) applies (including by reason of subparagraph (C) thereof).’’.
(b) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017."
KPMG released the following interpretation of the change when it was still in the conference committee:
"The conference agreement would provide that the special rule allowing contributions to one type of IRA to be recharacterized as a contribution to the other type of IRA would not apply to a conversion to a Roth IRA. The proposal provides that a conversion contribution to a Roth IRA during a tax year could no longer be recharacterized as a contribution to a traditional IRA and unwinding the conversion. Recharacterization would still be permitted for other contributions. This provision would not prohibit a contribution to an IRA and a conversion to a Roth IRA."
Their analysis is consistent with the joint explanatory statement by the conference committee:
"Under current law, a taxpayer making a contribution to an individual retirement arrangement (either a traditional IRA or Roth IRA) may recharacterize the contribution as a contribution to the other type of IRA before the due date for the individual’s income tax return for that year.
The Act revises the conversion rule so that a taxpayer may no longer reverse a rollover or conversion to a Roth IRA and treat the contribution as made to a traditional IRA. However, recharacterization is still permitted with respect to other contributions. For example, a taxpayer may still make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA before the due date for the individual’s income tax return for that year."
So if you have a private IRA, you will only be able to recharacterize contributions to traditional accounts as contributions to Roth accounts after they have been made. This would mean you pay taxes on the income now, not when the minimum mandatory distributions must be made. That limits a taxpayer's ability to influence the top marginal tax bracket in which they pay taxes when they take the distributions.
Circular 230 Notice: Pursuant to U.S. Treasury Department Regulations, all tax advice herein is not intended or written to be used, and may not be used, for the purposes of avoiding tax-related penalties under the Internal Revenue Code or promoting, marketing or recommending advice on any tax-related matters addressed herein.
The EFM Lawyer.