Converting a traditional IRA to a Roth IRA can provide tax-free growth and tax-free withdrawals in retirement. But what if you convert your traditional IRA — subject to income taxes on all earnings and deductible contributions — and then discover you would have been better off if you hadn’t converted it?
Before the Tax Cuts and Jobs Act (TCJA), you could undo a Roth IRA conversion using a “re-characterization.” Effective with 2018 conversions, the TCJA prohibits re-characterizations — permanently. But if you executed a conversion in 2017, you may still be able to undo it.
Reasons to recharacterize
Generally, if you converted to a Roth IRA in 2017, you have until October 15, 2018, to undo it and avoid the tax hit.
Here are some reasons you might want to recharacterize a 2017 Roth IRA conversion:
- The conversion combined with your other income pushed you into a higher tax bracket in 2017.
- Your marginal income tax rate will be lower in 2018 than it was in 2017.
- The value of your account has declined since the conversion, so you owe taxes partially on money you no longer have.
If you re-characterize your 2017 conversion but would still like to convert your traditional IRA […]