Lost in all the tax law changes that went into effect this year were several changes made to IRA and Roth IRA accounts that bear mentioning.
IRS Blessing of the Backdoor Roth IRA
The amount of money you can contribute to a Roth IRA is typically limited and direct contributions are completely disallowed if you exceed certain income limits. A backdoor Roth IRA is a strategy that allows you to get around those income limits by contributing first to a Traditional IRA, then converting it to a Roth IRA.
There has been some concern that the IRS would disallow this strategy, saying the taxpayer circumvented the nature of the law. The concern arose because there was nothing in the law explicitly allowing taxpayers to do a backdoor Roth IRA.
This has changed. THe Congressional Conference report on the Tax Cuts and Jobs Act published last December stated taxpayers are allowed to contribute and then convert. Then in July the IRS confirmed, saying on a Tax Talk Today webcast that the “backdoor Roth method is allowed under the law.
Extended Rollover Period for Plan Loan Offsets
Under the old law, if you left your employer and had a 401(k) or pension plan loan balance, your employer would accelerate the due date of the loan, and if not repaid, offset the outstanding loan against your plan balance. The balance of the plan would then be rolled over to an IRA account. You could roll an amount equal to the outstanding loan into the IRA, but if not done within 60 days, the amount of the outstanding loan would be taxable to you.
Under the new law, you have until the due date of your tax return, including extension, to roll the amount of the outstanding loan into the IRA.
Elimination of the Ability to Re-characterize Roth IRA Conversions
A common strategy when converting monies from a Traditional IRA to a Roth IRA was to reverse the conversion if the investments in the Roth IRA declined in value after the conversion. This allows you to avoid paying tax on value no longer in the IRA. You had until the due date of the tax return, including extensions, to evaluate this. This gave you a free look for up to 9 1/2 months after the year-end before deciding whether to keep the conversion or reverse it.
Beginning in 2018, the ability to reverse or re-characterize a Roth conversion is no longer allowed. Thus, you may want to wait until the end of the tax year to convert, when you have a better sense of your taxable income and tax brackets.
With marginal tax brackets being lowered, Roth conversions may still be a good strategy to consider, given a long-term holding period and a possibility of increasing marginal rates in the future.
If you have questions about any of the above retirement plan topics, please contact us. We are happy to discuss them with you.