With the 2017 Tax Cuts and Jobs Act going into effect, there are several tax and investment opportunities regarding Roth IRA’s. I am going to discuss two; Conversions and Recharacterizations.
As a refresher, a Roth IRA is a retirement savings account that allows your money to grow tax-free. There are contribution and income limitations to how much and who can contribute.
With 2018 bringing lower tax rates for most individuals, it is time to consider how your current tax rates compared to previous years and how they may compare to tax rates in the future.
Example - a couple filing jointly that has $300,000 in taxable income would have had a marginal tax rate of 33% in 2017 but only 24% in 2018. In addition, many experts believe tax rates will rise again in the future. Because of this, that family may want to consider converting some IRA’s to Roth IRA’s in 2018, paying tax now and locking in some tax-free growth for the future.
Roth Recharacterization (Last Chance!):
One of the great provisions of Roth conversions has been the ability to “undo” or recharacterize. The new law removed that ability going forward. However, for 2017 conversions, the provision is still in place until October 15th, 2018.
Example - Following the example above, if they couple had made a Roth conversion in 2017 and their marginal tax rate changed from 33% to 24%, they may want to consider recharacterizing all or part of their conversion at the higher tax rate and then redoing it at your lower 2018 rates. However, this decision is very individualistic, as other factors such as the benefits of the tax-free growth you have accumulated need to be considered.
**Disclaimer: Reston Wealth Management has provided this information as a service and does not provide legal, accounting or tax advice. The appropriate professionals should be consulted on all legal, accounting and tax matters.