ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with a financial advisor from Wisconsin is representative of a common inquiry related to recharacterizations. “A colleague of mine told me that Roth recharacterizations still exist. If so, does that mean my client can recharacterize an unwanted Roth IRA conversion?”
Highlights of the Discussion
While an investor still has the ability to recharacterize a traditional or Roth IRA annual contribution as the other type of IRA contribution if done so by the individual’s tax return due date plus extensions, investors no longer have the ability to recharacterize Roth IRA conversions.
Prior to 2018 investors did have the ability to undo or recharacterize a conversion of IRA or retirement plan assets. However, effective Jan. 1, 2018, pursuant to the Tax Cuts and Jobs Act (Pub. L. No. 115-97), a conversion from a traditional IRA, simplified employee pension (SEP) or savings incentive match plan for employees (SIMPLE) IRA to a Roth IRA cannot be recharacterized. The law also prohibits recharacterizing amounts rolled over or converted to a Roth IRA from workplace retirement plans, such as 401(k) or 403(b) plans.
Recharacterizations still exist, but only to treat a regular annual contribution made to a Roth IRA or to a traditional IRA as having been made to the other type of IRA.
Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.
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