No Takebacks?

As a parent of three young children, this time of year is certainly an exciting (yet hectic!) one. As you might guess, all of the kids were quite literally bouncing off the walls in anticipation of Christmas morning. Fortunately, Santa came through and delivered most of what was asked for. The jolly old soul even disregarded my wishes to NOT deliver a drum set. I suppose I must have done something to end up on the naughty list…

The Dad equivalent of a lump of coal

One other frequently requested item was something called a “rocker bike.” If you aren’t familiar, it’s essentially a smaller version of a BMX bike, but it has really fat tires. Each of my two older kids received said bikes and were very excited. To our surprise, they actually agreed to trade bikes shortly after opening them and trying them out. As kids often do, my son informed his sister that there would be “no takebacks,” meaning the trade would be permanent. “Fine with me,” she agreed. It remains to be seen if either child experiences trader’s remorse. My money is on there being additional conflict prior to the New Year.

It seems as though the new tax bill will also follow a no takeback policy with regard to IRA recharacterizations, however the timing is a little bit up in the air. Under current tax law, you are allowed to “takeback” a ROTH IRA conversion completed in 2017 up until October 15, 2018. A taxpayer can convert traditional IRA assets to a ROTH IRA, pay the required income tax for that year, and not be subject to a penalty. If this turns out to be a bad idea, and you owe more tax than you thought (or can afford to pay), you can recharacterize that conversion as having stayed in the traditional IRA.

The option to recharacterize is technically still in place, but there is a grey area. Maria Bruno, Vanguard senior investment strategist states, “…it’s unclear under the new law whether retirement savers will have until the end of this year or until October 15 of next year to do a recharacterization. We hope that the IRS will provide clarifying guidance on this in the near future.” The article goes on to say, “Vanguard will continue to permit investors to recharacterize their 2017 conversions through October 15, 2018. Investors who choose to recharacterize after the end of December 2017 should understand that there is some risk that the IRS could ultimately disallow their recharacterization transaction, potentially resulting in adverse tax consequences to them.”

As usual with complicated tax matters, it makes sense to contact your CPA or tax advisor. ROTH conversions still might be a good idea for many, but we all might have to be a little more careful when planning for the tax consequences. It seems as though the IRS will be saying “no takebacks” for the foreseeable future.

Happy New Year to you and your families!


Categories : Financial Planning

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