2018 Roth Conversion Planning After The Tax Cuts And Jobs Act

The Tax Cuts and Jobs Act (TCJA) eliminated the recharacterizations of Roth IRA conversions made in 2018 or later. Unfortunately for financial planners, this change eliminates one of the most useful strategies they have been able to help clients take advantage of for the past 20 years. Nonetheless, Roth conversions can still be successful tax planning tools for helping clients reduce their long-term tax liabilities. In fact, Roth conversions may now make sense for more clients than ever given current tax rates, if they know how to use them effectively.

In this guest post, Jeffrey Levine of BluePrint Wealth Alliance shares some Roth conversion planning strategies and considerations after the TCJA, including the even greater importance of due diligence before completing Roth conversions, a potential shift in the best time of year to complete Roth conversions, Roth IRA conversion-cost-averaging, and Roth IRA conversion “barbelling”.

Notably, recharacterizations of Roth contributions are still permitted, so clients who contribute to a Roth but end up with income above the contribution limit can still change their Roth contribution to a traditional IRA contribution, but recharacterizations of conversions that happen in 2018 and beyond are no longer permitted (2017 conversions can still be recharacterized until October 15th of 2018). The elimination of all recharacterizations of conversions puts even greater emphasis on getting a conversion right the first time, as the most common reasons for wanting to complete a recharacterization (e.g., market decline, client income was higher than expected, or a client simply changing their mind) could result in considerable client dissatisfaction if a conversion isn’t done right the first time (or if the client doesn’t understand the implications of new changes). Further, less commonly noted implications of Roth conversions, such as the potential to increase Medicare Part B/D premiums, should not be overlooked!

The elimination of recharacterizations of Roth conversions also has a considerable impact on the ideal timing of Roth conversions. In the past, completing Roth conversions as early as possible in the year was generally ideal, as a means to both maximizing the time available to consider a recharacterization and because of the general trend for markets tend to go up more than they go down. Now, however, the inability to undo Roth conversions may mean that conversions are more valuable towards the end of the year, when income can be projected with greater confidence. Nonetheless, clients may want to consider various timing strategies, as Roth IRA conversion-cost-averaging (to diversify conversion timing risk), Roth IRA conversion “barbelling” (to balance both growth potential and over-conversion risk), or simply still making a full conversion as soon as possible (to maximize Roth growth potential), can all be prudent strategies.

Ultimately, the key point is to acknowledge that Roth conversion strategies are still useful after the TCJA. Although many popular Roth conversion strategies are no longer viable after the elimination of the recharacterization of Roth conversions, the attractiveness of current tax rates can mean that Roth conversions are still an effective strategy for many!Read More…

source https://www.kitces.com/blog/2018-roth-ira-conversion-planning-tcja-conversion-cost-averaging-barbell/?utm_source=rss&utm_medium=rss&utm_campaign=2018-roth-ira-conversion-planning-tcja-conversion-cost-averaging-barbell