With the halfway mark of 2018 behind us, it might be appropriate to direct some thought towards calendar-sensitive estate planning and tax planning topics. (Last week in our blog we covered donating Required Minimum Distributions from IRA accounts to charity, noting that the law has allowed more flexibility in the timing of Qualified Charitable Distributions.)
Unfortunately, when it comes to Roth IRA conversions, flexibility appears to be going away. As Bill Bischoff puts it in marketwatch.com, the new tax law “creates a perfect storm for Roth IRA conversions.”
By way of quick review, Roth IRAs have two big tax advantages as compared with “traditional IRAs:
- Withdrawals are federal income tax-free (assuming you’ve kept a Roth account open for at least five years, and you’ve reached age 59 ½ – or have become disabled).
- There are no annual required minimum distributions, even after age 70 ½.
Because of these two advantages, many individuals moved significant sums of money into Roth IRAs by “converting” their traditional IRA accounts to Roth status. Yes, the conversion is treated as a taxable withdrawal, usually triggering a big federal and state tax bill, but…many believe today’s tax rates are the lowest we might see for the rest of our lives.
Since withdrawals from a Roth will be federal-income-tax free (so long as at least one Roth account has been open five years or longer), the motivation for doing the conversion now is to pay tax at today’s low rates (and enjoy spending it tax-free later – or leaving it as a legacy with less tax liability for the heirs).
Up until this year, a Roth conversion represented a reversible decision. Under prior law, if it turned out that the decision to convert traditional IRA monies into a Roth had a greater than anticipated negative tax impact, you could undo the deal up until October 15th of the following year. In fact, if you converted a traditional IRA into a Roth in 2017, you have the chance to reverse that conversion between now and October 15, 2018.
However, for 2018 and beyond, no longer will reversals of Roth conversions be allowed.
Handling IRA planning is yet another example of the way tax planning and estate planning tend to overlap. While Rebecca W. Geyer & Associates does not offer direct tax advice, we do coordinate efforts with other advisors to address the tax aspects of the planning process. This is an important change, and we want to be sure to keep our clients and blog readers apprised of all the latest updates in tax law.
– by Rebecca W. Geyer
