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 it is still possible to complete a Roth recharacterization. I thought those transactions were discontinued. If recharacterizations still exist, does that mean my client can recharacterize an unwanted Roth IRA conversion?”
Highlights of the Discussion
While investors still have the ability to recharacterize Traditional or Roth IRA annual contributions as the other type of IRA contribution if done so by their 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 (rollover) of IRA or retirement plan assets to Roth IRAs. However, effective January 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. Likewise, 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.