Happy Birthday Roth!

Roth IRA’s turn 20 this month. In 1998, 20 years ago Congress, passed the Taxpayer Relief Act, creating the Roth IRA, named for Senator William Roth who sponsored the legislation. We all know that Roth’s are wonderful! We wish all our money were in Roth IRA’s or (cash value life insurance) so it can grow and be spent or passed on without taxes. Of course, to put money into a Roth IRA, whether by “contribution” or “conversion,” you must pay the income taxes first.  So, do Roth’s make sense for you?

Our job is to position your money, so you can spend more of it and then pass on more when you’re done with it. That means giving less of your money to the IRS and less to waste and inefficiency. Roth IRA’s can be a tremendous tool in making more of your money spendable. The trick is to pay as little tax as possible as you contribute money to Roth’s or convert IRA’s to Roth’s. Just so you know, there are ways for many of us to convert IRA’s or other pre-tax moneys to Roth IRA’s without much of a cost at all. Could this work for you?
The only reason people don’t convert their IRA’s (or 401(k) or 403(b)’s or SEPs, etc.) to Roth IRA’s is they don’t want to pay the tax. Please realize by not doing a Roth conversion, you are still going to pay the tax at some point, and have to take RMD’s along the way.  The question is “When is the best time to pay the tax?”
Converting to a Roth, if done smartly, can reduce your taxes and eliminate RMD’s over your lifetime. So, Happy Birthday Roth IRA’s!
But wait! Income tax laws just changed beginning 2018.  Did the new tax law hurt Roth IRA’s? Yes and no! Roth contributions and Roth conversions are still available to you, just like before. The only difference is that the new tax law does not allow “recharacterization.” What is recharacterization? It is the ability to “undo” (either fully or partially) a Roth conversion, after the fact.
Prior to the new law, you could recharacterize a Roth back to an IRA up until October 15th in the year after the date of the conversion. Here’s an example.  Let’s say you converted $100K of your IRA to a Roth on January 1st of 2016. You do your taxes in March of 2017 and if you decided you would have been better off converting $90k to a Roth instead of $100k, you could recharacterize $10K back to an IRA by October 15th, of 2017. This has allowed us to convert an estimated amount and then fine tune it later.
There are many reasons why recharacterizing a Roth conversion back to an IRA can save you tax and wealth. But moving forward, you can no longer undo a Roth conversion. That means you want to convert the optimal amount, because you can’t fix it later. How about 2017 conversions? Can we still recharacterize by October 2018? The IRA has not been clear about this. We’ll let you know as soon as they clarify this.
The good news is you can recharacterize a Roth “contribution.” Contributions are different than conversions. So, if you make a Roth contribution on April 10th of 2018 for 2018 (not 2017) you have until October 15th, 2019 to move it to an IRA or remove your funds from the Roth like it never happened.  For example, you do a Roth contribution then realize you would be better off contributing to a traditional IRA instead for the tax deduction.  You can “recharacterize it” to a traditional IRA.

One thing is clear about taxes. Tax laws will keep changing, but Roth IRA’s continue to be a hero, giving us a way to minimize or eliminate taxes. Could we find a way to help you convert your IRA’s to a Roth with little or no tax? Let’s see!  Only a tax planning strategy session will tell!