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September 27, 2018


Sometimes a transaction does not result in the desired outcome. When it comes to IRA contributions and conversions though, tax laws were enacted to allow a do-over. This is the foundation for a "recharacterization." When a person converts a traditional IRA to a Roth IRA, the amount converted becomes immediately taxable to the account holder. The hope is that the Roth account continues to grow and will eventually provide tax-free distributions for many years to come. With the ups and downs of the market that may not always be the case. If the balance of your account has dropped since the date of conversion, you have the option of making an election to recharacterize the conversion, which essentially unwinds the original transaction as if it never happened. This eliminates the conversion income for the account holder and puts the IRA back into a traditional IRA account. A subsequent conversion can still be made at a later date.

The same can be done for an IRA contribution. An individual can elect to recharacterize a traditional IRA contribution (assuming they are not subject to the income limits) to a Roth contribution (or vice versa). However, the deadline to complete a recharacterization is fast approaching, Oct. 15, 2018. This only applies to conversions actually completed in calendar year 2017 or for contributions made for the calendar year 2017. If you made a conversion in 2017 and have not achieved the desired results, you should consider this election and contact your broker to begin the necessary steps.

As a final note, the Tax Cut and Jobs Act of 2017 eliminates recharcterizations of IRA conversions made in 2018 and beyond. So, this is your final chance to take advantage of this government approved "do-over."

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