New Roth IRA Conversion Rules – Eight Things Investors Should Know by James Lange, CPA/Attorney – Fact 5-8

Disclaimer: Please note that the Tax Cuts and Jobs Act of 2017 removed the ability for taxpayers to do any “recharacterizations” of Roth IRA conversions after 12/31/2017. The material below was created and published prior the passage of the Tax Cuts and Jobs Act of 2017. 

5. The impact of the conversion on your current income tax rate.
By converting to a Roth IRA you are immediately recognizing, in the year of your conversion, income that could propel you into a higher marginal tax bracket. The only way to really sort this challenge out is to crunch the numbers and try to make the best decision based upon your current tax bracket versus your future income tax bracket expectation.

6. Potential estate planning opportunities.
Roth IRAs can, in certain situations, offer estate planning opportunities. For investors that have other sources of retirement income and do not need to use their traditional IRA monies during their lifetime, a conversion can help leave income tax-free Roth IRA monies to heirs for gift and estate planning purposes. Because you pay the income tax on a Roth IRA up front, your heirs inherit this Roth IRA free of income taxes. When considering a Roth IRA for estate planning purposes, please keep in mind that the conversion will immediately reduce your IRA assets if you cannot pay the conversion tax with non-IRA assets and therefore you may have less money available to grow in your retirement plan. Roth IRAs offer tax-free earnings which can be more attractive than the tax-deferred earnings of a traditional IRA. However, if you have less money in your retirement account, this may not bring the results you desire.

7. Tax laws are always subject to change.
Remember, tax laws are always subject to change. Therefore, it is advisable for anyone making this decision and/or other decisions to stay in contact with a financial professional who is current and informed of these rules. When making financial decisions that involve tax laws it is always advisable to think about the “what ifs” and make sure you make the most informed decision.

8. Roth IRA Conversions Made in 2014 Can Be Recharacterized
Under current federal tax laws, all taxpayers have the option of recharacterizing or “undoing” a Roth IRA transaction. When you choose to recharacterize a Roth IRA, you are essentially making an election to place your retirement funds back to the way they were before the conversion.

This process can be completed no later than October 15th of the year following your conversion.  Please remember that under current tax laws, there are restrictions on how you must handle a partial recharacterization of a Roth IRA. You cannot choose to recharacterize only those investments that have declined in value. This is not allowed under the Anti-Cherry Picking Rules.[1] The Anti-Cherry Picking Rules were specifically designed to prevent people who converted to a Roth IRA from recharacterizing only those investments that declined in value. The effect of this rule is to pro-rate all gains and losses to the entire Roth IRA regardless of the actual stock or investment recharacterized. One strategy that is allowed is for an investor to break up their IRA into two separate IRAs and then convert to two separate Roth IRAs. You should familiarize yourself with the IRS laws regarding recharacterization in order to implement this strategy. As a financial advisor who understands these rules, we have experience in guiding clients in this area.


In conclusion, we realize the decision to convert some or all of your retirement account to a Roth IRA is complex. While this article is for informational purposes only and should not be deemed tax advice or an individualized recommendation, we hope that some of these points are helpful to you.

Should you have any question on whether or not you should contribute or convert to a Roth IRA, we welcome the opportunity to help you map out a strategy that will be best for your situation. Saving for retirement has and always will be a priority for most investors. We enjoy helping clients and prospects explore all of their options.