Recharacterization conundrum: Ed Slott vs. Michael Kitces

[BrianB]

Other threads have touched on Roth conversion / recharacterization issues with the new tax law, but the threads have multiple topics that make it difficult to follow comments on an individual issue.

We made a Roth conversion earlier in the year. The amount was about 2x what I expected we would want to optimize our taxes. We planned a partial recharacterization in March 2018 when we know our exact tax numbers.

I've been researching the subject and can't find an answer I am comfortable with.

Michael Kitces 12/18/2017 post on his blog:

Quote:

Fortunately, though, the new limit on Roth recharacterizations applies only for taxable years beginning after 12/31 of 2017 (i.e., the 2018 tax year and beyond). Which means existing already-completed 2017 Roth conversions should still be eligible to recharacterize in 2018 (since it would be recharacterizing a conversion for the 2017 tax year, while the new rules only apply in the 2018-and-beyond tax years). Although notably, the timing of the effective date for 2018 recharacterizations of 2017 conversion (i.e., whether they will be permitted or not) is still being debated by many tax commentators.

Ed Slott comments in CNBC article 12/19/2017:

Quote:

Ordinarily, savers have until Oct. 15 of the year following the IRA conversion, also called a recharacterization, to go back and change it. But if you did an IRA conversion at any time in 2017, you will only have until the end of 2017 to reverse your decision — provided the tax legislation passes with this provision in it. "Effectively, if this comes to law, the recharacterization is dead, eliminated, repealed after 2017," Slott said. "If you were even thinking of, maybe I want to undo part of it, maybe I don't want to pay the full tax or any of it or I changed my mind, you should do that recharacterization by the end of this year to protect yourself."

What is a person to do?

[Sunset]

Either gamble you can re-characterize and live with the results if you have to pay more taxes than expected, or re-characterize 1x now to ensure you don't pay the extra taxes.

[kaneohe]

I would think following Ed Slott is the more conservative route. By now you should have gotten most of your m.fund distributions so I would think you could make a pretty good guess as to your tax situation unless you have some unusual investments.

[BrianB]

Yes. (Sigh).

I wanted to convert the maximum possible for our last chance with this strategy, but the cost if I screw up will be $5000+.

We will recharacterize our best estimate this week.

[harley]

I think Ed Slott, who I admire greatly but recognize is selling a product, is wrong on this one. I did a Roth conversion this year, and I hope it all fits into my 15% bracket. But if not, I would like to be able to recharacterize any leftover amount. And I'm not positive he's wrong, but like Michaels Kitces I don't think the new law will effect 2017 processes. But I could be wrong. If so, whatever small amount falls under the higher tax rate won't kill me.

[pb4uski]

Quote:

Originally Posted by harley ....like Michaels Kitces I don't think the new law will effect 2017 processes. ...

+1 It all comes down to an interpretation of whether the prohibition on Roth recharacterizations for " taxable years beginning after December 31, 2017" relates to the year that the recharacterazation is reported for tax purposes (2017) or the year that the recharacterization happens (2018).

I have had an ongoing dialogue with my Vanguard rep on this issue and am still waiting for Vanguard's position.

Worst case I will refine my estimate as much as possible and do a Roth conversion on December 30 and cross my fingers that I am not too much under (lost opportunity) or over (30% marginal tax rate).

[RunningBum]

My recollection of the recharacterization process is that, at least at VG, you have to mail the form in. So if you are going the conservative route with Slott, you'd better do it pretty quickly to get it there on time. And make certain you have the correct form. Last year, or maybe it was the year before, I got a call that I had used a form for the old account style, and not the one required for the brokerage account (there's another strike against that account change, btw). I don't know what would happen if they just aren't allowed in 2018.

My best guess is that Kitces is correct, but if I had a subsidy cliff to worry about, or a major horse race bet, I'd recharacterize in 2017 and not take the chance unless you hear with certainty you can do it in 2018 and your broker will accept it. If it's just a matter of paying a little more in taxes for dipping into the 15+15% territory, I'd take my chances and get it where I want after completing my taxes in February or later.

I'm not planning on recharacterizing this tax year as I've changed my strategy for the year as noted in another thread I started within the last month, so it's not a concern to me. I just went though a Turbo Tax run and made my very best estimate to top off my conversions where I wanted them. I had to make a guess on foreign taxes adding to my VTIAX dividends, and I'm hoping I included all of my other income and deductions.

[braumeister]

According to the Fidelity website:

Quote:

The bill does call for ending the Roth IRA recharacterization option starting in 2018, but 2017 recharacterizations will be permitted.

[pb4uski]

Interesting... just found this on Vanguard. They are being more conservative.

Quote:

What’s less clear is what happens to those who want to recharacterize a conversion made in 2017—the last tax year in which this can be done under the final bill. “Under current law, you’d have until October 15, 2018, to change your mind and recharacterize a conversion made in 2017,” Ms. Bruno said. “But it’s unclear under the new law whether retirement savers will have until the end of 2017 or until October 15 of next year to do a recharacterization. “ Absent guidance from the IRS providing otherwise, Vanguard will continue to permit investors to recharacterize their 2017 conversions through October 15, 2018. Investors who choose to recharacterize after the end of December 2017 should understand that there is some risk that the IRS could ultimately disallow their recharacterization transaction, potentially resulting in adverse tax consequences to them. Because of this uncertainty, Vanguard suggests that investors who are considering a recharacterization of a 2017 conversion consult a qualified tax advisor and make a decision by the end of the 2017 calendar year.

[2017ish]

I am recharacterizing before end of year. In our situation, silly to take the risk, as we were targeting enough of a conversion to max out the 28% bracket in our last year with employment income (through July). Beginning in 2018, we can convert a whole bunch of money within the 24% bracket each year--so why take the risk of being frozen into putting a good chunk into 33% this year?

YMMV with how much you have converted over what tax bracket break though.

What's the old saying? Bulls make money, Bears make money ....

[harley]

How does that apply to us sloths?

[SecondCor521]

Quote:

Originally Posted by pb4uski +1 It all comes down to an interpretation of whether the prohibition on Roth recharacterizations for " taxable years beginning after December 31, 2017" relates to the year that the recharacterazation is reported for tax purposes (2017) or the year that the recharacterization happens (2018). I have had an ongoing dialogue with my Vanguard rep on this issue and am still waiting for Vanguard's position. Worst case I will refine my estimate as much as possible and do a Roth conversion on December 30 and cross my fingers that I am not too much under (lost opportunity) or over (30% marginal tax rate).

You're brave. December 30th is a Saturday. I'm not sure if (a) Vanguard reps are available and (b) they could effect a transaction that day which would take place for 2017.

RunningBum, I believe, mentioned sending in a form. I know for certain that I did my Roth conversion online through the website without human intervention or form. However, that was my first Roth conversion and I recharacterized a portion of that conversion earlier in 2017, and I understand from reading elsewhere here that this means I can't do it online and must call in.

I'm planning on doing my conversion starting Tuesday the 26th. If I have to mail a form I can still get it there on time.

[pb4uski]

Ok... so I didn't look at the calendar.. BFD.... I'll probably do it the 27th or 28th then (next to last trading day)... satisfied?

No need to mail a form... can do it online or over the phone. I've never had to mail a form.

[RunningBum]

I mentioned a form about a recharacterization, not a conversion.

[pb4uski]

Got it.

[SecondCor521]

Quote:

Originally Posted by pb4uski Ok... so I didn't look at the calendar.. BFD.... I'll probably do it the 27th or 28th then (next to last trading day)... satisfied? No need to mail a form... can do it online or over the phone. I've never had to mail a form.

Sorry if I offended; I was just trying to be helpful.

Thanks for the info on not needing a form. My conversion went smoothly last year but I didn't know what to expect for sure on my second one having done the recharacterization.

[pb4uski]

I just did my 2017 conversion... since I had recharacterized a small portion of my 2016 conversion in January 2017 I was precluded from doing the 2017 conversion on line and had to call in... its a Vanguard thing but nonetheless frustrating.

[Sandy & Shirley]

Recharacterizations have been eliminated in the new tax law. They are legal in 2017 but not in 2018. I’m not sure how that works if you recharacterize your 2017 conversions in 2018. You are doing the actual recharacterizations in 2018!

If it were me, I’d do my estimates now and recharacterize everything before 2017 ends!

We did a lot of conversion last year due to the BRexit market drops and did our recharacterizations in December so that all of our year end broker statements were accurate.

[pb4uski]

Yes, I am planning to do the recharacterization in 2018.

See posts #8 and #9. I talked with a Vanguard rep yesterday who indicted that they are hoping to hear what the IRS position will be with respect to recharacterizations of 2017 conversions in 2018 early next week.

[BrianB]

I started our recharacterization with Fidelity on Thursday. Here are a few things I learned:

1. It is possible to do a recharacterization through the Fidelity web site, but it's not easy to find. You have to go to the "Roth Conversion" page, then go to the bottom where there is a link to recharacterize.

2. You can recharacterize shares of a fund or stock. You do not have to go to cash for the recharacterization.

3. You can recharacterize part or all of the conversion. Enter the dollar value and date of the conversion, and the dollar value of the recharacterization. Fidelity adds the growth (or subtracts the loss). That is, if you converted $50000 that has grown to $55000 and you want to recharacterize 50% then enter $25000 and Fidelity will add the proportion of the growth to the amount recharacterized, as the IRS requires.

4. After completing the form I got a message that Fidelity would confirm the change in one business day, although the final change may take three days. As of today (Saturday) we have not received the confirmation. If not received by Tuesday then I will call to be sure all is OK.

We're sad to say goodbye to the "horse race" strategy and the ability to fine-tune income levels when doing Roth conversions. It was good while it lasted!