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Last shot at Roth do-over?

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in Small Business Tax

Suppose you converted funds in a traditional IRA to a Roth IRA last year. Then the value of the funds plummets in 2018 after a stock market downturn. So you’ve effectively overpaid the tax on the conversion.

Strategy: Undo the Roth conversion. If you meet the tax law deadline, you can “recharacterize” a Roth back into a traditional IRA. It’s like the conversion never happened.

The new Tax Cuts and Jobs Act (TCJA) eliminates this recharacterization technique, beginning in 2018. Although there’s been no official word yet from the IRS, an online posting indicates that you can still recharacterize a conversion that took place in 2017. Thus, you have until Oct. 15, 2018, for a “do-over”—possibly for the last time.

Here’s the whole story: Unlike a traditional IRA, contributions to a Roth IRA are never currently deductible, but the Roth offers the future promise of tax-free distributions.

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