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Roth Conversions Under TCJA

Before getting into how the Tax Cuts & Jobs Act changed the rules around Roth conversions, let’s first cover why financial advisors (and you) should love Roth money!

Tax Free Withdrawals

Roth money (Roth IRAs, Roth 401ks and the like) has two distinct advantages over other types of savings, whether retirement or non-qualified. The first is how Roth withdrawals are tax free! See, usually your options are to put money in pre-tax and then pay taxes on all of it (your money plus growth) when you take it out; or to put money in post-tax and then pay taxes on the growth (you can take your money our – aka basis – tax free).

But with Roth monies, you put money in post-tax and then you don’t pay taxes on that money, or its growth, at all! Roth money is the best kind of money from a tax perspective!

For the sake of simplicity, let’s pretend you put $1,000 per month into an account for 25 years, meaning your deposits total $300,000. After 25 years of compound interest you’d have nearly $680,000, assuming a 6% return. With a Roth account, that means you’re getting nearly $380,000 of tax-free money!


The other very distinct advantage of Roth money is that it isn’t subject to Required Minimum Distribution (RMD) rules. That means you aren’t required to begin taking withdrawals based on age beginning at age 70.5. This is a huge benefit for a couple reasons: you get increased control over your tax burden in retirement. By using Roth money, you can decrease your tax liability in years you might have otherwise had a high one. In addition, because you aren’t required to deplete this account with RMDs, it’s a great asset to provide to heirs because it’s tax free to them in their lifetime as well!

Are you beginning to see why financial advisors LOVE Roth money!?

Roth Conversions Before TCJA

Okay, now onto how the Tax Cuts & Jobs Act changed the rules for Roth conversions. After reading above, you can see how it’d be great to have the most money possible in Roth accounts. There are limited annual contribution amounts, so the other way we can get money into Roths is by converting traditional (i.e. pre-tax) money to Roth. This is a taxable event, but remember, once the money is in the Roth, you don’t pay taxes on it again.

Before the TCJA, you could do a Roth conversion for a tax year, and then you had until the tax deadline (April 15th) to undo that Roth conversion. You might want to undo it because your income was higher than you expected, or you ended up in a higher tax bracket than expected, so it wasn’t an opportune time to take on more of a tax liability with a Roth conversion. So, come tax time and you figured that out, you could just undo the conversion and ‘no harm, no foul.’

Roth Conversions After TCJA

But now with the new TCJA laws, you can’t undo Roth conversions like that anymore. The deadline is now year-end of the tax year you’re doing the conversion. Essentially, they removed the extra time after the tax year was over to determine if you made a mistake and should undo your Roth conversion.

What Does This Mean?

Well, for starters, it means your tax professional and financial advisor must be way more diligent about recognizing when is (or isn’t) a good time to do a Roth conversion. Before the new law, there was plenty of time to gather W-2s, additional income statements, etc. to determine Roth conversion opportunities. So, it also means your team of professionals will need some updated and accurate information from you much earlier (i.e. by December) than you’re probably used to (i.e. April).

After reading this, if you’re wondering how you can get more money into your Roth accounts, please don’t hesitate to reach out, we’re happy to help discover opportunities for your individual situation.

*Examples are hypothetical and for illustrative purposes only. The rates of return do not represent any actual investment and cannot be guaranteed. Any investment involves potential loss of principal.

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