So, is the new Tax Reform good or bad for Roth conversions?  The easy answer is “yes”!

Roth conversions are a useful option to move money from a standard IRA to a Roth IRA.  Standard IRA contributions are tax deductible but you’re taxed when you withdraw the money.  Roth gives no up front tax break, but the money isn’t taxed when you withdraw it.

Converting a regular IRA to Roth IRA is a potentially complex decision. What if the IRA you convert to Roth then goes down in value?  Then you’d be paying tax on the high amount but only getting the low amount.  Another possibility is that you miscalculate and push yourself into a high tax bracket with the conversion.  Surprisingly, Congress had thought of that and provided “recharacterization”, an option to undo the conversion.  The bad news about the tax bill is that it eliminates recharacterization.  Now, if you convert to Roth you will need to be much more careful in your planning, because you don’t get the free do-over of recharacterization.

The good news about the tax bill is that probably your tax bracket expands and lowers, giving you a bit more of a safe landing zone when you convert IRAs and add the converted amount to your taxable income.

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