The new tax reform package recently signed into law by President Trump started in Congress as a strong storm of change for retirement plans but by the time of passage ended as a whimper. Ironically the bill moved so quickly through Congress last minute changes were handwritten on the bill itself as it moved to the floor for votes. Even the name “The Tax Cuts and Jobs Act” was removed just before passage due to Senate procedural rules. The bill is now known as H.R.1. Only a few technical changes survived to the final bill. Following are the two main highlights:
1. Recharacterization of Roth Conversions
Prior to H.R. 1, individuals could convert a retirement plan rollover or IRA from a traditional pre-tax plan to a Roth IRA, change his or her mind, and recharacterize the conversion back to a traditional pre-tax IRA. Recharacterization is no longer allowed in this situation. One is still allowed to convert a Roth IRA to a traditional IRA and later recharacterize back to a Roth IRA. Easy way to remember this is once you convert to a taxable Roth IRA, you cannot change your mind and go back to a pre-tax traditional IRA. It has always been the rule that in-plan rollovers may not be recharacterized.
2. Separation from Employment and Loan Defaults
The new legislation does allow an individual to extend the time to repay a defaulted plan loan. To qualify for the extension, the loan must have been treated as distributed from the plan or defaulted because of the participant’s severance from employment. The time for repayment is extended to the individual’s due date for his/her tax return including any extension the person received from the IRS.
Stay tuned for more updates from Capitol Hill next quarter.
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