The Tax Cuts and Jobs Act that was put into place on December 22, 2017, included a repeal of the rule allowing recharacterization of IRA contributions.
Under pre-Act law, if a taxpayer made a contribution to an IRA (traditional or Roth) for a tax year, the taxpayer was allowed to recharacterize the contribution as a contribution to the other type of IRA (traditional or Roth) by making a trustee-to-trustee transfer to the other type of IRA before the due date for the individual’s income tax return for that year. In the case of a recharacterization, the contribution was treated as having been made to the transferee IRA (and not the original, transferor IRA) as of the date of the original contribution. Both regular contributions and conversion contributions to a Roth IRA could be recharacterized as having been made to a traditional IRA.
Under the new law, for tax years beginning after December 31, 2017, the rule no longer applies to a conversion contribution to a Roth IRA. As a result, recharacterization cannot be used to unwind a Roth conversion.
Earlier this week, the IRS clarified this change to apply to Roth conversions made on or after January 1, 2018. This clarification means than recharacterization of Roth conversions which were done in 2017 will still be permitted through October 15, 2018.