This precious savings for pirated retirement has just disappeared forever – The Fool Motley

It is difficult to save for retirement and savers have to work hard to make the most of all the resources available to them. Tax-advantaged accounts such as IRAs and 401 (k) are useful tools to help you save for your retirement, and the Roth IRAs, in particular, offer unparalleled benefits, such as tax-free growth and withdrawals after your retirement.

For years, retirement savers have used a valuable strategy that allows them to convert their regular retirement savings into traditional IRA accounts and 401 (k) into Roth IRA assets. One of the reasons this was particularly helpful was that savers could use what is called a new Roth requalification to cancel Roth's conversion if it did not work as well as it did. had hoped. However, the tax reform package that came into effect at the end of 2017 put an end to the elimination of new Roth characterizations. As the effective date of October 15 is now past, retirement savers can no longer use this strategy, making it much more difficult to assess the relevance of Roth's conversions.

How Roth's requalifications worked

Roth's recharacterization strategy began with the decision to convert traditional retirement assets into a Roth IRA. This decision is always available to anyone with money in an ordinary retirement account, as the tax reform has not changed the conversion rules. The advantage of a conversion is that once you do it, any additional growth becomes tax free.

The disadvantage is that during the conversion, you must include the value of the converted asset in your taxable income for the taxation year in which you make the transfer. In other words, you are now paying taxes on what you convert in exchange for not having to pay taxes later.

The problem with Roth conversions is that unless you wait until the last few days of the year, it's hard to predict whether including the converted amount in taxable income will make sense. Unexpected income or deductions can turn what seemed like a good idea into a less than ideal situation. In addition, if you convert investment assets and they lose value, you will have to pay taxes on money that you no longer have.

Roth's requalifications provided investors with the opportunity to retire in the event of a conversion problem. Under the old rules, you could reconfigure an earlier Roth conversion until the final due date of the tax return for the year in which you made the conversion. Because this included extensions, it meant that those who had converted to Roth IRA by 2017 had until October 15, 2018 to perform a new characterization.

How tax reform has removed this strategy

The tax reform package ended the Roth requalification. As of 2018, those who convert assets into Roth no longer have the opportunity to reverse the move.

As a result, retired savers will no longer have access to certain key strategic moves:

• Under the old law, if your converted investments were losing value, you could reconfigure and cancel the adverse tax consequences. Later, you can convert back to the lowest value, paying less taxes. If this happens now, you will be stuck with the biggest bill.
• The recharacterization also helped to avoid the difficult situation in which it appeared that you could not pay the tax on converted assets. Now, if you can not pay the resulting taxes, you will not be able to cancel the conversion and you will have to find some money somewhere. In some cases, this means paying taxes from the converted retirement assets themselves, a decision that can generate even more tax.

To be clear, you can still use Roth conversions if you wish. If you are 100% sure that your tax rates will be abnormally low, the conversion is usually smart because you will avoid having to pay higher tax rates later on when you retire.

However, for many, tax rates are going to down after your retirement. In this case, the traditional vs. Roth decision is much more similar. Now that you can not change the idea afterwards, you will need to be more careful before making the initial decision to convert.

Be smart with your retirement savings

The constant evolution of retirement savings rules creates both opportunities and obstacles for savers in their efforts to plan their financial futures. The loss of the Roth requalification capacity makes it a little more difficult to manage your retirement portfolio effectively, but that should not stop you from doing everything you can to save and invest in order to make your retirement financially safer.