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Can I reverse a Roth conversion?

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Q: If I convert an amount from my traditional IRA to a Roth, keeping me in a low tax bracket, and my financial adviser sells a bunch of stocks, leading to an unexpected gain that bumps me into a higher tax bracket, can I return the money to the traditional IRA to limit the tax liability for the year?

A.: Sorry to be the bearer of bad news, but the answer is “no.”

In 2018, as part of the Tax Cut and Jobs Act, “recharacterization” of Roth IRA conversions from traditional IRAs and qualified plans (e.g., 401(k)) were no longer permitted. As a result, all Roth conversions taking place on or after Jan. 1, 2018 are irrevocable.

Recharacterizing Roth contributions is still permitted. This would be the choice if you were to make a regular contribution (up to $6,000 for 2020, $7,000 if over age 50) to the wrong type of IRA and wanted it switched to the correct account.

The scenario you describe can be avoided with good communication and coordination. Talk to your adviser about the conversion before you execute it. Be aware though that while most “advisers” will talk about taxes, they will have a disclaimer that states that they don’t give tax advice. Many work at firms that prohibit them from preparing even the most basic tax projections. Some can critique a projection you create, but are still likely to avoid standing by any such critique. They will say, “see your tax adviser.” You should follow that suggestion, especially if you are not working with a financial planning and advisory firm that gives tax advice, coordinates the tax planning with the investments and stands by their tax advice.

It is easy to have the issue you describe even if you don’t use an adviser. Recharacterizations of Roth conversions were a staple of tax planning for years so one could be unaware of the change. A conversion done earlier in the year can easily be forgotten when placing trades later in the year. A Roth conversion was a tactic touted frequently around the COVID-19 crash.

Getting bumped to a higher bracket is also possible without placing a trade at all. For instance, you could receive a bonus at the end of the year. Further, mutual funds must pay out net realized capital gains every year. Most of these capital gain distributions are paid in the fourth quarter. If funds you own pay out enough capital gain distributions, one can easily find their income higher than expected and desired effect of a Roth conversion diminished.

Converting IRA money to a Roth IRA when in a low tax bracket is a sound tax strategy. In most years, it is usually advisable to wait until the end of the year to execute a conversion because you can use more actual numbers than estimated numbers for income items when projection your taxes and have higher assurance that you will remain in a low bracket.

In years like 2020 when the market declines early in the year and you think a Roth conversion is appealing, one option is to err on the conservative side and convert some but not all of what you think you will want to convert in the year at that time. Later in the year, if in fact your income is low enough to make further conversions attractive, you can convert more at that time. The more you convert, the more tax revenue Uncle Sam collects so there is no limit to the size or number of conversions executed during the year.

If you have a question for Dan, please email him with “MarketWatch Q&A” on the subject line.

Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo in Orlando, Melbourne, and Tampa Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity.



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S.E.C. Commissioner Hester Peirce on the outlook for crypto regulation, and whether this will finally be the year we see a Bitcoin ETF.





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My husband doesn’t get along with my son. I brought most of the wealth into our marriage. How do I split my estate?

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Dear Quentin,

How do couples typically handle their estates in a second marriage? My husband and I have been married for seven years, and it is the second marriage for both of us. I have one adult child from my previous marriage; he has no children.

I brought the majority of our wealth to our marriage, including almost $1 million in my 401(k) and a nice home that is almost paid off; otherwise, we have no debt. My husband and I bought a second home together. We work hard to fund our new 401(k)s, and own a successful business together.

I am turning 65 this year, so estate planning is long overdue. My husband is five years younger than me, and we are both in very good health. We have two issues facing us: I see our retirement as living very comfortably on the monthly income generated by our 401(k)s, pension, Social Security, etc., and leaving whatever may be left to my son.


‘The other issue is that my husband no longer gets along with my dear son at all, and feels no obligation to get along with him.’

I am not interested in scrimping, but I want to be able to have enough money to last us until age 90 (or beyond) by not touching the principal. My husband is more interested in dipping deep into our savings, and living it up in retirement while we are young enough to enjoy it.

The other issue is that my husband no longer gets along with my dear son at all, and feels no obligation to get along with him, to the point that neither one wants anything to do with the other. As far as he is concerned, my son doesn’t meet his expectations, and so deserves nothing from me and certainly nothing from him.

I want my estate planning to be fair to both my new husband and my son. How do people typically handle this type of quandary? I think that I need to create some type of trust to pass on my share of our estate to my son. My pre-marriage assets involved my son as I pursued my graduate degree through night school and worked long hours throughout his childhood.

Second Wife

You can email The Moneyist with any financial and ethical questions related to coronavirus at qfottrell@marketwatch.com.

Dear Second Wife,

Don’t allow your husband’s feelings toward your son to influence your estate planning.

Your relationships with your husband and your son and your own plans for retirement are all fair game when making decisions about your estate, but your husband and son’s fractured relationship is their business, not yours. You worked hard for this money, and your son is your legal heir. Any effort by your husband to spend all of your savings and fritter away any inheritance that you intended to leave to your son should be resisted at all costs.

You have worked too hard your entire life to compromise your plans for a comfortable retirement where you have money set aside for long-term medical care insurance, unforeseen emergencies and/or your son. If you jointly own your home, you can leave your half to your son in your will, and specify it can only be sold after your husband passes away.

If you own the home, you can give your husband a life estate. Your son would pay capital-gains tax on the value of your home when he sells it, and not when you bought it. You could also make your son the beneficiary on your life-insurance policy, and/or gift him a certain amount of money per year to see how he manages and spends that money.

Figure out what is fair to yourself first before moving on to what is fair to your husband and your son. It’s OK to put your needs first. I caution against your dipping into savings at a rate that is beyond your own risk tolerance.

Ultimately, you are entitled to leave all other separate property to your son when you die — and, along with a financial adviser, set up a trust with that in mind for you, your husband and your son. Not necessarily in that order.

The Moneyist: ‘I cut his hair because he won’t pay for a haircut’: My multimillionaire husband is 90. I’ve looked after him for 41 years, but he won’t help my son

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 group, where we look for answers to life’s thorniest money issues. Readers write in to me with all sorts of dilemmas. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.

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These money and investing tips can help you make a place for crypto in your portfolio

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Don’t miss these top money and investing features:

These money and investing stories, popular with MarketWatch readers over the past week, can give you a better understanding of bitcoin and other cyrptocurrency, and help you figure out if digital currency has a place in your portfolio alongside stocks, bonds and other traditional assets.

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