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What the Tax Cuts and Jobs Act Means for Retirement Benefits

The new law eliminates Roth recharacterizations, offers a break to some employees who take loans against their employer-sponsored plans, and may make qualified charitable distributions even more popular.

The Tax Cuts and Jobs Act makes sweeping changes to the tax code, but few directly impacting retirement benefits.

The most significant change is the elimination of the right to undo ("recharacterize") a Roth IRA conversion.

Under our tax code, individuals have the right to "convert" all or part of a traditional plan or IRA to a Roth IRA--at the cost of paying income tax currently on the converted amount. Throughout the 20-year existence of Roth IRAs, the Roth converter has been granted a unique privilege--the option to change his mind and reverse the conversion, right up until the extended due date of his tax return for the conversion year. (This was only for conversions to Roth IRAs; "in-plan conversions" have never been reversible.) The new tax law eliminates this right. For Roth IRA conversions in 2018 and later, there will be no option to recharacterize the conversion; all Roth conversions will be irrevocable.

What's not clear yet is how the law impacts 2017 conversions. Under previous law, the 2017 conversion of a traditional plan or IRA to a Roth IRA would have been reversible (i.e., the converter would have been entitled to recharacterize it) until Oct. 15, 2018. The new law repeals that right for "taxable years" after 2017. Some hope this means that conversions that occurred in tax year 2017 can still be reversed by the October 2018 deadline, but the law could be read as accelerating the recharacterization deadline for 2017 conversions to Dec. 31, 2017.

On the bright side, the law's final draft preserves recharacterization as a method for fixing some IRA contribution mistakes, unlike earlier versions of the bill that threw out the recharacterization-as-mistake-fixer baby along with the recharacterization-as-a-way-to-undo-a-Roth-conversion bath water.

More good news: Though not part of the law itself, the conference committee's explanatory statement of the law explicitly blesses a popular technique that some had questioned, namely, the "back-door Roth contribution." An individual who is younger than 70 1/2 and who has compensation income, but whose adjusted gross income is too high to permit her to make an annual-type contribution to a Roth IRA, can instead make her annual contribution to a traditional IRA, then convert that traditional IRA to a Roth (because there is no income limit applicable to conversions). Some had questioned the legality of such an indirect Roth IRA contribution, saying it might be illegal under the "step transaction doctrine." The conference committee definitively answers that question: Back-door Roth contributions are legal. The explanatory statement states (four times!) that an individual who is legally permitted to contribute to a traditional IRA can contribute to a traditional IRA then convert the account to a Roth--under the prior law and the new one. This should put an end to skepticism about back-door Roth contributions.

Another change: An employee who gets a plan loan gets a new little break--if the plan terminates, or the employee's employment terminates, the loan typically becomes due immediately in full. If the employee can't pay it back, the outstanding loan balance is treated as a distribution to him. He can roll over that distribution to avoid being taxable on it, but until now the rollover deadline was the usual 60 days. Under the new law this particular type of distribution gets a longer rollover deadline--the extended due date of the employee's tax return for the year of the distribution. Note this change will not help the employee who simply defaults on his regular plan loan repayments; that type of deemed distribution is still not eligible for rollover at all.

Now for some bad news that (hopefully) affects very few people. If you close out all your IRAs, or all your Roth IRAs, and the net amount thus distributed to you is less than your "basis" in those accounts (less than the amount of your after-tax contributions to the accounts, including conversion contributions, in the case of Roth IRAs), the IRS position is that the loss you have thus realized is deductible only under § 212, "Expenses for production of income." As such, the loss is a "miscellaneous itemized deduction" subject to Code § 67(a), meaning that (until now) the loss was deductible only to the extent the total of such loss and your other § 67(a) "miscellaneous itemized deductions" exceeded 2% of your adjusted gross income. Under the new law such loss will not be deductible at all for the years 2018-2025. Someone might challenge the IRS classification and try to claim the loss under a different code section.

The new law may make qualified charitable distributions even more popular. § 408(d)(8) permits an individuals older than 70 1/2 to transfer up to $100,000 per year from their IRAs directly to most types of charities. This device allows IRA owners to satisfy their charitable giving and their RMDs without having either the income or the deduction appear on their tax returns. That effect has always meant that some individuals could use the standard deduction while also getting the benefit of the "charitable deduction" by virtue of excluding the QCD from their income. Presumably more people will take advantage of that effect now that the new law has substantially increased the standard deduction (and slashed/eliminated some other deductions).

Finally, here's what's not in the new law: Other retirement plan changes proposed in the original House version of the bill (e.g., lowering the age for in-service distributions from pension plans, easing rules on hardship distributions) did not make it into the final legislation. And, the new law does not eliminate the life expectancy payout method for retirement plan death benefits, nor does it impose lifetime RMD requirements on Roth IRAs. We've heard for years now that "everyone" in Washington supported both these changes, but there is no such provision in the new law.

Where to read more: For treatment of IRA/Roth IRA losses as miscellaneous itemized deductions under § 212 and § 67(a), see IRS Publication 529: Miscellaneous Deductions (2016), p. 9. Regarding QCDs, see Chapter 7 of Life and Death Planning for Retirement Benefits (7th ed. 2011), available at or (in electronic format)

Now available in electronic edition! By popular demand, Natalie Choate’s book, Life and Death Planning for Retirement Benefits, has been published in an electronic version. The e-book edition gives you the entire book in word-searchable format, plus two chapters (on life insurance and annuities in retirement plans). Live links to cross-referenced book sections and most cited tax sources. Access anywhere you have an internet connection. Visit to subscribe or learn more.