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March 13, 2018

How to Cherry Pick Assets for a Recharacterization- Free download

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Excerpt from the March to June 2018 issue of The IRA Authority

Written by Denise Appleby

There is a long-held belief in the IRA industry, that one is not permitted to cherry pick stocks or other assets when recharacterizing a Roth conversion or IRA contribution. But it can be done through application of a simple algebraic formula, which negates the need to maintain multiple Roth IRAs for Roth Conversions.

An IRA owner who wants to change a regular traditional IRA contribution to a regular Roth IRA (or vice versa) may do so by recharacterizing that contribution. The recharacterization process also allows an individual to reverse amounts that were converted from traditional retirement accounts (employer sponsored retirement plans and IRAs) to Roth IRAs, thereby nullifying the tax impact of the conversion.

Important Tax Law Change: In accordance with the Tax Cuts and Jobs Act (Pub. L. No. 115-97), Roth Conversions done after 2017 cannot be recharacterized. However, regular IRA contributions can still be recharacterized.

A recharacterization must be completed by the IRA owner’s tax filing due date, plus extension. And, one who files one’s tax return by the due date, receives an automatic 6-month extension to complete one’s recharacterization.

One can choose to recharacterize a full or partial contribution or conversion. When performing a recharacterization of less than the full account balance, the IRA owner can choose to cherry pick which assets to recharacterize. Cherry picking is a useful option when one wants to choose whether to recharacterize only certain assets- such as those that have lost market value.

Why Some Believe Cherry Picking is Impermissible (click here to download the full issue)
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Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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