Post-tax-time IRA checkup

The due date for filing 2017 tax returns is almost behind us, other than for those clients filing extensions. Now would be a good time to do a post-tax time IRA check-up and make sure that nothing will be overlooked going forward in 2018.

2017 Roth Conversions

The Tax Cuts and Jobs Act eliminated the ability to reverse a Roth conversion beginning with 2018 Roth conversions, but 2017 conversions can still be undone if the move is right for the client. And clients can now do a more accurate evaluation since they have a better handle on their actual 2017 tax liability. Even if the 2017 tax return has already been filed, the recharacterization is still available up to Oct. 15 so contact clients now who may benefit from this.

IRA/Roth IRA Contributions

2017 IRA contributions can no longer be made, even if the client’s tax return is on extension. If the client missed out on a 2017 IRA or Roth IRA contribution, then make one now for 2018 (assuming they will qualify), to get a jump on building the tax-sheltered account. Also, don’t miss out on spousal IRA contributions for eligible clients. 2017 SEP IRA contributions can still be made up to Oct. 15 if the client has filed for an extension.

Back-Door Roth IRAs

There has been lots of misinformation out there on these. While the new tax law did not include guidance on so-called “back-door Roth IRAs,” there is no question any more that these are allowable. The conference report for The Tax Cuts and Jobs Acts includes four separate references making this clear.

If clients did not qualify for a Roth IRA contribution because their income exceeded the limits, they can contribute to a nondeductible traditional IRA and then convert those funds to a Roth IRA at any time. If they missed out on this in 2017, maybe because of uncertainty about the tax rules, make sure they take advantage of this now for 2018, assuming of course that they qualify to contribute to a traditional IRA, meaning they have earned income and are not 70 ½ or older.

Be sure clients are aware, before going ahead with the transaction, that if they have other IRAs, the pro-rata formula applies to back-door Roth IRA conversions, just as it does to any other conversion. Now, with recharacterization off the table for 2018 conversions, there is no way to undo these transactions after the fact if a client is unhappy with the tax consequences. If both spouses qualify, do back-door Roths for both.

Required Minimum Distributions

If a client missed a required minimum distribution or did not take the full amount for 2017 or even earlier years, get that missed RMD paid out now and apply to have the 50% penalty waived on Form 5329 when they file their 2018 taxes.

(More: 4 ways to reduce RMD taxes)

Qualified Charitable Distributions

Qualified charitable distributions have always been a good tax deal for clients, but for 2018, they are much more attractive. If your clients did not use them in 2017 or prior years, make sure to get this going for 2018. Every client who qualifies should be using them to make their future charitable contributions.

With more clients using the standard deduction, this is a way for you to help them get an effective charitable deduction in addition to the standard deduction and keep their adjusted gross income lower by being able to exclude RMD income that was donated. Too bad not every client qualifies. The QCD only applies to IRA owners and beneficiaries who are 70 ½ or older, but that is still a big chunk of clients for most financial advisers. Don’t let your clients miss out on this going forward.

Basis

Check the basis in clients’ IRAs. Check that Form 8606, “Nondeductible IRAs,” has been filed and carries an accurate basis, so that clients receive credit for after-tax funds in their IRAs when they make future withdrawals. Don’t forget about after-tax plan funds that were rolled over from a 401(k). That’s also to be added to the IRA basis on Form 8606.

Ed Slott, a certified public accountant, created the IRA Leadership Program and Ed Slott’s Elite IRA Advisor Group. He can be reached at irahelp.com.