Retirement account provisions

Recharacterization of Roth conversion

The ability to recharacterize a Roth conversion completed for tax years beginning with 2018 has been eliminated.

The Internal Revenue Code allows a taxpayer with a traditional IRA or qualified plan account to roll those accounts over to a Roth IRA. This is often referred to as a Roth conversion. Whenever a taxpayer completes a Roth conversion, the taxpayer is liable for income tax on the untaxed amounts included in the conversion. Prior to 2018, a taxpayer who completed a Roth conversion was able to undo the conversion by requesting a recharacterization of the conversion amount by the due date of the income tax return for the year that the conversion took place, including extensions.

The TCJA eliminates the ability to undo a Roth conversion for conversions completed in 2018 and in future years, so conversions completed for tax years beginning with 2018 cannot be recharacterized.

Qualified plan loan offset

The deadline to repay a qualified plan loan is extended to the due date of the tax return for the tax year in which the rollover took place.

A taxpayer who rolled a qualified plan account with an outstanding plan loan into another retirement account is required to repay the loan balance to the account to avoid having to include the loan balance in income. Prior to the TCJA, the deadline to repay the loan was 60 days from the date of the rollover. The TCJA extends the deadline for repayment to the due date of the tax return (including extensions) for the tax year in which the rollover took place.

Tax withholding provisions

The backup tax withholding rate has been reduced to 24 percent; the withholding rate of 30 percent for non–US persons has not changed. A 10 percent tax withholding from gross proceeds of interest in a publicly traded partnership sold by a non–US person may be added.

The TCJA reduction in the marginal income tax rates resulted in a reduction of the backup withholding rate from 28 percent to 24 percent. Likewise, the Section 1445 withholding rate for capital gains distributions from REITs to non-US persons was reduced from 35% to 21%. Finally, the TCJA established a requirement to withhold 10 percent tax from gross proceeds whenever a non–US person sells an interest in a publicly traded partnership. Application of the 10 percent withholding tax to sales of publicly traded partnerships is suspended until the Internal Revenue Service issues regulations.