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Traditional and Roth IRAs: What changed?

If you want a tax-advantaged retirement account outside your employer's plan, you have two main options: a traditional IRA or a Roth IRA. You may prefer one over the other, depending on your short-term savings goals, years until retirement and assumptions about future tax rates.

Traditional IRA vs. Roth IRA basics

You can generally deduct contributions to a traditional IRA, which lowers your tax bill. On the other hand, with a Roth IRA, you pay taxes upfront. So you may have to earn $7,500 pre-tax to sock away the annual maximum of $5,500 in a Roth IRA.

With a traditional IRA, taxes are deferred. When you're retired and withdraw money, it's counted as regular income and taxed accordingly. However, with a Roth IRA you're generally allowed to make tax-free withdrawals in retirement. That means that if you expect to be in a higher tax bracket in the future, a Roth IRA may make the most sense.

Roth recharacterizations: a thing of the past?

When Roth IRAs were originally created in the late 1990s, Congress provided a way to move or "convert" funds from a traditional IRA to a Roth account. Although taxpayers had to pay taxes on the amount converted, some considered the future benefit of tax-free withdrawals preferable to the current benefit of tax-deferred contributions. Congress also let taxpayers change their mind about Roth conversions, and "recharacterize" them back to traditional IRA accounts.

But the Tax Cuts and Jobs Act signed last year eliminated the ability to reverse a Roth conversion using the recharacterization process as of Jan. 1, 2018.

There is some wiggle room left to undo Roth conversions made during 2017, if you complete the recharacterization by Oct. 15, 2018.

Retirement planning can get complicated. If you'd like help evaluating your tax-advantaged account options, give us a call.

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