Can a 2018 & 2019 Back Door IRA Conversion be Undone?

Submitted by Pamela Duys on Fri, 2019-03-22 01:06

After recommending to a high income individual (already contributing to a 401(k) plan) to do a back to back 2018 & 2019 Back Door IRA Conversion by contributing to a Traditional IRA (becomes non-deductible, thus creates basis in the IRA) and then converting to a Roth IRA, I learned that he had another pre-tax conversion IRA account over $100,000. Now this Roth conversion will create a tax bill that we do not want. This happened in late January 2019 (almost two month ago). I learned that the 2017 TCJA does not allow for a Roth conversion election back to the Traditional IRA. Can the conversion be undone?
This was an unintended result and many late elections on Roth conversions being reversed have been allowed by the IRS as researched in several IRS Private Letter Rulings.



Submitted by Alan - IRA critic on Fri, 2019-03-22 01:51

Conversions done in 2017 were the last ones that could be recharacterized. Since back door Roths have become popular, not realizing that ALL non Roth IRAs must be included in the year end balance on Form 8606 has led to many of these conversions ending up mostly taxable. The usual resolution to this is the ability to roll the pre tax IRA still existing into an accepting employer plan before the end of the conversion year. Many 401k plans will accept IRA rollovers, but some that do will not accept IRA rollovers from contributary IRA accounts, those that have ever received a regular IRA contribution. So there is plenty of time to do this rollover if the individual has an employer plan that will accept the remaining IRA balance.  That would make the conversion tax free or nearly so because the taxable amount of the conversion already done is provisional until year end. If the employer plan will not accept the IRA rollover, I would not recommend spending 20k on a PLR request because I think the chance of success are not good since nothing happened here other than the other TIRA account was not disclosed.

Submitted by Pamela Duys on Fri, 2019-03-22 03:43

There may be an opportunity to roll the pre-tax IRA (it was moved into a self-directed account) back into the employer’s retirement account.  I will research this option, knowing that the complications of self-directed IRA investments.  Your suggestions were much appreciated. THANK YOU!

Submitted by David Mertz on Fri, 2019-03-22 03:18

  • I see zero chance of a favorable ruling on a PLR requesting a recharacterization of a 2019 conversion because the law explicitly prohibits recharacterizing these conversions.
  • While the taxable result will not be the intended result if a rollover of the pre-tax TIRA money to a qualified retirement plan cannot be accomplished in 2019, it’s not all that terrible.  While additional tax will be paid now, less tax will be paid in the future since the portion of the basis in nondeductible TIRA contributions not applicable to the 2019 conversion will be applicable to future TIRA distributions.  There is often still long-term benefit to doing Roth conversions even if the conversions are taxable.

Submitted by Pamela Duys on Fri, 2019-03-22 03:48

I have written PLR’s before, but the law is quite plain and clear, and I would not try a PLR unless there was more than 50% chance of success.  If this transaction is still within 60 days, can the Roth be rolled over back into the traditional IRA, and the conversion basically undone?  Some literature indicate possibly, yes, but it was not definitively.  What are you thoughts on this?

Submitted by Alan - IRA critic on Fri, 2019-03-22 04:13

Not possible. The only permitted rollover from a Roth IRA is to another Roth IRA.  A transfer to a TIRA would be limited to recharacterizations which we know ended in 2017. A regular Roth contribution can still be recharacterized, but this was not a regular Roth contribution.

Submitted by Pamela Duys on Fri, 2019-03-22 18:34

Thank you for all of your recommendations.  I appreciate this very much.  Take care, Pam

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