2016 is over so the book is closed on most transactions that will affect a client's 2016 taxes. Now that it's 2017, you'd need a time machine to make changes to 2016 tax returns.
IRAs, though, are a rare exception.
A 2016 IRA or Roth IRA contribution can still be made up to the due date of April 18, 2017 for 2016 taxes, but not beyond that date, even if an extension is filed. If a 2016 Roth IRA contribution is made in March 2017 for the five-year Roth IRA holding period, that Roth IRA is treated as if it were made on Jan. 1, 2016, over a year earlier, effectively cutting the five years to less than four years.
(More: Ed Slott: Why IRA and plan rollovers are one of the biggest traps in the retirement market)
A 2016 IRA contribution can also be recharacterized in 2017, meaning changed from a traditional IRA to a Roth IRA, or vice versa.
Say your client contributes to a 2016 Roth IRA, but later in 2017 finds out that his 2016 income is too high to qualify for a Roth IRA contribution. That 2016 Roth contribution can be recharacterized as a 2016 traditional IRA contribution in 2017, assuming the client qualifies to make a traditional IRA contribution for 2016. The client would have until Oct. 16, 2017 to do the recharacterization. The traditional IRA contribution would be deemed to have been made by the April 18, 2017 deadline, even though the actual funds were not deposited in the traditional IRA until after that date.
(Related read: Ed Slott: 5 common mistakes clients make with RMDs )
The recharacterization works the other way, too. Say your client contributed to a traditional IRA, but then realized he was not allowed to because he was over age 70½. Since there is no age limit for a Roth IRA contribution, the traditional IRA contribution can be recharacterized as a 2016 Roth IRA contribution up to Oct. 16, 2017, even though the funds were not deposited in the Roth IRA until well past the April 18, 2017 deadline for 2016 Roth IRA contributions. Of course the client must qualify for a Roth IRA contribution.
If it turns out that the client did not qualify for any type of IRA contribution, maybe because they had no qualifying compensation, and made a contribution anyway, that 2016 IRA or Roth IRA contribution which is an excess contribution, can be applied to 2017, if the client qualifies for a 2017 IRA contribution. If not, the contribution can be removed by Oct. 16, 2017, as an excess contribution, to avoid the 6% penalty.
A 2016 SEP IRA contribution can also be made in 2017, up to the April 18, 2017 due date, plus extensions. If an extension is filed, the client has until Oct. 16, 2017 to make a 2016 SEP contribution. If there was no existing SEP plan, a 2016 SEP plan can still be set up and funded in 2017, up to the original or extended due date.
A 2016 Roth conversion can be undone up to Oct. 16, 2017 whether or not an extension is filed. This could come in handy if new tax legislation reduces tax rates. If the rate reduction is substantial enough, and the gains in the new Roth are minimal, it could pay to recharacterize the 2016 Roth conversion and then reconvert in 2017. If the client wants to reconvert those same funds, they would have to wait until more than 30 days after the recharacterization.
Example: Tom converted $100,000 to a Roth IRA in August 2016. Tom's Roth IRA does not have much growth and due to new tax laws Tom's 2017 tax rate will be lower. If Tom recharacterizes his 2016 Roth conversion on May 10, 2017, he can reconvert those same funds after June 10, 2017, 30 days after the recharacterization. If Tom has other funds in his IRA that were not part of the 2016 Roth recharacterization, he can convert those funds at any time, since that would not be a reconversion. It would be a new Roth conversion.
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.
