The IRS just gave guidance that a nondeductible IRA may still in fact be converted into a Roth IRA. For those who didn’t know about that planning strategy in the past, at a certain level of income people were no longer allowed to deduct their IRA contributions. Many advisors thought that the rule was that the higher income earner could not open an IRA, which was incorrect. You simply lost the ability to deduct them.
Why would I open an IRA that I could not deduct? It was still tax differed growth after it was opened, so a “tax differed annuity” that could be invested in any way an IRA could be. Later, with the creation of a Roth IRA and the conversion rules that developed afterward, the planning community spared no time in putting two and two together and converting the IRA that had never been deducted into a Roth IRA, so that future growth would be tax free instead of tax differed. Thus opening the use and contribution to Roth IRAs by people who were previously not allowed to have them. With some of the changes in Trump’s new tax code, the planning community wondered if that ability had been forfeited. The ruling came down in favor of allowing that to continue.
So, at least that part of the marathon is over well ahead of 2025!
The changes to the code have left bits and pieces like this for clarification that will take years to mow through. Even grander in scope are new sections of the code like 199A, and new terms of art like “QBI” that will need to be further defined. That endeavor will take so much time that several years of business returns will be filled without reliable guidance, so battles over letter audits will continue easily until 2025. Then, the ribbon…It all sunsets and goes away and we are back to the 2017 tax code.
What should the Trump tax code be nicknamed? “Finish Line 2025”! Or, “The Constant Confusion of the American Taxpayer Act”.
So, if you have never used a tax planning firm in the past and have just used tax preparation firms, you may want to rethink that. Want proof? H&R Block just announced the closing of 400 offices and their stock has dropped significantly in value as a result.
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