Broker Check

Ed Slott's IRA Corner

CRDs and ROTH Conversions - Abuse of the Rules?

CRDs and ROTH Conversions - Abuse of the Rules?

The coronavirus-related distribution (CRD) rules for Roth conversions have a gaping hole.

An "affected person" (as we have defined in previous blogs), is entitled under the CARES Act to withdraw up to $100,000 from their IRA or workplace retirement plan. A CRD avoids the 10% early distribution penalty for those under 59 ½, can be repaid to a qualified retirement account within three years, and allows the account owner to spread the income (and subsequent taxes due) over a three-year period.

The coronavirus pandemic has decimated the world's economy. In the United States, unemployment levels rival the Great Depression. Businesses are shuttered. Food banks are strained as desperate families wait patiently for a box of groceries. Hospital staffs are exhausted, and the number of dead increases daily. CRDs are designed to help those most in need by providing access to a source of last-resort, emergency funds. The 3-year repayment option allows profoundly "affected people" to make their account whole once the economy turns, and the 3-year tax spread helps soften the monetary pain of the withdrawal.

The CARES Act does not appear to preclude an affected person from taking a CRD and immediately rolling those dollars into a Roth as a conversion. The taxes can then be spread over the CRD-allowable 3-year period. Individuals who do not need the money from their retirement account due to a coronavirus emergency, but who can otherwise shoehorn themselves into the definition of an "affected person," could abuse this loophole.

Does a CRD and immediate Roth conversion violate the "spirit" of the law? I certainly think so. Will I look sideways at those who maneuver their way into such a transaction? Absolutely. Will my disapproval make them lose any sleep at night? Probably not.

Be aware – this transaction is not without risk. The IRS or Congress could retroactively shut down the CRD/Roth conversion abuse. Until then, however, CRD exploitation will continue as people game the system.

Aren't we better than that?

How We Work

Our first priority is helping you take care of yourself and your family. We want to learn more about your personal situation, identify your dreams and goals, and understand your tolerance for risk. Long-term relationships that encourage open and honest communication have been the cornerstone of my foundation of success.

HELPING AMERICANS KEEP MORE OF THEIR HARD-EARNED MONEY

Diligent savers enter the second half of retirement with little insight into the complex tax and distribution planning dangers that can wipe away the sacrifice made during their working years.

What good is investment growth if you can't reap the rewards in retirement? Click below to learn more.

Learn more

Working with an Elite IRA Advisor



What is an Ed Slott Elite Advisor?

Ed Slott and Company is the nation's leading source of accurate, timely IRA expertise and analysis to financial advisors, institution, consumers and media across the country. We neither sell nor endorse any financial product.

Members of Ed Slott's Elite IRA Advisor GroupSM train with Ed Slott and his team of IRA Experts on a continuous basis. These advisors passed a background check, complete requisite training, attend semiannual workshops, webinars, and complete mandatory exams. They are immediately notified of changes to the tax code and updates on retirement planning, so you can be sure your retirement dollars are safe from unnecessary taxes and fees. Additionally, members have access to us, America’s IRA Experts to answer any tough questions or planning needs.


ACCESS OUR GUIDE

10 QUESTIONS TO ASK YOUR FINANCIAL ADVISOR
Download this list, a great starting point when questioning your financial advisor!