CRDs and Roth Conversions – Abuse of the Rules? | Ed Slott and Company, LLC

CRDs and Roth Conversions – Abuse of the Rules?

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on Twitter: 
@theslottreport


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?

 


Posted in:

Content Citation Guidelines

Below is the required verbiage that must be added to any re-branded piece from Ed Slott and Company, LLC or IRA Help, LLC. The verbiage must be used any time you take text from a piece and put it onto your own letterhead, within your newsletter, on your website, etc. Verbiage varies based on where you’re taking the content from.

Please be advised that prior to distributing re-branded content, you must send a proof to matt@irahelp.com for approval.

For white papers/other outflow pieces:
Copyright © [year of publication], [Ed Slott and Company, LLC or IRA Help, LLC - depending on what it says on the original piece] Reprinted with permission [Ed Slott and Company, LLC or IRA Help, LLC - depending on what it says on the original piece] takes no responsibility for the current accuracy of this information.

For charts:
Copyright © [year of publication], Ed Slott and Company, LLC Reprinted with permission Ed Slott and Company, LLC takes no responsibility for the current accuracy of this information.

For Slott Report articles:
Copyright © [year of article], Ed Slott and Company, LLC Reprinted from The Slott Report, [insert date of article], with permission. [Insert article URL] Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.

Please contact Matt Smith at matt@irahelp.com or (516) 536-8282 with any questions.

 

Find members of Ed Slott's Elite IRA Advisor GroupSM in your area.
We neither keep nor share your information entered on this form.
 

I agree to the terms and services:

You may review the terms and conditions here.