New laws are often filled with loopholes, unintended provisions that allow taxpayers to legally make money moves to their benefit.
There may be such loopholes with the Coronavirus Aid, Relief, and Economic Security (CARES) Act. But it’s not the case when it comes to converting distributions from a 401(k) and/or IRA into a Roth IRA.
In this episode of Ask Bob, a reader writes:
If you have not been impacted in any way by COVID-19, can you or can you not borrow against your 401(k) and convert it to a Roth IRA without the 10% penalty and pay whatever taxes owed over three years? And if you can't with a 401(k), can I withdraw money from a traditional IRA and convert it into a Roth IRA?
We are 55 and 59. We would like to convert as much as possible to Roth IRAs but do not want to get hit with the 10% penalty nor do we want to pay significant taxes on one year. This seems like our chance, but no one seems to be clear on who is eligible. Our CPA told me last week that they have not secured the details yet? Does anyone know?
Well, Denise Appleby, the CEO of Appleby Retirement Consulting knows.
You would be eligible to take coronavirus-related distributions if you fall into at least one of the following categories:
- You were diagnosed with the virus SARS–CoV–2 or with coronavirus disease 2019 (COVID–19) by a test approved by the Centers for Disease Control and Prevention,
- Your spouse or dependent was diagnosed with such virus or disease by such a test, or
- You experienced adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the IRS.
Since the coronavirus did not impact you, you would not be eligible for the CRD. But even if you were, you would not be able to roll those funds into a Roth IRA and not pay an ordinary income tax on the distribution.
Got questions about money? Get answers. Email Robert.Powell@maven.io.