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 1/2, 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 at 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 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.

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