Convert 401(k) COVID-19 distribution to Roth IRA?

Submitted by Robert Vashko on Wed, 2020-04-29 22:00

I apologize if this was already asked and answered, but I could not seem to find a post or article squarely on point:

Client is qualified individual eligible for COVID-19 distribution from 401(k), and wants to convert to Roth, given current depressed account value.

1.) I can’t see any reason in CARES that this cannot be done. Has anyone found otherwise?

2.) Assuming this is fine, does the client have the three years to (ratably) pay the tax on the conversion? Again, I can’t see why not, but am worried I am overlooking something.

3.) Is it fair to say that this must be an indirect conversion? The language of CARES seems to make it clear that the taxpayer must take receipt of the distribution before redepositing/rolling it into another qualified account.

Please and thank you!



Submitted by Alan - IRA critic on Wed, 2020-04-29 23:26

  • I know the feeling, and have extensively reviewed all the prior natural disaster distribution provisions dating back to 2005. Strangely enough, the answer to this is not clear. First, I thought that a Roth IRA was not an eligible retirement plan because Sec 408A is not listed as such. Later, I concluded that it does not have to be listed because 408A is carved out of 408 in the opening paragraph of 408A and a Roth IRA follows all the 408 rules except as specifically listed in 408A. If so, a Roth IRA is an eligible retirement plan. Also, Pub 976 that addresses disaster distributions on which CARES is modeled DOES list a Roth IRA as an eligible plan.  Form 8915, used in the past to report such distributions and repayments, does not specifically mention Roth conversions and is inconclusive along with it’s instructions. If allowed, there is no separate indication that the conversion income could not be reported over 3 years.
  • Next, after extensive research, I located two sources that said conversions were not allowed, but did not say why, one by T Rowe Price that indicated it IS allowed, and all the other articles were silent on this issue. It seems odd that with all the major hurricanes in recent years that this has not been clarified.
  • I agree that the requirements for a CRD eliminate direct rollovers. Any rollover must be done at least one day after the distribution, therefore any conversion would have to be an indirect rollover. Of course, an indirect rollover can be done with a withholding declination under CARES.
  • Obviously, CARES and prior relief legislation are designed to free up funds for individuals to meet their obligations, and conversions are the polar opposite. That may partially explain the lack of clarity on this question. Perhaps we will be provided with further guidance as time passes. If a taxpayer processes the conversion and it is later deemed disallowed, they would have a failed conversion that would be treated as an excess regular Roth contribution and corrected in the usual manner. Further, it is also not clear after correction if the 3 year repayment option would allow for the repayment of the failed conversion to a pre tax eligible plan. 

Submitted by Robert Vashko on Thu, 2020-04-30 00:34

Thanks, Alan.  In terms of the COVID-19 distributions being designed to help people “meet their obligations, and conversions are the polar opposite” – I don’t disagree, but I have to wonder why Congress a.) didn’t just flat-out call these “hardship distributions” (which is what I originally assumed they were) and squarely peg them as hardships under 401(k)(2)(B)(i)(IV); and b.) deliberately included the language allowing for the rollover of the distribution literally one day later?  How many people have a dire financial obligation on Tuesday but then don’t have it on Wednesday?  If they didn’t want to call it a hardship, but still wanted the money spent, why not put a waiting period on the rollover – 180 days or whatever – to ensure the money stayed “out there” for use vs. just being shuffled around qualified accounts?

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