CARES act conversion
Unders the CARES act can you convert up to $!00k from an IRA to a ROTH and not pay the taxes for 3 years? Assuming you qualify under the CARES act qualifications?
- What I stated was just a general consensus, so it’s possible the IRS will disregard those conversions. I would wait to see what Form 8915 E look like, as it needs to be released without too much further delay. The instructions and form itself should make it clear whether the IRS will allow a CRD to be converted. Early on, many thought this was doable, therefore many CRD conversions were likely done.
- If the IRS form disallows it, leaving no other option but to report the conversion normally, clients would have an extra 66,667 in taxable income over the expected 33,333. However, they many should also have some outstanding gains from the extra 66,667 converted that they would otherwise not have.
- There is no reason to believe that this will be handled any differently than any other type of disaster distribution. The law and tax forms regarding CRDs have been derived from the previous types of disaster distributions reportable on Forms 8915-A through -D.
- The draft Form 8915-E looks essentially the same as other Forms 8915 for disaster distributions, but with additions for the fact that more than one kind of disaster distribution can be made in 2020. Roth conversions are required to be reported on Form 8606 Part II and I can’t see any possible way to do that with the taxable amount spread over multiple years without actually making the distributions in multiple years. There’s no way I can see to make the reporting on the tax return would not match up with the single 2020 Form 1099-R that reports the CRD.
- https://www.irs.gov/pub/irs-dft/f8915e–dft.pdf
- https://www.irs.gov/pub/irs-dft/i8915e–dft.pdf
My clients are older than 59.5, what if we just withdraw the amount from the ROTH (assuming the IRS disallows conversions). Now it’s a taxable amount from a withdraw not a conversion and now we can spread the tax bill over 3 years. We still would probably have to explain to the IRS what happened but could that be a solution?
You could do that, but it would have to be done as a distribution of an excess regular contribution to the Roth since the Roth would not be an eligible plan to receive the repayment (rollover). This just means that any earnings allocated to the Roth contribution would have to be distributed in addition to the converted amount and would be taxed pursuant to the 1099R reporting the corrective distribution. The income from the CRD could then be reported ratably over 3 years, with the option to repay to the TIRA remaining open for 3 years from the CRD date. You have until 10/15/2021 to complete the corrective distribution providing the 2020 return is extended or filed by 4/15, so there is no urgency to complete the corrective distribution. The earnings on the conversion that are withdrawn would be taxable in 2020 even if the corrective distribution is not done this year.
Permalink Submitted by David Mertz on Wed, 2020-12-02 17:16
Permalink Submitted by dan casey on Wed, 2020-12-02 17:27
Crap, I’ve already done some for some clients. Now that recharachtization isn’t allowed, any ideas?? ugh I’d probably have to see if the custodian can reclassify it as a withdraw instead of a conversion and then transfer the money from the ROTH to the brokerage account and pray I don’t get sued.