IRA to Roth Conversion with Cares Act. Covid Related IRA distribution converted to Roth IRA

[timw657]

I took a CRD ira distribution and converted it to a Roth IRA. Am I allowed under the Cares act to pay the tax over 3 equal years or not? Unclear help is found, while it is not outright disallowed, getting the forms 1099-R and 8915-E and 8606 do not allow the 3 year payment distribution. Any clear help on this would be appreciated. I am retired and the distribution qualifies, wife's business was seriously negatively impacted due to the pandemic.

ira 

[macuser_22]

If the distribution was COVID related and you qualify then yes.   It can be paid back to any qualified retirement plan over 3 years.

[timw657]

Thanks for your reply. I am interested in paying the taxes due for the conversion over 3 years, which I think is allowed. Some tax advisors say this violated the spirit of the law, and the IRS will likely disallow it in the future, with penalties for those who took a CRD and converted it to a Roth ira. I'd like some assurance that it really is legal. Thats all. It was a 100,000 conversion, so paying taxes on a 33,333 conversion each of 3 years is my plan.

[macuser_22]

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@timw657 wrote:

Thanks for your reply. I am interested in paying the taxes due for the conversion over 3 years, which I think is allowed. Some tax advisors say this violated the spirit of the law, and the IRS will likely disallow it in the future, with penalties for those who took a CRD and converted it to a Roth ira. I'd like some assurance that it really is legal. Thats all. It was a 100,000 conversion, so paying taxes on a 33,333 conversion each of 3 years is my plan.

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I do not believe that is permitted under the CARES act that allows returning the money to the plan that it came from or a like plan as a rollover.  A Roth conversion would not qualify,

Section §2202(a)(3) or the CARES act says:

(3) Amount distributed may be repaid.--
                    (A) <<NOTE: Time period.>>  In general.--Any 
                individual who receives a coronavirus-related 
                distribution may, at any time during the 3-year period 
                beginning on the day after the date on which such 
                distribution was received, make 1 or more contributions 
                in an aggregate amount not to exceed the amount of such 
                distribution to an eligible retirement plan of which 
                such individual is a beneficiary and to which a rollover 
                contribution of such distribution could be made under 
                section 402(c), 403(a)(4), 403(b)(8), 408(d)(3), or 
                457(e)(16), of the Internal Revenue Code of 1986, as the 
                case may be.

It plainly states a "rollover contribution" and a conversion is not a rollover and none of the quoted sections pertain to a Roth conversion.

[timw657]

What am I missing in your answer? I do not wish to repay a distribution at all. My choice is simply to pay the taxes due from a IRA to Roth IRA conversion. Splitting the taxes due over 3 years is clearly in the Cares act, is it not?

[dmertz]

The IRS has never specifically addressed this issue with CRDs and other types of disaster distributions which are handled similarly on other types of Form 8915.  The industry consensus is that performing a Roth conversion with a CRD is not permitted because depositing the distribution into a Roth IRA would not constitute "repayment" of the distribution as defined in the statute.

Further, there is no way to accommodate such a transaction on Forms 8606 over multiple years.  The only way to be able to report this as a Roth conversion is to not report it as a CRD and report it entirely in Part II of the 2020 Form 8606.  As such, the entire amount is taxable in 2020.

[timw657]

I read from IRS webpages that paying the taxes due on a covid related distribution may be ratably distributed over a period of 3 years. What about that does not apply to my question?

[timw657]

This is called by the IRS including distribution income over a 3 year period, not the repayment option you are referring to. Thanks for your reply, with respect to your time, you are not replying to my question. Please reread and reply. Thank you. I read 2 options : repayment, OR paying taxes ratably over 3 years. 

[macuser_22]

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@timw657 wrote:

I read from IRS webpages that paying the taxes due on a covid related distribution may be ratably distributed over a period of 3 years. What about that does not apply to my question?

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Because *you* are not keeping the money, it was put into another retirement account that is a "rollover *conversion*" that the law did not include as the type of plan that it could be rolled into.

Nothing prevent you from making the conversion but the tax is due in the year of the conversion.

[timw657]

Hello Dear Community. I cut this from the IRS discussion about the Cares Act, which speaks directly to my question of distrubuting the income and resulting taxes over 3 years.  I fail to see why you disagree with the IRS.   With all due respect, can someone please explain that to me?  see pasted IRS text below:

Q6. When do I have to pay taxes on coronavirus-related distributions?

A6. The distributions generally are included in income ratably over a three-year period, starting with the year in which you receive your distribution. For example, if you receive a $9,000 coronavirus-related distribution in 2020, you would report $3,000 in income on your federal income tax return for each of 2020, 2021, and 2022. However, you have the option of including the entire distribution in your income for the year of the distribution.

[macuser_22]

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@timw657 wrote:

Hello Dear Community. I cut this from the IRS discussion about the Cares Act, which speaks directly to my question of distrubuting the income and resulting taxes over 3 years.  I fail to see why you disagree with the IRS.   With all due respect, can someone please explain that to me?  see pasted IRS text below:

Q6. When do I have to pay taxes on coronavirus-related distributions?

A6. The distributions generally are included in income ratably over a three-year period, starting with the year in which you receive your distribution. For example, if you receive a $9,000 coronavirus-related distribution in 2020, you would report $3,000 in income on your federal income tax return for each of 2020, 2021, and 2022. However, you have the option of including the entire distribution in your income for the year of the distribution.

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The IRS FAQ is not the actual CARES act, but I think the key words in your quote is " you *receive* your distribution" .   You converted the distribution rather than "received" it.

In any event TurboTax will not allow that or support it.  If you want to fill out a 8915-E by hand and file that way then  you can argue with the IRS when they disallow it.

[timw657]

I want to thank you for that explanation but admit I still find that an odd technicality and cannot understand the difference. This problem is probably not understood by thousands of people. Clearly not specifying that a Roth is not allowed, why then does the IRS  have the right to declare whether I put the money in the bank or do something else with it like convert to a Roth? Do you actually mean it is not my business to do what I want with the distribution?  I thought it was my money, and could convert it if I wanted.  I absolutely do not wish to break the law.  But I find it so difficult that this matter is not addressed in a more direct answer, such as specifying clearly that a Roth conversion is not allowed, in plain English for everyone to understand and then comply with the rules. Thanks for your reply.

[macuser_22]

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@timw657 wrote:

I want to thank you for that explanation but admit I still find that an odd technicality and cannot understand the difference. This problem is probably not understood by thousands of people. Clearly not specifying that a Roth is not allowed, why then does the IRS  have the right to declare whether I put the money in the bank or do something else with it like convert to a Roth? Do you actually mean it is not my business to do what I want with the distribution?  I thought it was my money, and could convert it if I wanted.  I absolutely do not wish to break the law.  But I find it so difficult that this matter is not addressed in a more direct answer, such as specifying clearly that a Roth conversion is not allowed, in plain English for everyone to understand and then comply with the rules. Thanks for your reply.

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The IRS does not make the rules, Congress does.   The plain reading of the CARES act that Congress passed to put money into peoples pockets because they took a distribution  because of COVID (such as loss of job,  unable to work, etc)  so they could pay their bills allows people to return the money tax free when they recover, to the same or similar account that it was taken from or to pay the tax over a 3 year period because of hardship.

It was not meant to be a "backdoor" method of making  taxable Roth conversions over a 3 year period - that is contrary to the purpose of the act.     

Do it if you want and let us know if the IRS disallows it.

[timw657 · Accepted solution]

My apologies, you are correct and I was going in the wrong direction.  Your help provided the answer I needed: A Covid Distribution cannot be converted to a Roth IRA, I get it now. And a Roth Conversion is not affected by the 2020 Cares Act, these are different animals, so to speak. I do wish that the IRS had provided some way to see this more clearly by the non Tax professionals among us, since I am not any sort of Tax professional or attorney. I did not understand until now.  Thank you for your patience in explaining this to me, and I hope this question and answer format can be useful to some other people who may be unclear about how a Covid Related Distribution or a Roth Conversion will be treated. Nothing has changed for how a Roth Conversion is treated, as always the entire tax expense must be paid in the year the conversion is taken. It is good to ask questions, we can always learn things that way rather than not asking, where no learning takes place at all. Thank you.