Can A CRD Be Directly Rolled Over To A Roth IRA?

[spiritrider]

How would this be mechanized.

Wouldn't the distribution be required to be reported on Form 8915 and the taxation proportionally applied over three years and reported on Form 1040 Line 4d.

Wouldn't whatever year(s) the Roth Conversion(s) were done have to be reported on Form 8606 and also reported in Form 1040 Line 4d.

How would this be reconciled.

[mming]

One last twist from my conversation with the participant - he was under the impression that after rolling over the CRD from his 401(k) to the Roth IRA, which under normal circumstances would be a taxable event, he mused that if he were to repay the CRD back to the 401k during 2020 that no taxes at all would be due.  It seems he has a personal taxable account somewhere from which he could make the repayment, the net benefit of all this being that he would have $100k placed into the Roth rather than have it sit in his taxable account. 

Even though I kind of see what he's getting at regarding how the CARES Act allows for the recouping of any taxes paid, i.e., he believes there wouldn't be a taxable event if the net amount of the CRD paid as of 12/31/20 is $0, I have to question whether it's possible to avoid taxation being that the end result is basically a permissible Roth conversion.  Did he find another loophole or am I just worn out by this circular argument and can't think straight?            

[RatherBeGolfing]

5 hours ago, mming said:

One last twist from my conversation with the participant - he was under the impression that after rolling over the CRD from his 401(k) to the Roth IRA, which under normal circumstances would be a taxable event, he mused that if he were to repay the CRD back to the 401k during 2020 that no taxes at all would be due.  It seems he has a personal taxable account somewhere from which he could make the repayment, the net benefit of all this being that he would have $100k placed into the Roth rather than have it sit in his taxable account. 

Even though I kind of see what he's getting at regarding how the CARES Act allows for the recouping of any taxes paid, i.e., he believes there wouldn't be a taxable event if the net amount of the CRD paid as of 12/31/20 is $0, I have to question whether it's possible to avoid taxation being that the end result is basically a permissible Roth conversion.  Did he find another loophole or am I just worn out by this circular argument and can't think straight?            

He is getting the most basic elements very wrong.  You have to consider aggregate distributions and repayments, they don't cancel each other out.  The limit is $100k.  You cant repay $100k twice.  

To put it in very simple terms, if I withdraw $100k today and put it back tomorrow, then withdraw $100k again next week, the second $100k cannot be repaid and has to be included as income in 2020.  

If he "repaid" the CRD into a Roth (assuming that is permissible), he can't also repay it to the 401(k).

[Luke Bailey]

On ‎5‎/‎29‎/‎2020 at 9:07 PM, RatherBeGolfing said:

I would actually argue that it would be the opposite.  The Roth conversion isn't a repayment, its another transaction triggering another taxable event.  If they meant for the rule to include as backdoor Roth conversion with three years to include the amount in taxes, there would be some way to account for it, and there isn't.  Repayment negates inclusion of that amount in income, and repayment of an amount already included triggers a refund.  

Right. You can argue for a negative conclusion based on a "two separate potential taxable events" theory as I outlined previously. But I don't exactly understand the rest of this. If I don't do a Roth conversion, but rather roll to a pre-tax account, then sure, any amount rolled after 2020 triggers refund. That's actually not in the statute, but rather the way IRS practically reconciles the fact that the statute tells you to recognize the income over three years, and requires income inclusion as early as the first year, but then allows you to treat the amount, including what you may have already included in income, as rolled over to the extent you roll over within three years. (Note that the actual statutory language is "contribute," while "repayment" is in the caption.)

It seems to me that it is also not inconsistent at all with either the language or, really, spirit of the statute to say that in the case of a Roth conversion (again, "conversion" of course not in the statute) of a CRD, you are on a parallel track that also works. First, by rolling to the Roth you have a "contribution" to a Roth IRA, at some point within the three year period. All the statute (2202(a)(3)(B)) tells you is that you can treat a "contribution" of a CRD to an "eligible retirement plan" as a timely direct rollover if it is made within 3 years. So you did that. Your conversion is timely (i.e., by contrast, if you had taken a distribution, waited 61 days, and then rolled to a Roth, your conversion would be no good; you would owe the tax, but would not have a Roth). Done. Second step: Since I rolled to a Roth (i.e., converted my pre-tax money to after-tax), I have to pay tax. When do I pay it? Well, since I rolled my money  to a Roth, it is just my "any amount required to be included in gross income for such taxable year" under 2202(a)(5), thus I include it in 2020-2022.

The only way I can see the IRS arguing that this does not work is to say that when Congress references 408(d)(3) in 2202(a)(3)(A), it really just meant 408(d)(3), not 408(d)(3) as modified by 408A(d)(3)(A)'s "notwithstanding," which seems to me to make 408(d)(3) inclusive of 408A(d)(3), especially when you take into account that 408A(a) tells you to treat a Roth IRA as a pre-tax IRA except as otherwise provided in 408A. That is just a variant on the "two separate potential taxable events" theory, and maybe that's what they will do.

Since this issue does seem to be present in the prior disaster provisions, I'm  still surprised it is not addressed in guidance.

[RatherBeGolfing]

6 hours ago, Luke Bailey said:

Right. You can argue for a negative conclusion based on a "two separate potential taxable events" theory as I outlined previously. But I don't exactly understand the rest of this. If I don't do a Roth conversion, but rather roll to a pre-tax account, then sure, any amount rolled after 2020 triggers refund. That's actually not in the statute, but rather the way IRS practically reconciles the fact that the statute tells you to recognize the income over three years, and requires income inclusion as early as the first year, but then allows you to treat the amount, including what you may have already included in income, as rolled over to the extent you roll over within three years. (Note that the actual statutory language is "contribute," while "repayment" is in the caption.)

It seems to me that it is also not inconsistent at all with either the language or, really, spirit of the statute to say that in the case of a Roth conversion (again, "conversion" of course not in the statute) of a CRD, you are on a parallel track that also works. First, by rolling to the Roth you have a "contribution" to a Roth IRA, at some point within the three year period. All the statute (2202(a)(3)(B)) tells you is that you can treat a "contribution" of a CRD to an "eligible retirement plan" as a timely direct rollover if it is made within 3 years. So you did that. Your conversion is timely (i.e., by contrast, if you had taken a distribution, waited 61 days, and then rolled to a Roth, your conversion would be no good; you would owe the tax, but would not have a Roth). Done. Second step: Since I rolled to a Roth (i.e., converted my pre-tax money to after-tax), I have to pay tax. When do I pay it? Well, since I rolled my money  to a Roth, it is just my "any amount required to be included in gross income for such taxable year" under 2202(a)(5), thus I include it in 2020-2022.

The only way I can see the IRS arguing that this does not work is to say that when Congress references 408(d)(3) in 2202(a)(3)(A), it really just meant 408(d)(3), not 408(d)(3) as modified by 408A(d)(3)(A)'s "notwithstanding," which seems to me to make 408(d)(3) inclusive of 408A(d)(3), especially when you take into account that 408A(a) tells you to treat a Roth IRA as a pre-tax IRA except as otherwise provided in 408A. That is just a variant on the "two separate potential taxable events" theory, and maybe that's what they will do.

Since this issue does seem to be present in the prior disaster provisions, I'm  still surprised it is not addressed in guidance.

Luke, I'll concede that the statutory language does not seem to prohibit a pre-tax CRD from being repaid to a Roth IRA.  I disagree with the assertion that it consistent with the spirit of the statute.  The spirit of the law is that unless you repay over three years, you include the the CRD as income over three years.  As I see it, the use of Form 8915 backs that up (assuming that Form 8915-E will not have some new feature).  The 8915 seems clear that the amount NOT repaid is included in income, and any excess repaid in a carries forward or is refunded.  

Ive seen plenty of people on the investment side urge caution on the issue absent guidance, and I think that is the most sensible thing to do at this point.  We know the IRS will issue more guidance, so hopefully they will help clear it up.

Id be curious to hear what @Appleby has to say on this issue...

[Luke Bailey]

15 hours ago, RatherBeGolfing said:

Luke, I'll concede that the statutory language does not seem to prohibit a pre-tax CRD from being repaid to a Roth IRA.  I disagree with the assertion that it consistent with the spirit of the statute.  The spirit of the law is that unless you repay over three years, you include the the CRD as income over three years.  As I see it, the use of Form 8915 backs that up (assuming that Form 8915-E will not have some new feature).  The 8915 seems clear that the amount NOT repaid is included in income, and any excess repaid in a carries forward or is refunded.  

Ive seen plenty of people on the investment side urge caution on the issue absent guidance, and I think that is the most sensible thing to do at this point.  We know the IRS will issue more guidance, so hopefully they will help clear it up.

Id be curious to hear what @Appleby has to say on this issue...

Thanks, RBG. I think now we are at ultimate clarity, or reasonably close.

[mming]

Quote

You cant repay $100k twice.  

Isn't the CRD only being repaid once, though, RBG?  The $100k is going from the 401k to the Roth IRA and instead of the Roth repaying the 401k, it's a different account (the personal taxable one) making the reimbursement. 

[Luke Bailey]

2 hours ago, mming said:

Isn't the CRD only being repaid once, though, RBG?  The $100k is going from the 401k to the Roth IRA and instead of the Roth repaying the 401k, it's a different account (the personal taxable one) making the reimbursement. 

mming, I think what RBG was commenting on was the idea that you could avoid tax altogether, i.e., get $100k out of the plan, convert it to Roth, and then roll some  other amount back into the plan to avoid tax on the Roth conversion, which was an idea that a participant had apparently raised with you. No.

[RatherBeGolfing]

2 hours ago, mming said:

Isn't the CRD only being repaid once, though, RBG?  The $100k is going from the 401k to the Roth IRA and instead of the Roth repaying the 401k, it's a different account (the personal taxable one) making the reimbursement. 

No.  How are you getting the CRD into the Roth IRA without a repayment/contribution?  Put different accounts, rollovers, and conversions aside for a minute and make it super simple.

$100K can move FROM your 401(k) or IRA once (the distribution).  $100K can be repaid/contributed once (the contribution into the IRA).  Thats it. You  moved money out and you moved money in.  For CARES purposes you done. 

[mming]

Thx RBG and Luke - the participant should just consider himself fortunate that the tax on the conversion can be spread out over 3 yrs.

[Luke Bailey]

54 minutes ago, mming said:

Thx RBG and Luke - the participant should just consider himself fortunate that the tax on the conversion can be spread out over 3 yrs.

If he can. As you will have noted, mming, opinions differ and everyone acknowledges some uncertainty because of lack of IRS guidance.

[RatherBeGolfing]

Does notice 2020-50 change anyone's opinion?

 

[Appleby]

On 5/31/2020 at 9:06 PM, RatherBeGolfing said:

Luke, I'll concede that the statutory language does not seem to prohibit a pre-tax CRD from being repaid to a Roth IRA.  I disagree with the assertion that it consistent with the spirit of the statute.  The spirit of the law is that unless you repay over three years, you include the the CRD as income over three years.  As I see it, the use of Form 8915 backs that up (assuming that Form 8915-E will not have some new feature).  The 8915 seems clear that the amount NOT repaid is included in income, and any excess repaid in a carries forward or is refunded.  

Ive seen plenty of people on the investment side urge caution on the issue absent guidance, and I think that is the most sensible thing to do at this point.  We know the IRS will issue more guidance, so hopefully they will help clear it up.

Id be curious to hear what @Appleby has to say on this issue...

Apologies for being late to the party . I agree that one cannot spread the income from a Roth conversion over three years. The three year spread is available only to Coronavirus-related distributions. A Roth conversion is not a  Coronavirus-related distribution- whether direct or indirect. Form 8915 is one of the sources that I also used to come to my conclusion. It does not permit Roth conversions. 

[Luke Bailey]

9 hours ago, Appleby said:

It does not permit Roth conversions. 

Appleby, where? I searched the 8915 instructions and it seemed to me that all of the Roth references were regarding treatment of disaster-related Roth distributions, not contributions. The only thing I will grant you is that if, to take the simple example I used earlier, an individual (a) took a $100k CVD, (b) does not contribute it for almost three years to either a regular or Roth IRA, (c) reports $33,333.33 for each of years 2020, 2021, and 2022, and then (d) before the end of the three-year period puts the $100k into a Roth IRA, he or she would not report that as a "contribution" on Form 8915, even though the instructions, seemingly assuming that the "contribution" will be to a pre-tax vehicle, tell you to put "contributions" on a particular line and then subtract that from prior included amounts. But that can't be the IRS's subtle way of saying that you can't roll a DRD (and now CRD) to a Roth, because if that is the result they think is right they really would need to just come out and say it and (somehow) defend it.

[Luke Bailey]

On ‎6‎/‎19‎/‎2020 at 3:33 PM, RatherBeGolfing said:

Does notice 2020-50 change anyone's opinion?

 

Not really. It does not seem to address the issue at all, one way or the other. There is in 2020-50 the statement (which is repeated at least a couple of times) that "only a coroanavirus-related distribution that is eligible for tax-free rollover ... is permitted to be recontributed," but Roth conversions are eligible to be rolled over tax-free, and in fact amounts can't be rolled to Roths as conversions unless they could be rolled over tax-free. They just aren't rolled over tax-free.

 

 

 

[RatherBeGolfing]

3 hours ago, Luke Bailey said:

There is in 2020-50 the statement (which is repeated at least a couple of times) that "only a coroanavirus-related distribution that is eligible for tax-free rollover ... is permitted to be recontributed," but Roth conversions are eligible to be rolled over tax-free,

That isn't the context of the statement in 2020-50 though.  The distinction is made throughout 2020-50 because it is possible to have a distribution that is not rollover eligible but also a CRD, like a distribution to a qualified individual who is a non-spouse beneficiary.  The distribution would be eligible for the favorable tax treatment as a CRD, but cannot be repaid/recontribtued.

4 hours ago, Luke Bailey said:

he or she would not report that as a "contribution" on Form 8915

IRS guidance says all distributions and repayments for a CRD must be reported using Form 8915.  You don't have the option to not do it if you also want to claim the CRD benefits.  If you simply decided to not report the year 3 repayment on the 8915, the IRS could just say that it wasn't proper CRD repayment, so the $100,000 is actually a quite significant excess contribution.

I want more definite guidance from the IRS either way, but so far the IRS has not provided a mechanism that enables the the recontribution of a pretax CRD into Roth IRA.

[Luke Bailey]

10 hours ago, RatherBeGolfing said:

I want more definite guidance from the IRS either way, but so far the IRS has not provided a mechanism that enables the the recontribution of a pretax CRD into Roth IRA

Something from the IRS saying what they think would definitely be in order.

[Appleby]

My take Can You Convert A Coronavirus-Related Distribution To A Roth IRA?

Comments welcome

[Luke Bailey]

Denise, I'm unconvinced. I don't think anyone knows at this point. The IRS certainly has not blessed it, and yes, the current 8915 reads as if the IRS hadn't really thought folks would do it, but would rather do nontaxable rollovers. But assuming the IRS really thinks  converting a CRD to a Roth is not permitted under the CARES Act language, I think they would need to address that, i.e., explain what it is about the CARES Act and interacted-with Code language that doesn't allow it. And then they would need to tell us their conclusion, explicitly. Until they do that in a way that convinces me on the statutory language side of things, I will continue to think it is probably OK to do it.

I also think that you need to deal with the scenario that I have posited a couple of times above of someone who maybe isn't even thinking now of doing a CRD Roth conversion, but rather takes the CRD in 2020, dutifully pays 1/3rd of the tax in 2020 and files a 2020 8915, does not roll over, dutifully pays another 1/3rd in 2021, etc., and same in 2022. Then, in 2023, within 3 years of the date of distribution, he or she is doing well and thinks, "Hey, I already paid all the tax on this. I will put it in a Roth," and then simply does that. I'd have to  check (maybe you will do it for me, hint hint), but in that scenario would I even need to file a 2023 8915? Not sure.

[RatherBeGolfing]

1 hour ago, Luke Bailey said:

But assuming the IRS really think's converting a CRD to a Roth is not permitted under the CARES Act language, they would need to address that, i.e., explain what it is about the CARES Act and interacted-with Code language that doesn't allow it. And then they would need to tell us their conclusion, explicitly. Until they do that in a way that convinces me on the statutory language side of things, I will continue to think it is probably OK to do it.

The statutory language argument is that CARES does not prohibit it because the code sections referenced do not distinguish pre-tax and Roth accounts, correct?  

Since you can take a CRD from a Roth IRA or Roth 401(k), you can also repay that CRD to a Roth IRA or Roth 401(k). Wouldn't that also explain the why the statute would reference code sections including pre-tax and  Roth?  I don't think it is at all clear that the the statutory language was meant to allow conversion of a pre-tax asset to Roth.

1 hour ago, Luke Bailey said:

I also think that you need to deal with the scenario that I have posited a couple of times above of someone who maybe isn't even thinking now of doing a CRD Roth conversion, but rather takes the CRD in 2020, dutifully pays 1/3rd of the tax in 2020 and files a 2020 8915, does not roll over, dutifully pays another 1/3rd in 2021, etc., and same in 2022. Then, in 2023, within 3 years of the date of distribution, he or she is doing well and thinks, "Hey, I already paid all the tax on this. I will put it in a Roth," and then simply does that. I'd have to  check (maybe you will do it for me, hint hint), but in that scenario would I even need to file a 2023 8915? Not sure.

You cant just put money into the Roth, its either a contribution or a conversion.  I think your argument is that repaying into the Roth is a conversion, but I'm still not sure I buy that.  In order to repay a distribution, it has to be a CRD.  In order to be a CRD repayment, it has to be reported on Form 8915.  

Notice 2020-50 is pretty clear on how recontributions work.  While we haven't seen the 8915-E yet, there is no reason to think they would include a "don't reduce the amount included in income because you repaid to a Roth IRA" option without even mentioning it in 2020-50.

Quote

If a qualified individual includes a coronavirus-related distribution ratably over a 3-year period and the individual recontributes any portion of the coronavirus-related distribution to an eligible retirement plan at any date before the timely filing of the individual’s federal income tax return (that is, by the due date, including extensions) for a tax year in the 3-year period, the amount of the recontribution will reduce the ratable portion of the coronavirus-related distribution that is includible in gross income for that tax year.

Quote

If a qualified individual using the 3-year ratable income inclusion method recontributes an amount of a coronavirus-related distribution for a tax year in the 3-year period that exceeds the amount that is otherwise includible in gross income for that tax year, as described in section 4.E of this notice, the excess amount of the recontribution is permitted to be carried forward to reduce the amount of the coronavirus-related distribution that is includible in gross income in the next tax year in the 3-year period. Alternatively, the qualified individual is permitted to carry back the excess amount of the recontribution to a prior taxable year or years in which the individual included income attributable to a coronavirus-related distribution. The individual will need to file an amended federal income tax return for the prior taxable year or years to report the amount of the recontribution on Form 8915-E and reduce his or her gross income by the excess amount of the recontribution.

 

[Luke Bailey]

6 hours ago, RatherBeGolfing said:

I don't think it is at all clear that the the statutory language was meant to allow conversion of a pre-tax asset to Roth.

RBG, I think that is what I said, with a little bit different emphasis.

6 hours ago, RatherBeGolfing said:

I think your argument is that repaying into the Roth is a conversion, but I'm still not sure I buy that. 

Right, and agreed, sort of. So someone who wants to do it or thinks possibly they might want to can, assuming the have been affected by C-19 to the required extent, take the money out and wait until it is (or is not) clear. You have the rest of the year to take the money out, and then three years from the date you take it out to put it back in something, after all. Worst that can happen is that if the IRS somehow nixes it, they have to roll back in to a pre-tax vehicle instead of Roth. Meanwhile, you have a tax-deferred loan.

[RatherBeGolfing]

17 hours ago, Luke Bailey said:

Right, and agreed, sort of. So someone who wants to do it or thinks possibly they might want to can, assuming the have been affected by C-19 to the required extent, take the money out and wait until it is (or is not) clear. You have the rest of the year to take the money out, and then three years from the date you take it out to put it back in something, after all. Worst that can happen is that if the IRS somehow nixes it, they have to roll back in to a pre-tax vehicle instead of Roth. Meanwhile, you have a tax-deferred loan.

I agree with this version of the hypo.  Worst case scenario is that you have a tax deferred loan and miss out on the tax deferred earnings during the three years when you are sitting on the cash. I disagreed with prior version where the idea was that you might be able to repay in to the Roth after three years of income inclusion, and whether that would even need to be reported on the 8915.  

17 hours ago, Luke Bailey said:

RBG, I think that is what I said, with a little bit different emphasis

I think where we split is whether the IRS is required to address it, we clearly both agree that they should.  I think I have understood your position as the statute permits (by referencing certain sections of the code), or at least does not prohibit, repayment of a pre-tax CRD to a Roth IRA.  Further, if the IRS intends to prohibit a Roth conversion of a pre-tax CRD, it needs explicitly do so.

The counter to that argument is that the code references are needed simply because Roth assets can be distributed and repaid as a CRD, and the IRS would only need to address it if its interpretation is that Roth conversions are in fact allowed.

So if we agree that the statutory language does not explicitly permit CRD Roth conversions, I suppose it comes down to method of statutory interpretation.  I cant get there using plain meaning, and would defer to agency interpretation. At least that is how I get to my conclusion.

[RatherBeGolfing]

On 7/3/2020 at 2:18 PM, Appleby said:

My take Can You Convert A Coronavirus-Related Distribution To A Roth IRA?

Comments welcome

Denise, you explained it very well in the article.  I did make a note on the "to the extent the distribution is eligible for tax-free rollover treatment" part of the article that points to the continued use of the phrase in Notice 2020-50.  I believe the context of that phrase in 2020-50 is unrelated to Roth IRAs, and is there because a distribution to a qualified individual as a beneficiary can be treated as a CRD for income inclusion purposes, but is not permitted to be recontributed.  But even with that note, I think your argument in the article is solid.

[Luke Bailey]

It occurs to me that we may be talking about a distinction almost without a difference, and that I may have misunderstood something about this conversation. The original topic is whether a CRD can be rolled over "directly" to a Roth. It's not clear, I guess, what the questioner meant by "directly?" CARES Act says that the direct rollover rules don't apply to CRDs, but I guess that if the distributee requested a direct transfer, the plan could do it. Or maybe the questioner just meant roll the CRD over, at some point, to a Roth without having run it through a pre-tax IRA first. But for the latter, what difference would it make to the end result? Can't I achieve any result I want regarding having a CRD, or a part of it, end up in a Roth, at some point in time, by just rolling it to a traditional IRA, and then converting to a Roth IRA a day later? So what exactly is the loophole that the IRS may be concerned with stopping?

[Appleby]

I sent an email to the author of the Notice and cc'd Luke. They are usually pretty good at calling back. Will keep you posted.