CARES Act, 403b withdrawals, and Roth conversions

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Topic Author
EnjoyTheJourney
Posts: 101
Joined: Sat Nov 17, 2018 8:36 pm

CARES Act, 403b withdrawals, and Roth conversions

Post by EnjoyTheJourney »

The CARES Act allows those adversely affected by the coronavirus to make early withdrawals from 401K balances without the 10% penalty. As far as I can tell proof of having been infected and/or financial harmed is important, but the amount of financial harm is not.

This might be helpful for at least some as an opportunity to do a Roth conversion of up to $100,000 in 2020 at a relatively low marginal tax rate, compared to future anticipated tax rates.

At least, this is my understanding so far. Since this can have noticeable financial implications, I'm "checking in" here first, before taking action. And, there are a couple of questions to try to answer before moving forward with a Roth conversion ...

1. If there is good reason for somebody to believe their marginal tax rates will rise in the future, is it a feasible / reasonable idea to do early (ie: pre-retirement, pre-59.5 years old) 401K withdrawal and then a Roth conversion with those funds?

2. Does the CARES act also allow 403b withdrawals under the same terms as 401K withdrawals?

Thank you in advance for any help provided!
pshonore
Posts: 6883
Joined: Sun Jun 28, 2009 2:21 pm

Re: CARES Act, 403b withdrawals, and Roth conversions

Post by pshonore »

EnjoyTheJourney wrote: Thu May 14, 2020 8:11 am The CARES Act allows those adversely affected by the coronavirus to make early withdrawals from 401K balances without the 10% penalty. As far as I can tell proof of having been infected and/or financial harmed is important, but the amount of financial harm is not.

This might be helpful for at least some as an opportunity to do a Roth conversion of up to $100,000 in 2020 at a relatively low marginal tax rate, compared to future anticipated tax rates.

At least, this is my understanding so far. Since this can have noticeable financial implications, I'm "checking in" here first, before taking action. And, there are a couple of questions to try to answer before moving forward with a Roth conversion ...

1. If there is good reason for somebody to believe their marginal tax rates will rise in the future, is it a feasible / reasonable idea to do early (ie: pre-retirement, pre-59.5 years old) 401K withdrawal and then a Roth conversion with those funds?

2. Does the CARES act also allow 403b withdrawals under the same terms as 401K withdrawals?

Thank you in advance for any help provided!
A recent Kitces advises against doing Roth conversions with CARES although he may be referring to spreading it over three years.

https://www.kitces.com/blog/corona-viru ... on-penalty

Here's an excerpt from the article:
Another way that some people have considered using a Coronavirus-Related Distribution is to have the default, three-year income inclusion provision spread Roth conversion income from a 2020 conversion equally over 2020, 2021, and 2022. It is the author’s opinion that Coronavirus-Related Distributions should not be considered for this purpose.

Candidly, there is absolutely nothing in the CARES Act that suggests that such a transaction would not be allowed. Rather, if anything, the language used – that a distribution can be rolled over to an “eligible retirement plan” – would seem to suggest that such a transaction can be completed (as Roth IRAs are an eligible retirement plan).

But using a Coronavirus-Related Distribution for purely tax planning purposes seems dramatically at odds with the intended purpose of the provision and has the potential to significantly reduce an individual’s ultimate tax burden on the distributed income. This is different from either the return-of-an-RMD strategy (which is in line with Congressional intent of the CARES Act) or the move-money-from-a-plan-to-an-IRA approach (which does not provide any net tax reduction).

Accordingly, it’s entirely possible that the IRS could disallow the three-year income spread for Coronavirus-Related Distributions that are rolled over to Roth IRAs. Perhaps, for instance, the IRS would treat the distribution as first rolled back to an IRA and then converted to a Roth IRA via a ‘regular’ conversion (taxable all in one year). While there is nothing in the CARES Act that would suggest this treatment, the IRS has acted similarly in the past.

Notably, in IRS Notice 2009-75, the IRS shut down an NUA-Roth conversion strategy by treating NUA shares transferred to a Roth IRA as if they are first rolled to a Traditional IRA, and then converted from the Traditional IRA to a Roth IRA.
Topic Author
EnjoyTheJourney
Posts: 101
Joined: Sat Nov 17, 2018 8:36 pm

Re: CARES Act, 403b withdrawals, and Roth conversions

Post by EnjoyTheJourney »

Thank you for the link. It was a very helpful resource.

I'm (also?) thinking that the article was warning against spreading out paying taxes across three years, as that could be disallowed by the IRS. I didn't see any cautionary notes about doing a Roth conversion and then paying the extra tax as part of one's 2020 tax filing.

An extra 100K moved to a Roth conversion can be helpful even if all the taxes would need to be paid in the same tax year as the distribution for those who have a solid reason to believe their tax rates will be noticeably higher in the future.
sawdust60
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Joined: Tue Jul 17, 2018 12:06 pm

Re: CARES Act, 403b withdrawals, and Roth conversions

Post by sawdust60 »

Depending on your income level and whether you received the full stimulus payment, the 22% marginal tax rate may be 5% higher for some income above 150k MFJ.

I will do less Roth conversions in 2020, to capture the full tax credit by limiting 2020 AGI to 150k MFJ. (see prior post)
Nate7out
Posts: 111
Joined: Wed Jan 16, 2008 2:06 pm

Re: CARES Act, 403b withdrawals, and Roth conversions

Post by Nate7out »

I believe that it does allow 403(b) withdrawals. My wife's 403(b) sent us a notice they were waiving fees and working with people on the CARES act. The bulk of assets are in a variable annuity with high fees, and we recently started a new 403(b) at another provider with much lower fees. If we could certify as being affected, I would like to pull the money out of the bad 403(b) and put it back in the good 403(b). I wonder if that would be possible.

If not, it could probably go to a tIRA.
lakpr
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Joined: Fri Mar 18, 2011 9:59 am

Re: CARES Act, 403b withdrawals, and Roth conversions

Post by lakpr »

Nate7out wrote: Fri May 15, 2020 7:48 am I believe that it does allow 403(b) withdrawals. My wife's 403(b) sent us a notice they were waiving fees and working with people on the CARES act. The bulk of assets are in a variable annuity with high fees, and we recently started a new 403(b) at another provider with much lower fees. If we could certify as being affected, I would like to pull the money out of the bad 403(b) and put it back in the good 403(b). I wonder if that would be possible.

If not, it could probably go to a tIRA.
Any reason you are not considering a direct rollover from old (bad) 403(b) plan to the "new 403(b) at another provider" ? Just curious. Even if both providers are at the same job and your wife is still working at the same job, it should be possible to roll the 403b funds from one provider to another.
Nate7out
Posts: 111
Joined: Wed Jan 16, 2008 2:06 pm

Re: CARES Act, 403b withdrawals, and Roth conversions

Post by Nate7out »

lakpr wrote: Fri May 15, 2020 7:52 am
Nate7out wrote: Fri May 15, 2020 7:48 am I believe that it does allow 403(b) withdrawals. My wife's 403(b) sent us a notice they were waiving fees and working with people on the CARES act. The bulk of assets are in a variable annuity with high fees, and we recently started a new 403(b) at another provider with much lower fees. If we could certify as being affected, I would like to pull the money out of the bad 403(b) and put it back in the good 403(b). I wonder if that would be possible.

If not, it could probably go to a tIRA.
Any reason you are not considering a direct rollover from old (bad) 403(b) plan to the "new 403(b) at another provider" ? Just curious. Even if both providers are at the same job and your wife is still working at the same job, it should be possible to roll the 403b funds from one provider to another.
We have a 5% surrender charge until Sep 2021. Will do a direct rollover after that point. I was just thinking this might be a penalty free way to speed that up.
lakpr
Posts: 6066
Joined: Fri Mar 18, 2011 9:59 am

Re: CARES Act, 403b withdrawals, and Roth conversions

Post by lakpr »

Nate7out wrote: Fri May 15, 2020 8:12 am
lakpr wrote: Fri May 15, 2020 7:52 am
Nate7out wrote: Fri May 15, 2020 7:48 am I believe that it does allow 403(b) withdrawals. My wife's 403(b) sent us a notice they were waiving fees and working with people on the CARES act. The bulk of assets are in a variable annuity with high fees, and we recently started a new 403(b) at another provider with much lower fees. If we could certify as being affected, I would like to pull the money out of the bad 403(b) and put it back in the good 403(b). I wonder if that would be possible.

If not, it could probably go to a tIRA.
Any reason you are not considering a direct rollover from old (bad) 403(b) plan to the "new 403(b) at another provider" ? Just curious. Even if both providers are at the same job and your wife is still working at the same job, it should be possible to roll the 403b funds from one provider to another.
We have a 5% surrender charge until Sep 2021. Will do a direct rollover after that point. I was just thinking this might be a penalty free way to speed that up.
aah! That makes perfect sense what you are contemplating. Thanks for clarifying.
Topic Author
EnjoyTheJourney
Posts: 101
Joined: Sat Nov 17, 2018 8:36 pm

Re: CARES Act, 403b withdrawals, and Roth conversions

Post by EnjoyTheJourney »

Nate7out wrote: Fri May 15, 2020 7:48 am I believe that it does allow 403(b) withdrawals. My wife's 403(b) sent us a notice they were waiving fees and working with people on the CARES act. The bulk of assets are in a variable annuity with high fees, and we recently started a new 403(b) at another provider with much lower fees. If we could certify as being affected, I would like to pull the money out of the bad 403(b) and put it back in the good 403(b). I wonder if that would be possible.

If not, it could probably go to a tIRA.
The effect on the funds being given to everybody by the US government is also a very good point to bear in mind. Thank you!
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