Under prevailing law and the stipulations of the CARES Act, a coronavirus-related distribution can be converted to a Roth IRA, said Slott, but this is also an area in which to tread carefully.
“I don’t think this is what the IRS had intended,” he said. “Let’s go back to who qualifies for a CRD: individuals who are sick, individuals with spouses or children who are sick, individuals under quarantine or otherwise unable to work. I don’t see being able to convert to a Roth IRA on that llist. Can it be done? Maybe, but I think this is pushing the envelope and the IRS might shut the door on this.”
Still, the most likely outcome for those trying to create a Roth IRA conversion using a CRD is that the IRS makes them take all of the income on one year’s taxes instead of spreading it over three years to potentially pay a lower rate.
Many retirement participants have seen their retirement plan loan availability increase from $50,000 to $100,000, said Slott, but not all plans offer loans and plans are not required to allow for the larger loan availability. The qualifications for CRDs also apply to the larger coronavirus-related plan loans.
Similarly, while the CARES Act allows plans to suspend loan repayments for up to a year, plans are not required to do so.
The End Of The Stretch IRA
Slott also answered questions about 2019’s SECURE Act, which, as already mentioned, raised the age at which required minimum distributions begin from 70.5 to 72. But more important, it eliminated the “stretch IRA” strategy for beneficiaries of inherited IRAs. The stretch IRA was a powerful estate planning strategy that allowed distributions from an inherited IRA to be “stretched” across the entire life expectancy of the beneficiary, leading to lower required distributions—and lower taxes—over time.
The elimination of the stretch IRA makes more advanced estate planning techniques, including life insurance and trust planning, more valuable, said Slott.
“The IRA has been severely downgraded and is no longer a great option for transferring to beneficiaries,” said Slott. “Use RMDs to get the money out of there. Roth conversions now work much better. Life insurance now works much better. Charitable remainder trusts now work much better. Even though most people have had plans for 20 to 30 years under those old rules, when Congress changed the rules, they pulled the rug out from under all of those plans.”
Similarly, thanks to the SECURE Act, simplified IRA-trust estate planning strategies like the conduit trust are no longer as effective as before. Conduit trusts are usually set up to ensure that a large IRA balance doesn’t pass to a beneficiary in one lump sum. Now, all traditional IRA assets have to be paid to beneficiaries and taxed within 10 years after the death of the original account owner, meaning that conduit trusts can no longer serve as an effective control on the wealth transfer.
In lieu of the stretch IRA strategy, Slott suggested a number of alternatives: Naming a spouse as a beneficiary; tax-bracket planning during life and after death; making qualified charitable distributions; naming multiple beneficiaries; Roth IRA conversions and life insurance.
“Take some IRA money down now at today’s bargain basement lowest rates; that’s good tax planning,” he said. “Use it for permanent cash-value life insurance, that’s better than an IRA right now and it doesn’t’ have complex tax problems, no RMDs. The client can make anything they want out of life insurance and get precisely want they want. Clients usually want two things—post-death control of their assets and lower taxes or no taxes. With life insurance, you can get both and you can get both with a Roth IRA, too.”