Question: Wes, The CARES act includes a provision for tax-favored corona-virus related distributions from IRAs. Is there an opportunity for me and my wife to leverage this new law with regards to Roth Conversions?
Answer: The tax-favored provision related to IRA distributions is the elimination of the 10% early withdrawal penalty. Traditional IRA distributions are still taxed at your ordinary income rates. Even under normal circumstances, when you complete a Roth Conversion there is no 10% penalty levied, only the ordinary income tax.
However, there are some opportunities that may present during this time. A couple thoughts:
- If your income is substantially lower in 2020 (due to the coronavirus or otherwise) then a Roth conversion could make sense as you’d be paying a lower tax rate.
- The other opportunity that could exist with the decline in market value is converting an IRA that’s dropped in value and getting it immediately reinvested in a Roth IRA so that you can participate in the rebound within the Roth IRA. In both cases though, you’re still paying ordinary income tax rates on the conversion amount.