What Is the Coronavirus-Related Distribution (CRD) Roth Conversion Loophole (And Should You Do It?)

A Coronavirus-Related Distribution (CRD) is any distribution by a person diagnosed with Covid-19, this can also include a spouse or dependent. Alternatively, if you've been adversely affected by the Coronavirus in some way, for example being furloughed, you may qualify as well.

The CRD allows you to withdraw up to $100,000 from your qualified plan and if you're younger than 59½, the 10% penalty is waived. Another benefit is you are allowed to pay the money back over the course of the next three years.

The IRS treats this as a rollover instead of a contribution so you're not constrained by the traditional contribution limits.

This is where the Roth Conversion loophole comes in. You have the opportunity to recharacterize the money and contribute it into a Roth IRA, and because of the extra benefits that come with the CRD, it's possible to avoid the 10% penalty you would normally face.

This provision allows for someone younger than 59½ to take the money out, retain a portion of it for taxes, and put the rest into their Roth IRA.

David runs through a hypothetical example of what this means for the average taxpayer under 59½.

The question is whether this strategy is morally permissible for someone affected by the Coronavirus. The spirit of the rule suggests that the answer is yes but only if you are actually adversely affected.

This is a loophole, and what do we know about loopholes? When they get abused, eventually the IRS catches on.

The IRS reserves the right to change the rules, and if they think people are abusing the CRD, they may come after the people they believe took advantage of it.

This doesn't diminish the importance of taking advantage of Roth Conversions. This is the greatest opportunity in the history of our country to do Power of Zero-type planning. There are two sales going on right now, taxes are historically low at the same time as the stock market is down.

The CRD Roth Conversion loophole is available for those that want to take advantage of it, but if you haven't actually been affected by the Coronavirus it could cause you problems with the IRS in the future.

Check out The Hallmarks of a True Power of Zero Advisor podcast episode to learn how a true Power of Zero advisor can help you set up multiple streams of tax-free income.