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2020: The Year for Roth Conversions?

Contributor Natalie Choate tackles three scenarios where a Roth conversion seems to make sense--but may not.

Editor’s note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.

Question: In February, I took the 2020 “required minimum distribution” from my 401(k) plan. I took the distribution in the form of 100 shares of Acme stock, then worth $50,000. Then the market dropped, and the CARES Act decreed that there would be no required minimum distributions for 2020. I understand that under IRS Notice 2020-23, I have until July 15, 2020, to reverse my RMD by rolling it over to an IRA or back into the 401(k) plan. But the stock is now worth only $30,000. How can I replace the missing $20,000 of value in order to carry out that rollover? I’m thinking that instead I should contribute the stock to a Roth IRA--I’m sure the price will recover and a Roth conversion would give me a way to profit off this current low value.

Answer: Stop! Whatever you do, don’t contribute this depreciated stock to a Roth IRA! You are right that this would be a valid Roth conversion, but you would have to pay tax on $50,000, not $30,000. What’s taxable when you do a Roth conversion is the amount that was distributed from the first plan, not the amount that is contributed to the Roth IRA. So a Roth conversion may be a good idea (see below), but this is not the way to do it.

Instead, roll the 100 shares of stock back into your 401(k) plan (or into an IRA) and start over. Don’t worry about “replacing the missing value” when doing the rollover. What you have to roll back (in order to have a valid rollover) is the same property that was distributed to you. If you received cash, you can only validly roll over cash (not, for example, something you purchased with that cash). If you received stock, you must roll over the shares you received ... regardless of whether they have appreciated or depreciated since the distribution. (There’s an exception in certain cases if the distributed property was actually sold.) The 1099-R for the distribution won’t appear to match the documentation of the rollover contribution, but that’s OK--this is the right way to do it.

Once you have completed that rollover, and thereby safely eliminated the potentially taxable $50,000 distribution that occurred in February, you can start working on whether you want to (separately) do a Roth conversion in 2020.

Question: I was diagnosed with COVID-19 (had a mild case, luckily for me), so it appears I qualify for a “coronavirus-related distribution” (or CRD--see last month’s column). I propose to take $100,000 out of my IRA as a CRD, then contribute it to a Roth IRA (taxable Roth conversion) and elect to pay the tax over three years. Any reason this would not work?

Answer: As the law is written right now, it would work. But since the purpose of the CARES Act is to help people hurt financially by the pandemic, not to facilitate bargain Roth conversions, I expect this loophole will close, and I expect that change will be retroactive, as in 1998 when the government put a stop to another unintended Roth conversion loophole: Someone under age 59 1/2 who wanted to withdraw some money from his IRA without paying the 10% Section 72(t) tax realized that he could convert his IRA to a Roth (conversion income-taxable but not subject to 10% tax), then immediately withdraw the contribution from the Roth IRA (distribution nontaxable and also not subject to 10% penalty). The statute was changed to prevent this and was applied retroactively. (See Kitt v. U.S., 277 F. 3d 1330.)

Question: Since I don’t have to take any RMDs this year, my income will be much lower than originally projected, and I’ll be in a lower tax bracket than usual. With the market being down, and my tax rate temporarily low, should I consider a Roth conversion?

Answer: For everyone over 70 1/2 who is in a much lower tax bracket than she expected to be due to the suspension of RMDs, and who does not need to take those IRA distributions for living expenses, and who has some cash lying around with which to pay the taxes on a Roth conversion, and who expects to be in a higher tax bracket next year and all succeeding years, this is definitely the year to consider a Roth conversion. If your future tax rates are indeed higher and your Roth investments appreciate--and you never do need that cash you’re spending in 2020 to prepay some income taxes--the Roth conversion is a definite winner.

Of course, if your tax rate goes down instead of up, and/or your investments go down instead of up, and/or you desperately need that cash you had spent on taxes for some later, unexpected purpose such as major medical expenses, you may regret doing that irrevocable Roth conversion. Be cautious when you look into that crystal ball!

Natalie Choate is an estate planning lawyer in Boston with Nutter McClennen & Fish LLP. Her practice is limited to consulting regarding retirement benefits. The new 2019 edition of Choate's best-selling book, Life and Death Planning for Retirement Benefits, is now available through her website,, where you can also see her speaking schedule and submit questions for this column. The views expressed in this article may or may not reflect the views of Morningstar.