The New Math Driving 2020 Roth Conversions

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July 12: 2020 Roth Conversion Q&A
Roth Conversion is a major tax saving strategy of 2020 for those who take RMDs or about to do so for the first time.

The July 9 class received an average rating of 9.6 on a 10-point scale. At the end of the session, Bob Keebler, CPA/PFS, answered questions from A4A members.  (Read Q&A) 

July 9: 2020: Main Street Lending Program Alert For Business Owners
Business owners who were unable to qualify for federal Covid-crisis emergency assistance from the Payment Protection Program (PPP) need to know about the Main Street Lending Program (MSLP).

Enabled by the CARES Act on March 27, 2020, MSLP is administered by the Federal Reserve Board, which is not a normal function of the Fed. MSLP  makes available $600 billion in federal aid to small businesses  that had sound financials before the Covid outbreak. MSLP loans are not forgivable and the program has been met with a tepid reponse from business owners.    

MSLP has been thew subject of considerable buzz in recent weeks, with business owners awaiting details about MSLP loans terms. On June 26, the Fed released this lengthy FAQ, which prompted a video and email campaign educating business owners about latest details on MSLP.   

To learn about our FINRA-reviewed content for financial consumers,contact us.  

June 23, 2020: Covid-19 Tax Break Suspends Required Minimum Distributions

In this period of social distancing, many individuals 65 and older are staying home and their expenses are lower than expected. This has created an unexpected tax break for those who take required minimum distributions – RMDs -- or who are are about to start RMDs.

The New Math Driving 2020 Roth Conversions

SECURE Act and CARES Act, coincident with epidemic economics and the lowest rates in modern U.S. history, along with high stock volatility, drastically change the math driving Roth IRA conversions.    

Knowledge of the quantitative dynamics driving Roth IRA conversions, in a litigious society, is a professional requirement. More importantly, this class helps practitioners advise clients amid the unusual confluence of financial, tax and investment fundamentals conspiring to make Roth conversions more compelling in more situations.

Retirement income planning has never been so important to so many Americans. Nor has it ever been more complex to mass affluent as well as ultra-high net worth individuals. This class covers:

• Roth IRA basics
• Reasons to convert to a Roth IRA
• Taxation of Roth IRA conversions
• Taxation of Roth IRA distributions
• Mathematics of Roth IRA conversions
• Recharacterizations
• Estate tax considerations
• “Stretch” Roth IRAs
• Using insurance to preserve post-death “stretch-out”
• Tax-sensitive withdrawal strategies

This webinar is eligible for one hour of CE credit towards the CIMA® and CPWA® certifications, IRS EA CE, CFP® CE, PACE credit toward the CLU® and ChFC® designations, and live CPA CPE credit.

(May 21, 2020, 7:30 p.m. EST) The tax relief regulations published by the IRS two weeks ago, in an unusual Q&A format, enable early withdrawals from qualified plans and IRAs for those harmed by the covid-19 epidemic. That’s a really big deal. Right?

Yes, but Bob Keebler says that the SECURE Act is an even bigger deal!

Point is, this is the most challenging time ever for tax and financial advisors. Financial planners are bombarded with one sweeping technical reform law after another.

Bob Keebler  the quintessential financial planning practitioner, earned an average rating of more than 4.8 stars (out of five) from A4A members in his last 12 monthly sessions. Bob, who has taught legal and accounting professionals about taxation of individuals for three decades, presents slides for 50 minutes and then answer questions.

This webinar is eligible for one hour of CE credit towards the CIMA® and CPWA® certifications, IRS EA CE, CFP® CE, PACE credit toward the CLU® and ChFC® designations and live CPA CPE credit.

July 12: 2020 Roth Conversion Q&A from July 9 CE Class 

Gluck: Bob, by the way, what’s a chronic illness? Define a chronic illness, please.

Keebler: They actually define that in the Code. Jake asked that question. If you send me Jake’s email, I’ll get him that definition.

Gluck: Did he ask that question? I didn’t even know. On slide 44, I think it is, where you talked about which plans can be converted, is it pretty much all federally qualified plans that can be converted?

Keebler: Yes. I think that’s fair.

Gluck: OK. And on slide 45, and then at the end again, when you were talking about CPAs, which I really appreciate how candid you are with talking about that this may be a blind spot kind of, you’re saying, so you’re saying that you really can’t rely on a traditional CPA to recommend the conversion unless he’s also a financial planner. Is that basically what the dynamic is?

Keebler: No. I don’t think you have to be a financial planner. I think it’s just you need somebody that’s been able to spend enough time analyzing this, and really understands it at a pretty high level. That’s going to be one of the keys. I just think most CPAs are doing a great job for their clients on business stuff. Corporations, C-corps, S-corps, LLCs, that’s really where they take care of people as a bread-and-butter matter. So, where we are right now is, they’re going to be better at those issues than at Roth conversions.

Gluck: OK. Let’s start going through some of these. Andrew Fama, Mr. Andrew Fama, is asking, “On slide 44, can a defined benefit plan also be converted?”

Keebler: Sure. Absolutely.

Gluck: “Can a non-governmental 457 plan also be converted to a Roth?” Courtney Powell, thank you for that question.

Keebler: There’s a trick there. That has to be looked at. I think that’s one of the ones that might not be able to be converted.

Gluck: That’s a non-governmental 457.

Keebler: Yeah, I think that’s the problem. Like a hospital plan. I’m not so sure you can convert that. I had that with a doctor in North Dakota, and I think the eventual conclusion is you couldn’t convert that.

Gluck: Christine Romsdahl is asking, “If inherited IRA beneficiary, inherited pre-SECURE Act, dies now, and the contingent beneficiary now inherits it, is the contingent beneficiary subject to the 10-year rule, or grandfathered based on the date?”

Keebler: That’s correct. No, that’s correct. You switch over it.

Gluck: Ed Fulbright is asking, page 30, “Can you distribute the securities in the 10th year?”

Keebler: Sure. Yeah, you can wait till the last year.

Gluck: Robert Pyle. “Do Roth conversions in low-tax brackets make sense if the person who inherits the money will be in a much higher tax bracket, given the 10-year payout? An example—

Keebler: That’s exactly right. No, he’s got that exactly right.

Gluck: Cathy Pinard is asking, “What software do you use, Bob, to analyze the benefits of Roth IRA converting?”

Keebler: We’ve kind of built our own software, over time. There is some software. If you email me privately, I think there is some software that’s out there that I can recommend.

Gluck: You don’t sell your own?

Keebler: We sell a more straightforward version of our own, but the most robust versions of our own are, quite frankly, really in-depth. For a while there we tried to market it, but people weren’t understanding it. So, we realized it was probably better not to continue to sell a product that people really couldn’t use.

Gluck: Ouch. Mr. Fama again. “Bob, you mentioned the dentist beginning Roth conversions at age 58.”

Keebler: Right.

Gluck: “Does that mean that it’s OK to convert monies from traditional IRAs into Roths prior to age 59 and a half without penalty?”

Keebler: Sure. No problem. Yeah, that’s not a problem at all.

Gluck: Susan Honig wants to know, “What about a widowed 92-year-old with a million dollars plus in a traditional IRA, regarding the five-year waiting period?”

Keebler: Well, her children might have to wait five years. If she converted today and died tomorrow, her children would have to wait four years, 363 days before they could get the money without a penalty. But they can always take out their basis.

Gluck: Bill Desormeaux—I hope I pronounced your name correctly—says that he thinks you’re right, that a non-governmental 457 cannot be converted to the Roth. Thank you.

Keebler: Yeah, Bill, thank you for jumping in on that.

Gluck: “Do you think that if we get a blue wave, with restoration of older rates, that they might restore undoing Roth conversions?” Thank you, Sam Fawaz, for that.

Keebler: I have no idea. I mean, they put it in because people were playing games. They were converting and crossing their fingers. If it went up, they kept it. If it went down, they threw it back. You might be able to come up with a different anti-abuse rule. I had a guy who converted in January 2020, and the account went from 4 million to 2 million because of the coronavirus. So, I mean, that was really bad timing. And without the ability to recharacterize, he’s basically wiped out.

Gluck: And Steve Ragonese is asking—this is a long one—“In a partial conversion, say 30K out of a 150K regular IRA, can you simply characterize the $30,000 Roth conversion, thus leaving the total balance of the account at 150K, and just inform your CPA of the 30K conversion amount? Or do you need to actually withdraw the 30K from the regular IRA and put it into a Roth IRA, thus leaving you with a balance of 120K in the regular IRA and a 30K Roth, respectively?”

Keebler: I don’t understand the question. If Steve’s willing to email me separately, I’ll try to help him, I promise.

Gluck: Yeah, Steve.

Keebler: I think I know what you’re getting at, Steve, but if you just clarify that a little bit, I’ll try to help.

Gluck: Yeah. If you want to send in something right now, just to clarify, or email us. “Can you two-step the 457,” Guy Cumbie is asking, “by conducting it through a traditional IRA?”

Keebler: That’s probably possible. Yeah, sure.

Gluck: Wow. Zip zip. Bob, great session. Action-packed, really. Just great.

Keebler: Well, thank you, Andy. My honor to be here.

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Keebler Q&A About Paycheck Protection Program and CARES Act

April 4, 2020

Robert S. Keebler, CPA/PFS, MST, AEP (Distinguished), CGMA

Andrew Gluck, editor, Advisors4Advisors

Andrew Gluck: Hey, good afternoon, everybody. Welcome. Today is Saturday, April 4^th, 2020. It’s about 2:30 p.m. eastern time, and Bob is here with me to answer the questions to the session that he did two days ago. That session received a 9.6 out of 10 review, which is astounding. And people were very grateful for that session, and we appreciate that. But please do let us know that we’re doing this right for you. We think we are. We’re really working hard, obviously. We’re both here on Saturday and we’re doing this. Please let us know how we’re doing, and that you understand that we’re really trying to make this special for you.

Without further ado, Bob is here to answer those questions about the PPP and CARES Act. These acronyms that we didn’t know just a few days ago are now just part of our vernacular. Bob, thank you for doing this. Let me know if you want me to refer to the slides while you go through those questions.

Robert S. Keebler: Of course, Andy, and thank you for having me back. OK, here are the questions. I will read them and then I will answer the best I can.

Are self-employed people eligible for the Payroll Protection Program or the EIDL? Yes. Absolutely, yes.

Question 2: What about the FTE Headcount test for the covered period? What if I had some temporary employees during that time? Is there any adjustment for that? The answer to that is yes. There are going to be adjustments—it’s right in the law—for temporary employees.

Three: An employee is hired in December of 2009 at annual salary of 200,000 dollars. In looking at 2019 average monthly payroll, does one only consider the one month that the employee was paid, or can the employee annualize that one month? I think you’re stuck with just that one month of contribution.

Is the program on a first come, first serve basis? Is there a federal cap on the program? The cap is 349 billion dollars, so that’s out there.

Can a client do a Roth conversion if they waive the RMD? The answer to that is yes. Absolutely no problem. That was question 5. So, no problem with that.

Let’s look at question 6. There is an information sheet on the U.S. Treasury website, so there is information. The PPP Information Sheet is on the U.S. Treasury website.

OK, the next one: The head count criteria for the forgiveness of the PPP, do you know what that is? Do you have to have 100 percent or 75 percent of the staff on? There is a mathematical test. If you had 100 employees and you lost 20 of them, you would get 80 percent of the forgiveness. Now, you can rehire those people and get back to 100 percent.

Are payroll calculations per calendar year, or trailing, like April to April? No, they’re per calendar year right now.

For self-employed people, you’re going to take the profit off the business or, if it’s a partnership, the profit off schedule K.

Gluck: What number are you up to, Bob?

Keebler: That was question number 12.

Gluck: Thank you.

Keebler: Question 11: After creating an inherited spousal IRA to delay the RMD, can a survivor subsequently roll his or her own IRA next year, and then the deceased would turn 72? That’s correct. You can roll that over later. It’s not a problem.

For advisors, are AUM fees within the coverage, under 100K? Sure. If you had a sole proprietorship or a partnership that was all driven by AUM fees, if your income was under 100K, that would work.

OK, 14. Will refunds be delayed? I don’t think so. I think the IRS has promised to process all this as efficiently as possible.

OK, Andy, if we could just put up page 58 of the slides, please.

Slide 58: Individual Tax Relief – Retirement Plan Loans

Keebler: OK, the question is, it appears … Right. You don’t have to be directly affected by COVID-19. Simply, if the economy is hurting you, you’re able to borrow that 100,000 dollars from your retirement plan. And they’ve just increased that, so that should be pretty easy.

Go up to 59, please.

Slide 59: Individual Tax Relief – Temporary Waiver of RMDs

Keebler: Does that affect the 401(k) RMD? Yes. You would not have to take a distribution out of your 401(k). It’s not just IRAs.

OK, question 17: Will real estate passive losses be able to be deducted retroactively? No. Nothing changed with the passive loss rules, so you can’t go back and change that.

Question 18: How do you calculate a salary for a sole proprietor? It would be your income on Schedule C.

OK, 19: Can a business file for PPP if they have furloughed all employees, including the owner, and each employee has filed for unemployment, take the unemployment, and then rehire everyone before around April 30^th to maximize the eight weeks? Yes. There’s nothing to prohibit you from doing that.

Gluck: That is a great question. Just slow down on that one, again, because that is kind of a hardship case, I think, right? He’s saying that the employer—or she [laughs]—that the employer furloughed everybody. Those employees are receiving unemployment. And you’re saying, “Yep, you could still qualify for PPP”?

Keebler: That’s exactly what I’m saying.

Now, 20: In general, will the PPP be a preferable way to go, instead of the retention credit or the deferral of payroll taxes? That’s correct. Everybody’s agreeing that that’s the better way to go.

Gluck: Bob, one thing I was wondering about that I don’t see addressed here in these questions is, this is a first come, first serve basis, and there’s less than 350 billion dollars. I think it’s going to be really important for people to move on this stuff really quickly, won’t it?

Keebler: Yeah. You would need to get in line because the line’s going to fill up.

Question 21: If a client owns a dental practice that leases space from the owner’s LLC, will that count as a covered expense? Sure. No problem. There’s no related-party prohibitions in the statute.

Shouldn’t any business affected apply for the EIDL grant up to 10,000? Absolutely. There’s no harm in that.

Since banks seem to be not up and running yet, with the PPP for a dental practice where the wages are all under 100K, is it more ideal to be in control and take the employee retention credit and deferral of the employee payroll taxes? I would wait. I would give it a few weeks to see if they deny you, because you could always get back on that other track.

OK, there’s a question more for Fritz, which I’ll jump over, 24. Twenty-five is more for Fritz. So is 26.

Twenty-eight is for me. For PPP, are banks only working with current customers? No. They’ll take other people. But it’s going to delay you because if you’re already a customer, they’ve already been able to do all the anti-terrorism work for you.

OK, on the $1,200 check, if you filed a 2019 return, that’s the return they’re going to use. If you haven’t filed that, they’ll use the 2018 return.

OK, under CARES, the RMD for 2020 is waived. What about clients who withdrew the RMD in January and are now beyond their 60-day window? If you’re beyond the 60-day window, right now you can’t fix that. We’re waiting for guidance from the IRS on that.

Question 31: Are the $1,200 checks taxable? Do they need to be paid back? They’re not taxable, and they do not need to be paid back.

On the timeline for all states, 10 days seems optimistic. It’s terribly optimistic. It’s one thing if the government has your bank account number. If the government doesn’t have your bank account number, you’re going to get a paper check, and that could take up to 20 weeks.

OK, I know there was an overhaul in passive losses from real estate, as it refers to offsetting capital gains. Has anything changed with high-income earners being able to offset business income with their passive losses? Nothing’s changed there. It’s only active income can now offset business-type income.

OK, question 34 is more for Fritz.

Thirty-five: How will self-employed take a PPP loan? You get to use your profit off your Schedule C.

Question 36: Does the CARES Act include any special loan provisions for family farm owners? I think that’s being handled in a different part of the bill, so I’m not so sure. And I actually have Farm Credit checking on that for a farmer I represent. We do his estate planning, but they bring us special projects like this from time to time. And Farm Credit is looking into that.

Gluck: Bob? Bob?

Keebler: Go ahead, Andy.

Gluck: Well, finish what you were going to say about the farm.

Keebler: No, I’m good.

Gluck: With the PPP loan not being forgiven under certain circumstances, could you just talk about that formula? I mean, it has to do with how well you retain people, or what percent of people you retain, I think, or the salary. Could you just explain that limitation?

Keebler: Of course. There’s actually three limitations. The first limitation is a head count limitation. The second limitation is a dollar amount limitation, like if you cut everybody’s salary more than 25 percent, they would cut back on some of that forgiveness. And then, finally, there’s a third limitation, that if you ask them to forgive a thousand dollars, only if your payroll was 750 dollars or more would they forgive the whole thousand. If your amount was, say, 60 dollars of payroll, you could only have 80 dollars forgiven. You’re going to take the payroll divided by 0.75, and that will be the maximum forgiveness. So, there’s three tests there. Those are tests the clients’ CPAs are going to have to do.

Gluck: You also said something the other day about segregating the loan money. Just to keep compliance really clean, I think. Want to just mention that again?

Keebler: Oh, sure. You’re not going to get forgiveness if you use the money for anything but the enumerated items. And you’re going to have to prove that. So, what we’ve been suggesting is that you actually create a separate bank account, and only take money out of that bank account for those enumerated items—payrolls, rents, interest on mortgages. Those would be the primary things.

Gluck: The employer part of FICA … Oh, somebody asked that, right there, 39.

Keebler: Yeah, 39. You have to reduce your payroll by the 7.65 percent, but most people think it’s actually the employee’s side, not the employer’s side.

Now, going back one question, what would happen if the employees quit, which would reduce your head count through no fault of the employer? They haven’t allowed for that, so, I mean, that’s just tough. And it’s just going to reduce your forgiveness.

OK, question 40: What if you have a salaried, part-time employee for all of 2019 who plans to retire before the June 15^th lookback date? There’s nothing about that. Maybe what you’re going to have to do for that person … I would go to that person and incentivize them in some way, and pay them, because it looks like the government is going to be paying them after that point in time. That’s certainly what I would do. I would try to get them to stay to that date. You could always work out that they can … I mean, they have to come to work, but if they were doing a very hard job, you can give them a very easy job.

Does this three-year repayment rule apply to Roth distributions? I would have to look at that very closely. I just don’t know the answer to that. I’ll talk about that the next time we do an A4A presentation. I just don’t have the statute right in front of me quickly.

What if you took RMDs in order to complete a Roth conversion? Will they be able to repay those distributions and still qualify for the Roth conversion? I don’t think that’s a problem. I think you’re fine with that.

OK, is a business in bankruptcy eligible for the SBA loans? I really don’t know that. That’s a question that you’re going to have to go to the bank on and ask the banks about that. Remember, there are new provisions in the CARES Act dealing with bankruptcy, but I would bring that to the bankruptcy attorney that’s handling that for you and have he or she run that to ground.

OK, 44 we answered.

Forty-five: With regard to PPP loans, does payroll include an owner’s draw, or just payroll to the other employees? If you had a sole proprietorship or a partnership, it potentially would include the owner’s profit. I think that’s where we’re going with that.

Slide: Paycheck Protection Program Borrower Application Form

Keebler: If you look at the regulations that the SBA issued, some of that is enumerated in there. Those regulations came out Thursday night. Oh, I’m sorry. Maybe Wednesday night or Thursday night, like at 7 or 8 at night. So, take a look at those. I know they came out after I taped the A4A event.

Gluck: Bob, I put this up over here just in case you want to comment on any of this.

Keebler: Yeah, these forms aren’t very hard. Two comments. These really should be completed by the client with the help of their CPA. And you want to be very careful, if you’re a CPA, that you don’t inadvertently certify anything, because the client is supposed to do the certification. And you’re going to take on way too much liability if you certify anything. And then, if you get into trouble, if you’re working with somebody that has a criminal past, you ought to get somebody that does just SBA work, on the legal side, to help you with that, to see if there’s any workaround that would make them eligible for this. Because on the surface it looks like if you’ve committed serious crimes, you’re going to be pushed out of this program.

Gluck: Yeah, that certification of need, essentially, that you are signing is a serious compliance issue for a business owner, isn’t it? I mean, that’s why you recommended really being careful about what you’re signing [laughs]. Isn’t that what you’re saying? And just looking at this application, when you see, it’s clear. You’re certifying a bunch of things that are … You could be charged with—here’s the word, over here—fraud.

Keebler: Right. No, no, no, that’s the problem.

Gluck: Yeah. And what’s that certification called? You used the term the other day, that everybody is certifying that they’re not lying [laughs], essentially, right?

Keebler: Right, right. It’s a penalties of perjury thing.

Gluck: OK. Anything else that you want to go over here, on terms of maybe—

Keebler: No, I’m just always glad to help the A4A members. And we will probably have to follow up with this in the next few weeks, as this develops, but good luck helping your clients with this.

Gluck: And, indeed, advisors themselves. Any idea how many … I mean, is everybody going to apply for this, or like 90 percent of businesses? I know you said that if you have like six months of cash on hand to pay expenses, then you’re probably not going to qualify, and certifying that you have a need is going to be difficult. And that’s where the certification becomes so important, I think. But that’s pretty rare for people to have that sort of cash on hand, I would imagine. Could you give me any idea of, I mean, how big is this? And how far does 350 billion dollars go when you’re talking about that?

Keebler: It’s almost certain not to go far enough. Andy, it’s not going to go far enough. And what’s going to happen is Congress is going to have to authorize more money. So, it’s not going to go far enough.Word on the street is that the speaker of the House, Speaker Pelosi, would like to expand this.

Gluck: So, you think there’ll be authorization of more money for this? They’re going to come back to this?

Keebler: Undoubtedly.

Gluck: Really? Wow. OK. So, even if you’re late, get your application in. And it sounds like it’s going to be massive in terms of the people that can qualify, but we’ll know more about that in the next days. OK, Bob, thank you so much.

Keebler: You’re welcome, Andy. Always an honor to be here with A4A.

Gluck: OK, everybody, we’ll see you soon. Let us know if you have questions about the Q&A here. Thanks again, Bob.

Keebler: Thank you, Andy.