Upholding the spirit of new legislation

The economic disruption caused by COVID-19 has wiped out much of the economic prosperity clients enjoyed over the historic 10-year bull market run. With entire industries struggling to stay afloat amid the fallout from the pandemic, Congress has rightfully stepped in to provide necessary relief to millions of Americans in dire need of government assistance. Those programs have helped countless families across the country.

The relief programs have also supplied unforeseen openings that may allow advisers to provide even greater benefits to clients. While these tax loopholes sound like an enticing option, advisers should think twice about using the laws to benefit clients in ways that weren’t part of lawmakers’ original plans, according to experts. In some cases, such practices contradict the spirit of the laws that were initially intended and are also ethically questionable.


COVID-19-eligible distributions, for example, have been a successful new tool to help Americans gain access to much-needed liquidity. Under the CARES Act, people who were physically or financially affected by the pandemic may be eligible to take penalty-free withdrawals from their retirement plans. These coronavirus-related distributions allow qualified individuals to take up to $100,000 from individual retirement accounts and company plans during 2020 without incurring the 10% penalty normally imposed. Plan loans were also expanded under the new law.

Of course, emergency distributions are never ideal and should only be tapped during extreme financial hardships when advisers have no other options available to give clients access to funds. That being said, there are currently no restrictions on how the distributed assets are used after being removed from retirement accounts.

One way advisers might look to help clients is by using the money to fund Roth IRAs, for example. That kind of transfer would let account holders take advantage of considerable tax breaks — largely because taxes on the distributions can be paid over three years. That makes for a tempting place to stash client cash, especially while the market is down and tax liabilities are at their lowest point in years. But that almost certainly is not what lawmakers had in mind when they passed the CARES Act.

While the new law doesn’t specifically address the idea of funding Roth IRAs with COVID-19 distributions, it is something the Internal Revenue Service could provide further guidance on, according to Ed Slott, president of the consulting firm Ed Slott and Co. In a column for , Slott argues that both Congress and the IRS could view the practice as abusive.


Using emergency withdrawals to fund retirement accounts is also ethically questionable. The CARES Act was passed to help provide relief during an emergency, and there is a moral responsibility to follow the spirit of the law, according to many advisers.

At a time when industry groups are calling on Congress for relief in the form of government stimulus packages, advisers would do well to uphold the intention of the new rules passed by lawmakers. Advisers should remember the true purpose of the new laws — and the objective of the financial advice industry — is to help those who are in need of financial security.

Written by Investors Wallets

Pandemic prompts some to rethink Social Security claiming strategy

LPL shines a spotlight on succession planning