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Roth conversion before start of SEPP  


quisp65
Posts: 2
(@quisp65)
Active Member
Joined: 7 months ago

I have several employee rollovers that might take 2-3 months and I am in need of cash to live on till then.   I could easily grab a few months expenses from my Roth since I have at least 1 year expenses that are contributions only and not earnings.   I would like to grab about $20K and do a Roth conversion so not to lower my funds in my Roth account.    My Roth is at least 10 years old and has at least 50K in contributions that should be without 10% penalty to withdrawal from my understanding.   

I have other options but would prefer this over running to my parents asking for money.   Would 2020's tax forms be suspect starting a SEPP and having a Roth Conversion that same tax year from SEPP universe account, even though the Roth conversion and withdrawal came before the start of the SEPP.   I will probably be able to start my SEPP sometime between this April or May.   

4 Replies
dlzallestaxes@msn.com
Posts: 61
(@dlzallestaxesmsn-com)
Illustrious Member
Joined: 1 year ago

e usually like more specific information before responding to postings. You should look at the template from the link at the home page so that you can provide us with the information. Also, look at the link to EXCEPTIONS TO THE 10% EARLY DISTRIBUTION PENALTY, or google various articles.

Basically, some key information is:

Single or Married

Your Date of Birth

Total amount in all of your Traditional IRAs

Amount of money you need NOW

Amount of Money you need in the rest of 2020

Amount of money you need EVERY YEAR until you are 59 1/2

Other Taxable Income you expect to have in 2020, and in future years, which will give us your approximate tax bracket

In some situations, your taxable income , including IRA distributions before 59 1/2, might be at a low tax rate of 0, so the 10% penalty might be the only tax. If you do a ROTH CONVERSION, you might be subject to an income tax, but not the 10% penalty. As you apparently know, you are never taxed for ROTH IRA DISTRIBUTIONS on the cumulative amount of your contributions and conversions. You are only taxed on the "earnings", which is the cumulative income and appreciation within the ROTH account.

The "problem" with using a SEPP 72-T for a "short-term or immediate cash crisis" is that you are locked into an ANNUAL TAXABLE DISTRIBUTION until the later of 59 1/2 or 60 months. 

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2 Replies
dlzallestaxes@msn.com
(@dlzallestaxesmsn-com)
Joined: 1 year ago

Illustrious Member
Posts: 61

P.S. Taking ROTH IRA DISTRIBUTIONS in the same year as starting a SEPP 72-T, or continuing one, is "never" an issue with the IRS. I have never heard of them even relating these together.

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quisp65
(@quisp65)
Joined: 7 months ago

Active Member
Posts: 2

Both the conversion and the withdrawal will be in my SEPP universe but before starting.   I am including my Roths to increase the amount I can withdrawal.   

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dlzallestaxes@msn.com
Posts: 61
(@dlzallestaxesmsn-com)
Illustrious Member
Joined: 1 year ago

I wouldn't do that. You are making your situation overly complicated, and locking your ROTH IRA accounts in until you are 59 1/2, or 5 years, whichever is later. You didn't give me any of the information that I asked for in order to give you a professional response. Until you do, I can't help you any further.

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