72t on Roth IRA
L1: 72t on Roth IRAI am considering applying a 72t to a Roth IRA. All funds are over 5 years conversion date, so that is not an issue. Will the distributions be taxable income? Of course, it is not taxable over age 59.5. If it is taxable, I cannot figure out how it would make sense to do this.I appreciate your help.2008-09-17 19:38, By: Dr Jam, IP: [188.8.131.52]
L2: 72t on Roth IRADr Jam,As you can see below, in an excerpt from the FAIRMMARKwebsiteI list, if you funded this with contributions or conversions,then your can take out your contributions & conversions tax free even if under 59 1/2, and once you are 59 1/2 you can also take out any earnings tax free. With that in mind, unless you need to pull out earnings before turning 59 1/2, I don”t think you need a 72t, but I may be missing something. KENfrom: http://www.fairmark.com/rothira/roth101.htmDistributions
Distributions from Roth IRAs are tax-free until you”ve withdrawn all your regular contributions. After that you”ll withdraw your conversion contributions, if any. When you”ve withdrawn all your contributions (regular and conversion), any subsequent withdrawals come from earnings. Withdrawals of earnings are tax-free if you”re over age 59_ and at least five years have expired since you established your Roth IRA. Otherwise (with limited exceptions) they”re taxable and potentially subject to the early withdrawal penalty.Here is another page you should review from that site: http://www.fairmark.com/rothira/taxfree.htmpartial quote:
Rules for tax-free distributions from Roth IRAs.
In most cases the best strategy is to leave as much money in your IRA as you can, and for as long as you can. But if you need early access to that money, you”re generally in better shape with a Roth IRA than with a traditional IRA. You”re allowed to withdraw your regular contributions at any time without paying tax or penalty. This is not the case for the earnings, however. Unless you meet the tests described below, a withdrawal of earnings will be taxable and may be subject to a penalty as well.
Terminology: When you put money into an IRA, you”re making a contribution. When you take money out, you”re making a withdrawal, and you”re receiving a distribution. The words “withdrawal” and “distribution” mean the same thing and are used interchangeably.
Withdrawing Your Contributions
The rules for Roth IRAs permit you to do something that isn”t allowed for traditional IRAs: withdraw the nontaxable part of your money first. Distributions from traditional IRAs come partly from earnings and partly from contributions. But when you take money out of a Roth IRA, the first dollars you take out are considered to be a return of your regular contributions. You don”t have to meet any special tests to receive those dollars free of tax. You can take them out any time, for any reason, without paying tax or penalties. 2008-09-18 03:05, By: Ken, IP: [184.108.40.206]
L2: 72t on Roth IRAYes. I am familiar with taking out any basis at any time tax free. What I as not sure about is whether the 72t allowed the earnings to be taken out before age 59.5 tax-free also or if the 72t only addressed the 10% penalty part and the distributions were taxable as income.I appreciate your help.2008-09-18 07:02, By: Dr Jam, IP: [220.127.116.11]
L2: 72t on Roth IRAYes. I am familiar with taking out any basis at any time tax free. What I as not sure about is whether the 72t allowed the earnings to be taken out before age 59.5 tax-free also or if the 72t only addressed the 10% penalty part and the distributions were taxable as income.I appreciate your help.2008-09-18 07:03, By: Dr Jam, IP: [18.104.22.168]
L2: 72t on Roth IRAHello Dr. Jam:IRC 72(t) only taxes / surtaxes distributions which are “taxable” to begin with. Therefore, distrbution of basis in a regular IRA or distribution of LTD contributions to a Roth IRA are not effected by IRC 72(t). On the other hand, assume you removed all of your contributions in a Roth IRA and then started to distribute earnings from the Roth before age 59 1/2. Instantly, those earnings distributions are covered by IRC 72(T) and will be taxed as well as surtaxed.TheBadgerwjstecker@wispertel.net2008-09-18 07:16, By: TheBadger, IP: [22.214.171.124]
L2: 72t on Roth IRAInstead of “dancing on the head of a pin”, tell us what your age is, how much is in the ROTH IRA and how much of it is “earnings”. And thenwhy don”t you explain why you seem to beso set on going to the trouble of setting up a SEPP 72-T just to take out the earnings before 59 1/2 and paying income taxes and an additional 10% penalty ?2008-09-18 12:27, By: dlzallestaxes, IP: [126.96.36.199]
L2: 72t on Roth IRAActually, while the earnings in the Roth would be taxable prior to age 59.5 if they were reached under the ordering rules, there would be no 10% penalty. There also would be no 10% penalty if conversions under 5 years were distributed under the SEPP. The SEPP itself constitutes a penalty exception for Roth distributions just as it does for TIRA distributions. (Ref. Pub 590, p 66).If the SEPP were busted, all the distributions under the plan that were taxable would then become subject to penalty. That would only be the earnings you may have distributed since your conversions are over 5 years. Therefore, the penalty for busting the SEPP on a Roth IRA is likely to be far less than on a TIRA, and possibly no penalty at all.In fact, the SEPP may well be totally unnecessary if you have enough regular contributions and conversions over 5 years to get you to age 59.5. If there is no penalty, there is no reason for undertaking the restrictions of a 72t plan. It would probably make more sense to use a TIRA if you have one, or even a combination of a TIRA and a Roth to keep the taxes down. A situation where a Roth only is best for the 72t would have to involve some fairly unique circumstances eg a Roth that has done very well and attained significant earnings.2008-09-18 12:43, By: Alan S., IP: [188.8.131.52]