72t to ROTH

L1: 72t to ROTHMy client wants to decrease his current draw but a change to the RMD method will now result in $2800 versus the $9350 he is currently taking. This go us thinking….Can an individual treat their 72t as a ROTH Conversion if their AGI is under the income cap and they have earned income? This would allow us to move the amount that he doesn’t need to another tax advantaged account as opposed to moving it to a taxable brokerage account.2009-01-05 15:37, By: Charlie, IP: [70.154.66.171]
L2: 72t to ROTHIf the funds are part of a SEPP when the plan was started, they must remain as part of the plan until the later of 5 years or age 59.5. With the exceptions of death, disability or a switch to the MD alternative, the payment as initially calculated must also continue.2009-01-05 15:51, By: Gfw, IP: [216.80.125.206]

L3: 72t to ROTHOur client did take the distribution as part of a SEPP. The question is this…can we treat part of the current distributions as a ROTH conversion to keep the portion that he doesn’t need anymore in a tax advantaged account.2009-01-05 15:55, By: Charlie, IP: [70.154.66.171]

L4: 72t to ROTHYou can only convert (to a Roth) amounts that are rollover-eligible. So the answer is no_2009-01-05 15:59, By: Denise Appleby, IP: [67.191.197.23]

L5: 72t to ROTHSince he apparently doesn’t need the money, I assume that he has a job or other assets that he did not have when he set up his SEPP 72-T.THINKING OUTSIDE THE BOX :When did he set his SEPP up ? How old is he now ? How much has he taken in distributions from his SEPP since setting it up ?It might be to his advantage to “bust” the SEPP, pay the 10% penalty on the cumulative distributions, and then start a ROTH CONVERSION program with his IRA balance so that all future income and growth will never be taxed.2009-01-05 20:37, By: dlzallestaxes, IP: [96.245.168.66]

L6: 72t to ROTHThe client will be 58 this year. We started in October of 2007 and has taken ~$140k so far. Before the 72t we split a 2.1 million dollar IRA into two IRAs. The balances now are 930k (SEPP IRA) and a 430k. These are his only assets aside from his home. He is retired and has no other income. He has decided that he can live on less the the $9385 he was taking each month from the 72t before tax but cannot live on the $2835 if we change to RMD now. 2009-01-05 22:57, By: Charlie, IP: [70.154.66.171]

L7: 72t to ROTHThe least expensive alternative may be a home equity line of credit (or home equity loan) to supplement his RMD SEPP 72-T until he is 59 1/2. Assuming he needs an extra $ 2,000/month, that’s $ 24,000/year tax-free from the house, and a tax deduction for mortgage interest totaling about $ 800 using 6%/month rate on the monthly distributions. You can take the 12 monthly RMD payments all out now, and defer the home equity line of credit withdrawls until August to reduce that interest each year until 59 1/2.2009-01-05 23:26, By: dlzallestaxes, IP: [96.245.168.66]

L8: 72t to ROTHAs Denise stated, a 72t distribution cannot be rolled over, and a Roth conversion is such a rollover, so it cannot be used to reduce IRA distributions under a 72t plan.However, a Roth conversion does NOT bust the 72t plan if done correctly. It would not be practical to convert the entire account after taking the annual 72t distribution, since the effect of that would be to make your entire IRA taxable in a single year, inflating your tax bracket and making the conversion counterproductive.However, after taking the 72t distribution, a portion of the remaining account, small enough not to inflate your tax bracket, could be converted to a new Roth IRA, which would then be part of the SEPP universe of accounts. The taxes for this partial conversion can be paid from the 72t distribution that went to the taxable account. What this amounts to is being able to convert to a Roth if it would be wise, irrespective of the 72t plan participation. The only way if would affect the 72t plan is that you would have another IRA (Roth) as part of your SEPP universe, and you could then determine how much of your future 72t distributions came out of the TIRA vrs the Roth. The total of the distributions must meet the requirements of the 72t plan, but you could control the taxes.If you took 72t distributions from the Roth IRA, they would not be subject to the 5 year conversion holding period because the SEPP exception would waive that penalty in the same fashion as it waives other early withdrawal penalties.It is safe to say that converting the entire account in this case would be disastrous from a current year tax standpoint, but it would be possible to weigh partial conversions against other options such as dlz proposed with the home equity loan. We do not know enough here to analyze which option or combination thereof are best, but I did want to clarify that a conversion can be done, but it would not accomplish the purpose stated in the original post.2009-01-06 05:06, By: Alan S., IP: [24.116.165.60]

L9: 72t to ROTHI am going to throw out a possibility:1. If the IRA was split in 2 before this SEPP started, was the larger one used as the SEPP universe for the calculation of the payments and the withdrawals? I used reverse calculator and age 56 (in 2007) with int rate of 6.13% (max avail for Oct 2007 start, and I got a starting balance needed of $1,504,075 to support the $112,620 per year in payments. If that is true, then I would propose the following:2. Use 2nd unrelated (currently $430K) IRA to start a new SEPP plan with Amortization. I used the calculators, andusing 3.57% curr max rate, age 58, and it yields $2,089+ per month or $25,077 per year. Then change the original SEPP to RMD. The combined payout of the two SEPPS may solve his problem., while cutting his current withdrawal in half ..or so. He would have to maintain each one for a full five years from start, but the lower combined payout may work nicely for him. It just leaves him with no other IRA source of emergency funds if he needs a one time withdrawal that he would be willing to pay a 10% penalty on. Perhaps- spin off $50K from 2nd IRA to third one before starting, and get a little less in new SEPP, but have the emergency $$ that could be tapped without penalty once he reaches 59 1/2. He could later change the 2nd SEPP to RMD if he feels that he is no longer in need of all of this money.KEN2009-01-07 16:42, By: Ken, IP: [71.192.120.143]