contribution to IRA after SEPP distribution

L1: contribution to IRA after SEPP distribution
I started a SEPP. An accountant provided me a letter stating my withdrawal should be $XXXX per year (I apologize about being discreet on the amount of money). I took my first withdrawal on
August 26, 2016 of the amount $XXXX. I have 2 accounts which my SEPP is based upon, one is a rollover traditional IRA, and the other is a Roth IRA.
1) I have been withdrawing from my Roth IRA since my first withdrawal. I have been withdrawing the $XXXX as tax free since I contributed in taxed $XXXXX to the Roth IRA.

Can I withdraw each SEPP annual amount from the Roth IRA until it reaches $0, and then start withdrawing from the traditional IRA ?

2) Also, I contributed $5,500 on April 7, 2017 for tax year 2016 to my traditional IRA (which is in a 30% stock/70% bond mutual fund).

Is this a violation of the SEPP rules even though a minor effect to my IRA balance ? The mutual fund company says I can reverse the contribution.

Thank you for your help.

2019-03-11 23:16, By: AD, IP: [75.76.218.19]

L2: contribution to IRA after SEPP distribution
1) Yes, you can make your annual distribution in any combination from the TIRA and Roth IRA. Of course, the tax implications of the IRA you choose for the distribution are vastly different. If you take a distribution from two IRA types in the same year, you will get a 1099R for each since the Box 7 distribution codes are different. Since the IRS Regs state that it is permitted to convert a TIRA to a Roth IRA during the plan, it is presumed that the IRS considers both IRA types are permitted to be combined under the same SEPP. In fact, by using the account balances of both accounts to calculate your SEPP distribution originally, you actually combined them from the start.
2) However, the above only serves to confirm that your plan was valid from the start, but you unfortunately busted it by making the contribution in 2017. Once made, the plan was busted, so it is not clear what the mutual fund company is saying. This is not permitted per RR 2002-62 Sec 2, 02 (e). It is also too late to have a 2016 contribution returned with allocated earnings, but that would not have changed the fact you made the contribution. It would have been OK if you made that contribution to a different IRA account than the two plans that were part of your SEPP.
3) You should have reported a busted plan on your 2017 return, paying the total retroactive penalty for all SEPP distributions from the start through the end of 2017. You can file this on Form 5329 for 2017 by itself without a 1040X. The IRS might also bill you late interest. You can start a new plan at this point with an entirely new calculation, and it must run for the longer of 5 years or until 59.5.
2019-03-12 02:46, By: Alan S, IP: [72.24.226.251]

L3: contribution to IRA after SEPP distribution
Thank you Alan.
1) Yes, the accountant combined both the traditional IRA (TIRA) and the Roth IRA (RIRA). The total amount in these 2 accounts were applied for the accountant’s calculation of my SEPP annual distribution.
So I understand that I can keep deducting the annual SEPP distribution from my Roth IRA until it reaches $0 balance, and then move on to my Traditional IRA.

Yes, the mutual fund company provided a 1099-R. I identified on TurboTax that the SEPP distribution is tax free. I originally deposited $70,000 of taxed money into my Roth and I my annual SEPP distribution is $14500.

2) I took a SEPP distribution for 2018 as well.

So I would have to pay the 10% penalty on the 2016, 2017, and 2018 distributions ? That seems extreme for making one slight error. Can I negotiate with the IRS and not get penalized with Form 5329 ?

Should I just stop the existing SEPP plan and then recalculate a new SEPP distribution ? I do not plan on making the 2019 distribution until this gets settled and not put myself in further jeopardy.
2019-03-12 03:41, By: AD, IP: [75.76.218.19]

L3: contribution to IRA after SEPP distribution
If you don’t mind I have a question on his situation.
When he took his 2018 distribution (after the 2017 bust) Could that 2018 distribution be the starting point for his new SEPP? Assuming the balance and distribution numbers work to his 2018 balance?
Or if the 2017 withdraw was after April 7, 2017, could the 2017 distribution be part of the new SEPP if the balance and distribution numbers work out?
2019-03-12 03:47, By: Russell, IP: [189.177.36.247]

L4: contribution to IRA after SEPP distribution
Good point.

I think the 2018 SEPP distribution of $14,500 taken would be less than the new SEPP distribution (estimate $15,000) because the balance is higher now in both the traditional and Roth IRA’s.
So you are saying start a new SEPP plan and withdraw the remainder for 2018 ?
But then I still would have be pay the 10% penalty on the 2016 and 2017 SEPP distributions ?

HOWEVER, the 2016, 2017 and 2018 SEPP distributions were from my Roth IRA. I made about $80,000 in contributions to the Roth IRA over several years. So is there a way I can end the SEPP and not still take the penalty since the SEPP distributions ($14,500 per year) were from already taxed money ?
2019-03-12 04:02, By: AD, IP: [75.76.218.19]

L4: contribution to IRA after SEPP distribution
He COULD have started a new SEPP in 2017 when he busted his plan, or in 2018.
BUT, he did not have any documentation that he actually started a new SEPP, and which balance(s) he was using.
I think that there is a better approach. Forget about setting up a SEPP, and just take ROTH distributions until he reaches 59 1/2, or until it runs out. Or at least report the 2017 distributions after the busting, and for all of 2018, and until now. ROTH IRA distributions are not taxable up to the total amount of the CONTRIBUTIONS. Then he can start a new SEPP now, if it makes sense.
2019-03-12 04:07, By: dlzallestaxes, IP: [173.59.117.151]

L5: contribution to IRA after SEPP distribution
dlzallestaxes, thank you !
I am trying to figure out the least penalized action to take.
Yes, the three SEPP distributions (2016-2018) were identifed as tax free in my tax returns since they were from my Roth IRA, and the annual SEPP distribution is $14,500 and my Roth IRA contributions were $80,000. That $80,000 was already taxed.
Box 7 of each year’s (2016-2018) 1099-R shows “J”, which is early distribution from Roth IRA.

The balance of the “remaining tax free available money” in the Roth IRA is $80,000 minus $43500, or $36,500.
So can I just keep withdrawing the tax-free available money (remainder $36,600) from my Roth IRA via the SEPP distribution until the “remaining tax free money” runs out ? Would that help me to avoid the 10% penalty and not have to file the IRS form 5329 ?

I state this because I read the below paragraph about deducting contributions from a Roth IRA from CNN’s Money website.
You may withdraw your contributions to a Roth IRA penalty-free at any time for any reason, but you’ll be penalized for withdrawing any investment earnings before age 59 _, unless it’s for a qualifying reason. Money that was converted into a Roth IRA cannot be taken out penalty-free until at least five years after the conversion.
2019-03-12 04:28, By: AD, IP: [75.76.218.19]

L6: contribution to IRA after SEPP distribution
You did not indicate your age, and did not indicate if your ROTH IRA was the result of CONTRIBUTIONS or CONVERSIONS. These are treated differently.
Assuming that it was all from CONTRIBUTIONS, you can withdraw all of the Contributions TAX-FREE. However, amounts withdrawn in excess of that amount are TAXABLE “earnings”, which include not only Accumulated Interest and Dividend Income over the years, but also the Capital Gains and Increase in Value of the Investments, unless you are over 59 1/2 when you start to take distributions of “earnings” (or if it was withdrawn for “other qualified exceptions”).
2019-03-12 15:43, By: dlzallestaxes, IP: [173.59.117.151]

L7: contribution to IRA after SEPP distribution
I apologize for not doing that. Here is my info.
Current age: 49 and 7 months
Total approximate amount in IRA’s for SEPP calculation: $402,000
SEPP annual distribution based on accountant calculation in 2016: $14,400

Total Contributions to Roth IRA: $71,852
Of the $71,852 there was a conversion from traditional IRA to Roth IRA of $14468 in 1998
Paid $2468 on taxes via IRS Form 8606 on the $14468 conversion
So far I have deducted 3 years (2016-2018) of an amount of $14400 annually, or $43,200.

I thought I made an error contributing to the Traditional IRA in April 7, 2017 for tax year 2016 contribution because I started my SEPP on August 26, 2016, with my first deduction of $14,400.
However, from the very helpful posts such as from dlzallestaxes, it appears that I have just deducted my tax free and penalty free contributions from my Roth IRA and technically have not started my SEPP plan.

Please correct me if I am wrong.
2019-03-12 16:11, By: AD, IP: [75.76.218.19]

L8: contribution to IRA after SEPP distribution
Technically, you cannot “put the baby back”. If you started a SEPP, then you did.
BUT, since you only distributed less than your ROTH IRA CONTRIBUTIONS, none of it was taxable while the SEPP was viable, and even afterwards when you busted your SEPP in 2016.
Now you have to decide if you want to continue to distribute $ 14,440 tax-free for 2019 and 2020, which will liquidate the tax-free aspect of your ROTH IRA DISTRIBUTIONS before age 59 1/2.
Then you can distribute your ROTH IRA CONVERSION of $ 14,468 TAX FREE in 2021.
Of course, you have to consider that you are giving up a lifetime of tax-free growth if you left these amounts in your ROTH account. You have to take into consideration your current tax situation, and whether or not you want to take taxable distributions up to the limit of the 12% tax bracket, which is $ 103,000 of Gross Income (which is $ 79,000 after the $ 24,000 Standard Deduction). By the way, if you stay under the $79,000 taxable income figure including Qualified Dividends and Long-Term Capital Gains, then these latter items are also TAX FREE in the 12% tax bracket.
There is some serious tax planning that you should do with a qualified tax professional.
2019-03-12 16:43, By: dlzallestaxes, IP: [173.59.117.151]

L8: contribution to IRA after SEPP distribution
Good news. You are correct.
As long as you did not distribute any taxable amounts or Roth conversion amounts under 5 years, you owe no penalty for busting a SEPP. You did not even need a SEPP until you were ready to tap your TIRA account or Roth earnings.
Check your 8606 reporting your Roth distributions for 2016 and 2017 to make sure that the basis amounts reported on line 22 were correct and there was no taxable income. Same for 2018. You will be OK as long as you did not withdraw any Roth earnings or TIRA amounts.
You do not have to report a busted SEPP if there is no penalty due. But you may want to start a new plan this year, being extra careful to avoid errors in calculation or making non SEPP distributions or contributions. You have 10 years to go, so be sure to plan for inflation or emergency needs. You may have to include your Roth again to generate a high enough distribution amount, but if you do not need the Roth balance, leave it out of the new plan.
2019-03-12 16:44, By: Alan S, IP: [72.24.226.251]

L9: contribution to IRA after SEPP distribution
Russell, Alan and dlztaxes, I want to thank you all very much for your valuable help.
I checked my basis in my TurboTax filings, and I deducted about $43,200 from my Roth IRA for the 3 years (2016-2018). The 1099-R for each of the 3 years shows box 7 as “J”.

I contributed $71852.74 of which $14467.75 was from a traditional IRA conversion. So $57,384.99 is from original contributions and non-conversion.

I confirmed that I did not deduct any “earnings” from my Roth IRA.
So I am going to be very cautious and not withdraw any more money from my Roth IRA.
I may start a “new” SEPP plan and will definitely consult a CPA or tax professional.

Very Respectfully,
AD
2019-03-12 18:04, By: AD, IP: [75.76.218.19]

L8: contribution to IRA after SEPP distribution
First, my regrets regarding the busted SEPP penalty. Since all your distributions have been non taxable and did not include any earnings or conversions under 5 years, your Roth distributions are also penalty free. Hopefully, you have been properly reporting them on Form 8606 using the Roth IRA ordering rules.
Since there is no penalty to report for a busted SEPP and therefore no need to report a busted SEPP, your IRA contribution in 2017 has no negative implications.
Your last statement is correct. The IRS does not even know you started a SEPP. You are ready for a fresh start with a new SEPP if you wish. Whether you should combine both balances together in a new plan as before or just wait until you reach your Roth IRA earnings before starting a new plan is a technical issue. The only reason for not waiting is that if you wait until your Roth is drawn down to just earnings, you will have a smaller total balance in both IRAs and that will reduce the payout you can generate with the SEPP calculation. Therefore, you would have to crunch some numbers before starting a new plan.
2019-03-12 19:46, By: Alan S, IP: [72.24.226.251]

L9: contribution to IRA after SEPP distribution
Alan S, thank you for your valuable insight.
I agree about the significance of the balance of both my traditional/rollover and Roth IRA’s. The larger the balance, then obviously the larger the SEPP distribution if I decide to take it.

This is true if I need to establish income like for securing a loan, mortgage, etc. since the loan amount is based on available income. I think for mortgages the monthly payment (principal/interest/insurance/property taxes/hoa fee) is to be no greater than 35% (or 40%) of net monthly income.
I am just relieved to realize I will not suffer a 10% penalty because my box 7 of 1099-R says “J” and I verified I’ve been just deducting the Roth IRA contributions.

2019-03-13 03:47, By: AD, IP: [75.76.218.19]