Converting part of 72(t) to Roth
L1: Converting part of 72(t) to RothHave a 72(t) for two years. Want to take part (non-publically traded shares) and convert to Roth. What is the affect on the 72(t)?Thank you.2010-02-12 15:14, By: Dede, IP: [18.104.22.168]
L2: Converting part of 72(t) to RothMost people have a SEPP 72-T because they need to supplement their income. If that is your situation, then where are you going to get the additional 25% (or 15%) to pay the income taxes on the distribution ?You COULD take part of your SEPP 72-T distribution IN KIND by distributing the shares at FAIR MARKET VALUE in lieu of cash.Further, if you took these shares IN ADDITION TO YOUR ANNUAL DISTRIBUTION, then by taking more than your annual distribution amount, you will bust the plan, and owe a 10% penalty on all distributions since inception of your SEPP 72-T plan.Why don’t you give us your age, all of the figures, value of this stock, and how you got non-publicly traded stock into your IRA. If you have another IRA account, you could buy similar shares, and do a conversion of those to a ROTH, or rollover cash from your other IRA to a ROTH IRA, and have the ROTH buy shares.Otherwise, just buy that company’s shares outside of your retirement account(s) and get favorable tax rates on any gains.In other words, this is a dumb idea, and should not be done. If someone suggested this to you, they should lose their license.2010-02-12 21:12, By: dlzallestaxes, IP: [22.214.171.124]
L3: Converting part of 72(t) to RothI agree in the vast majority of cases, this is not a good idea. However, it is still allowed under the tax code as per the following Q&A from Sec 1.408A-4:>>>>>>>>
Q12. Can an individual convert a traditional IRA to a Roth IRA if he or she is receiving substantially equal periodic payments within the meaning of section 72(t)(2)(A)(iv) from that traditional IRA?
A12. Yes. Not only is the conversion amount itself not subject to the early distribution tax under section 72(t), but the conversion amount is also not treated as a distribution for purposes of determining whether a modification within the meaning of section 72(t)(4)(A) has occurred. Distributions from the Roth IRA that are part of the original series of substantially equal periodic payments will be nonqualified distributions from the Roth IRA until they meet the requirements for being a qualified distribution, described in 1.408A6 A1(b). The additional 10-percent tax under section 72(t) will not apply to the extent that these nonqualified distributions are part of a series of substantially equal periodic payments. Nevertheless, to the extent that such distributions are allocable to a 1998 conversion contribution with respect to which the 4-year spread for the resultant income inclusion applies (see A8 of this section) and are received during 1998, 1999, or 2000, the special acceleration rules of 1.408A6 A6 apply. However, if the original series of substantially equal periodic payments does not continue to be distributed in substantially equal periodic payments from the Roth IRA after the conversion, the series of payments will have been modified and, if this modification occurs within 5 years of the first payment or prior to the individual becoming disabled or attaining age 59 1/2, the taxpayer will be subject to the recapture tax of section 72(t)(4)(A).>>>>>>>>>>>>>>>>.Note that the resulting Roth account would be part of the “SEPP universe” and subject to all the rules for SEPP distributions. The number of variables to be addressed in doing a conversion within a 72t plan are considerable, and therefore there is added risk of busting the plan by making an error. Also, note that the similar acceleration rules will apply to 2010 conversions to those mentioned for 1998 conversions in this Reg.
2010-02-12 22:03, By: Alan S., IP: [126.96.36.199]