Distributions from Roth

L1: Distributions from RothI think I know the answer, but want to be sure. Can you combine a rollover IRA and a Roth IRA to form the basis for a 72t SEPP. I would only withdraw funds from the rollover IRA, but could the assets be combined to calculate the distribution?2004-02-14 12:48, By: Ryan W, IP: [24.145.242.199]
L2: Distributions from RothHello Ryan:
Which answer did you think was right? Admittedly, I had to go look & the answer is YES.
TheBadger
wjstecker@wispertel.net2004-02-14 13:11, By: TheBadger, IP: [12.221.34.192]

L2: Distributions from RothWell, I thought the answer would be NO. So I could combine the different IRA’s and then take the annual distribution from the rollover IRA which would be taxable. Then, after continuing the distributions until age 59 1/2, I could begin withdrawing funds from the Roth IRA tax free.

2004-02-14 13:43, By: Ryan W, IP: [24.145.242.199]

L2: Distributions from RothI thought the answer would be no as well.Badger- I usually agree with your responses but I can’t see this one ( not yet anyway)
Since Roth IRAs cannot be combined with traditional IRAs for any other reason, including determining basis for distribution purposes, it would appear that it cannot be combined for 72(t) purposes.
Badger, on what do you base your response? Where or what did you ”check”?
Thanks
2004-02-17 12:58, By: ashanti, IP: [127.0.0.1]

L2: Distributions from RothIwill be the first to admit that this subject is a bit convoluted and may appear to lead to an illogical result; both legally and financially. That being said here goes:
1. IRC 72(t) basically covers the taxation of retirement plans; specifically those enumerated in IRC 4974(c); which in turn enumerates plans covered by 401(a) & therefore 401(k); 403(a) & (b) and 408(a) & (b); this last group being better known as Individual Retirement Accounts and Annuities, respectively.
2. IRC 408A (not to be confused with IRC 408(a)) covers ROTHs. 408A(a) says that a ROTH is an individual retirement plan. Further, 408A(b) says to go read the specifics in 7701(a)(37); which in turn says:
(37) Individual retirement plan The term ”individual retirement plan” means –
(A) an individual retirement account described in section 408(a), and (B) an individual retirement annuity described in section 408(b).
In summary, we travel through no less than 4 -5 code sections; all to run in a circle which can be summarized as follows: a ROTH IRA and regular IRA a statutorily treated as the same animal except for special treatment rules explicitly found in 408A, such as the sequencing for the return of basis in the account.
Now, I thought (logically) the same as everyone else until I researched it. I still think it is an illogical result and not particularly smart from a financial perspective; nonetheless doable.
TheBadger
wjstecker@wispertel.net2004-02-17 13:21, By: TheBadger, IP: [12.221.34.192]

L2: Distributions from RothWhile it may be legal to combine Traditional, SEP, SIMPLE, SAR-SEPand Roth IRA’s, 401(k)’s, 403(b)’s, and all of the other “retirement” plans to establish the “basis” for a SEPP too, presumably, increase the amount of payout, may I suggest some realistic planning for what you are attempting to establish. The bigger problem, as I see it and having experienced it, is making sure you don’t have to rely on that part of the law which says (paraphrased), “If you run out of money it is not a busted plan.” The point being, don’t create such a large payout that the growth of your investments can’t keep up with the rate of withdrawal.
I set up a 72(t) for a client with payments starting in 1996, and the interest rate was about 8.8% to maximize distributions. Life was good until the internet bubble burst in 2000. As interest rates and the stock market took their high-dive into the deep end of the dry pool, life has not been fun. Thankfully the market has begun to turnup and my client is reaching 59 1/2 in a few months. (He also went back to work because he discovered that neither he nor I could overcome the spending ability of his wife.)
Good luck.
Jim2004-02-17 13:56, By: Jim, IP: [68.1.147.61]

L2: Distributions from RothJim raises a good point here; however, I am not sure that the target is right. Many taxpayers have “so called” gone broke on SEPP plans in the last three years. What might be the causes?

1. Combining too many of one’s retirement plan accounts together to build a big basis & therefore a bigger annual distribution — possible, but I don’t see it as a major contributor.

2. Using too high of an interest rate assumption or too aggressive a mortality table thus pumping up the annual distribution. This is what the IRS would like you to believe; however, I do not buy for one second. Do the math. The difference in the annual distribution is about $7000 per year per 1% absolute change in the interest rate per $1mm in the IRA; e.g. going from 8% to 7% or from 5% to 4%. This just does not explain a $1mm IRA that is now worth $100k or even zero.

3. How about failure to realign the underlying investments in the IRAs to coincide with new performance objectives of the account; e.g. for years/decades John was invested in growth stocks; now he starts a SEPP plan and says that he will leave the investments alone intending to “skim” the assets to produce the periodic cash needed. Did John stop to think for a moment that maybe he needed some bonds, zeros, REITS, etc. in his IRA — NOOOOOO. John is now retirement plan broke. This one is the biggy in my book.

TheBadger
wjstecker@wispertel.net
2004-02-17 14:10, By: TheBadger, IP: [38.116.134.130]

L2: Distributions from RothVery good explanation The Badger. I am now convinced2004-02-17 15:07, By: ashanti, IP: [199.53.215.37]