Distributions taken same year before starting SEPP
L1: Distributions taken same year before starting SEPPI am 56 (57 later this year) and thinking of starting a SEPP from my Roth. Earlier this year I already took several early distributions, part of which are not taxable being from the contribution basis. And some of the rest will qualify for the medical expenses exception. My question is, if I start a SEPP now, are the earlier distributions this year part of this year’s annual SEPP distribution? If not, would my custodian (Merrill Lynch) be sending me two 1099-R’s for 2014, one for the earlier withdrawals and one for the SEPP?2014-06-28 20:19, By: Gopher, IP: [184.108.40.206]
L2: Distributions taken same year before starting SEPPLet’s start with… no distribution is 100% a retrurn of basis unless there is zero gain in the IRA. If there is any gain in the IRA, all distributions are a return of basis and gain … including any distributions taken for medical expenses. In addition, the medical exemption only applies to the 10% penalty tax, not the income tax.2014-06-28 21:23, By: Gfw, IP: [220.127.116.11]
L3: Distributions taken same year before starting SEPPGFW might have overlooked that you took it from your ROTH IRA. Therefore, distributions come first from contributions, and no distributions from ROTH IRAs are taxable before 59 1/2 until all of the contributions have been distributed. Only distributions of earnings from ROTH IRAs are taxable, and then only if taken before 59 1/2. Therefore, there is probably no reason to start a SEPP 72-T.
Different rules apply if your first contribution to the ROTH was in 2009 (i.e. less than 5 years before you took the 2014 distributions), if your ROTH was set up in a 401-K, or if it was established by a rollover from a TRADITIONAL IRA CONVERSION.
Give us the background of when and how you started the ROTH IRA, how much you contributed, and what it was worh at 12/31/2013.2014-06-28 22:23, By: dlzallestaxes, IP: [18.104.22.168]
L4: Distributions taken same year before starting SEPPSet up in 2004 with ordinary contributions through 2008 totalling $19000, various conversion contributions 2005 through 2013 totaling $494,553, distribution 2013 $11,000, basis at start of this year is $8000, value 12/31 was $552,000, $10500 in distributions taken already this year, present value $550,000.2014-06-28 22:42, By: Gopher, IP: [22.214.171.124]
L5: Distributions taken same year before starting SEPPMy prior post did not reflect your breakdown as it had not shown up yet, but the breakdown appears to simplify things. But still need the conversion amounts by year.
You used up your remaining 8k of regular contributions, and you then took out 2.5k from conversions over 5 years before the SEPP, so there is no penalty to be waived on what you already took out, so the medical exceptions will not apply.
You can still take out the remaining total of your conversions done 2005-2009 before starting your SEPP, so there is no need to start your SEPP this year and therefore no need for a 5329. Still do not have breakdown for 494.6 in conversions prior to 2010 vrs after. Once 2014 is over, your 2010 conversions (whether you paid taxes on them over the next two years or not) are also penalty free.
You will noteven need a SEPP if you can get to 59.5 before you have to tap conversions under 5 years because those 5 year holding requirements all end at 59.5. It should be easy to determine how much more you can take out before you get into conversions under 5 years.2014-06-28 23:23, By: Alan S, IP: [126.96.36.199]
L4: Distributions taken same year before starting SEPPGopher asks a good question. Roth IRAs have entirely different 1099R distributioncodes than non Roth IRAs. The only possible code that ML can use for these distributions is “J” since he has not reached 59.5. This applies to both the distributions taken prior to starting a SEPP using Roth money AND SEPP distributions. Therefore, all the Roth distributions will be reported on a single 1099R form and this will create potential confusion for the IRS. Further, Form 8606 will be needed to report the Roth distributions that are subject to the usual Roth ordering rules for non qualified Roth distributions.
Under the ordering rules, the pre SEPP distributions came from regular contributions and you would have to show your balance in regular Roth contributions on the 8606. Next out is conversions in order of age, and the SEPP will waive the 10% penalty on conversions under 5 years. If you reach earnings, they will be taxable and again the SEPP will waive the penalty on the earnings. With respect to the penalty waivers, you will need an attachment to the 5329 Code 12 (multiple exceptions apply)to list the amount of penalty waived by the medical exceptions (if needed) prior to the SEPP distributions and the SEPP exception for the rest.
You may also need an explanatory statement indicating the date your SEPP started and the gross amount of SEPP distributions and gross amount of non SEPP distributions taken prior to the start date. This is a very rare combination and if the IRS tries to figure it out there is a good chance they will confuse themselves no matter how thorough you are. The same would be true if your SEPP included some combination of Roth and traditional IRA accounts.
Finally, if your Roth IRA included direct rollovers from qualified plans known as qualfied rollover contributions or from a Roth 401k, those contributions must be included in the ordering rules stated above in the proper order and also correctly shown on the 8606 and 5329.
If there is any way to avoid using a SEPP for the Roth, you should consider it.2014-06-28 23:05, By: Alan S., IP: [188.8.131.52]
L5: Distributions taken same year before starting SEPPThanks! so much for all the useful information. I was not aware that certain conversion contributions might not be subject to 10% penalty. The breakdown is $475,100 total conversions before 2009, none in 2009, and $19452 after 2009.2014-06-29 01:41, By: Gopher, IP: [184.108.40.206]
L6: Distributions taken same year before starting SEPPAccording to a famous quote from Joe Friday,” just the facts, just give me the facts”.
That is especially true in dealing with retirement planning and taxation, ROTH contributions and conversions, SEPP 72-T, etc.
It would be helpful in order to reduce wasting time for gfw to require “the facts” for all postings before there are any responses.
Gopher could have eliminated a considerable amount of problems for himself if he had used separate accounts for his ROTH contributions and ROTH conversions, especially because they have different 5-year holding periods. As a matter of fact, by having combined them and co-mingled the funds, I’m not sure if our answer about the sequencing is correct in a co-mingled account, but the amount of the ROTH contribution is too small to worry about it.
Bottom line, unless you are going to make extensive distributions of another $ 465,000 before age 59 1/2, I would not recommend setting up a SEPP 72-T.
2014-06-29 16:22, By: dlzallestaxes, IP: [220.127.116.11]
L7: Distributions taken same year before starting SEPPThanks everyone, I won’t need to SEPP after all. And thank you, Alan S., for answering my question about the reporting so thoroughly.2014-06-29 17:02, By: Gopher, IP: [18.104.22.168]