followup question on section 72 on rothira
L1: followup question on section 72 on rothiraAll of my contributions in my roth were more than 5 years ago. My understanding is I can do a Section 72t on my roth. Once I do this, is the section 72t distribution taxable? I know I don’t have to pay the 10% penalty on it. Thanks.
If it is taxable, is it taxable at marginal tax rate or at capital gains rate?
2017-09-06 16:53, By: namehij, IP: [18.104.22.168]
L2: followup question on section 72 on rothiraDistributions of CONTRIBUTIONS or CONVERSIONS from ROTH IRAs are never taxable. Only the EARNINGS (Income or Appreciation) are taxable if withdrawn before age 59 1/2.
Any taxable distributions from any IRA are taxed at Regular Tax Rates, never at Capital Gains rates.2017-09-06 17:33, By: dlzallestaxes, IP: [22.214.171.124]
L3: followup question on section 72 on rothiraSince a large part of your Roth IRA can be distributed without tax or penalty, why would you need to start a 72t plan? You could just take distributions now as needed without any restrictions, and if you ended up needing to take out earnings as well, then consider a 72t plan at that time.2017-09-06 18:35, By: Alan S, IP: [126.96.36.199]
L4: followup question on section 72 on rothiraYou did not indicate your age/DOB, the amount in your ROTH IRA, or total Contributions, and your annual needs. If you had, we might have been able to give you a more definitive answer.
Using Alan’s excellent suggestion, you might see that your tax-free distributions of contributions would take you to 59 1/2, after which none of your distributions would be taxable, or subject to the 10% penalty.2017-09-06 18:59, By: dlzallestaxes, IP: [188.8.131.52]
L4: followup question on section 72 on rothiraBear in mind too, that nonqualified Roth IRA distributions are distributed in the following order:
Regular Contributions first
Roth Conversion amounts second (FIFO), and
As indicated in the other responses, you need not be concerned about taxes or the penalty, unless your total distributions exceed your regular contributions and conversion amounts; and you are still under 59 1/2 when you get to the penalty and do not qualify for any other exception to the penalty. ( if you add new taxable conversions, distributions of those amounts before 59 1/2 would need to age in your Roth IRA for at least 5-years to be automatically exempted from the early distribution penalty
Denise2017-09-06 23:47, By: Denise, IP: [184.108.40.206]
L5: followup question on section 72 on rothiraI’ve got a similar question.
I’m 50 and I’ve got 210K in a Roth IRA (start 2009, 95K Contributions/Conversions and 105K Earnings) and 260K in a Traditional IRA. Currently working part time and need to bridge the gap until my pension starts ca. 57.
Seems sensible to me to split the Roth IRA into one with the Contributions/Conversions in it (95K) and then use the remaining 365K (remainder of Roth + traditional) as the basis for a SEPP plan (I intend to make the withdrawals from the traditional part and let the Roth part continue to grow).
Then the 95K part would be an emergency fund which I could freely withdraw from.
Timeframe to start this is in the next year or so depending on my balance/the mid-term rate.
Is this doable? Can I split the Roth as described? Or put another way: if I leave the Roth portion of the SEPP untouched, I could take 95K out of the other portion before it’s considered earnings?
Rich2017-10-31 10:18, By: richp, IP: [220.127.116.11]
L6: followup question on section 72 on rothiraIt’s unusual for a pension to start at 57, so double check that.
If any of your pension, or 401-K, is invested in company, ask HR or the fund administrator for the cost basis (and # of shares), and research the IRS provisions for NUA (Net Unrealized Appreciation). (See J K Lasser Your Income Taxes for an excellent 2-page narrative.)
Yes, you could start withdrawing your ROTH IRA CONTRIBUTIONS/CONVERSIONS first, but from a Tax and Financial Planning approach, that is usually not a good idea. You would destroy the long-term tax-free accumulation benefits of having made these contributions to start with. At a 5% annual growth, the ROTH IRA would double every 14 years, tax-free. It would be $ 200,000 when you reached 65/66.
Depending upon your part-time and other taxable income, I would have a tax or financial advisor, or yourself, calculate the alternative approach of setting up a SEPP 72-T to use your taxable IRA instead until you are 59 1/2.2017-10-31 15:20, By: dlzallestaxes, IP: [18.104.22.168]
L7: followup question on section 72 on rothiraIf you partition your Roth IRA into two accounts, that will not change the taxation of distributions you take from either of the Roth accounts (one account as part of the 72t plan and the other outside the plan). The Roth IRA ordering rules will result in your earnings coming out last either way, since all your Roth IRAs are treated as one single account for tax purposes.
However, if you included only one of the Roth accounts in your 72t plan, the account balance to calculate the 72t would be less than if you included both.
If your 72t plan consists of both a TIRA and a Roth IRA account, you will have a choice of which IRA type you take the distributions from, therefore you can control your tax bill. That said, the IRS sees extremely few 72t plans incorporating the two IRA types, so doing this may result in an inquiry.2017-11-01 03:47, By: Alan S, IP: [22.214.171.124]
L8: followup question on section 72 on rothiraThanks bothIt’s military retirement , which we at least colloquially refer to as a pension. I am dead certain it will start at 57 (USAR is normally 60 but it’s had some modifications).
Totally understand theRoth comments; just want to have a backup which I hopefully won’t use.
2017-11-01 08:24, By: richp, IP: [126.96.36.199]
L9: followup question on section 72 on rothiraDouble-check the taxability of your military “pension”. Some are taxable, but many are not. See IRS Pub # 3 (Armed Forces Tax Guide) for taxable and non-taxable military payments.2017-11-01 16:02, By: dlzallestaxes, IP: [188.8.131.52]
L10: followup question on section 72 on rothiraUPDATE: This is somewhat off the 72t topic, but I think it’s relevant for those contemplating 72t. I will likely execute a “Roth IRA Conversion ladder” rather than 72t because it essentially has the same results but with more flexibility. (Think there’s one other post on this subject in the entire forum.) It involves making yearly conversions from the traditional IRA to the Roth IRA while withdrawing the same amount from the basis I already have in the Roth IRA.I have to pay taxes but no penalty on the conversion, andthe basis amount in the Roth remains the same because it’s beingplussed up.
The one catch is that conversions have to remain in the Roth for 5 years, but I have enough basis in there already that this is not a problem for the first 5 years.2017-11-08 08:41, By: richp, IP: [184.108.40.206]