in-kind xfers between 2 IRAs within one SEPP
L1: in-kind xfers between 2 IRAs within one SEPP
I will be starting a new 72t SEPP at the beginning of 2020 at age 49. Two existing IRA’s will be included in the initial single SEPP calculation: IRA #1: Vanguard TIRA brokerage account IRA#2: local CU TIRA with very aggressive short term CD rates.
Am I allowed to do in-kind trustee to trustee transfers between these two accounts during the life of the SEPP since they’re considered one SEPP entity? or does this violate the partial transfer rule?
I understand that I should not contribute or take any other distributions from these accounts during the life of the SEPP.
Also, should I include a near empty Vanguard Roth IRA#3 in the original SEPP calculation to have a future repository for any TIRA to Roth conversions I may want to do? (I will have another Roth IRA #4 for my emergency fund that will not be included in the SEPP)
Thanks for your time!
2019-04-17 19:43, By: beancurd, IP: [188.8.131.52]
L2: in-kind xfers between 2 IRAs within one SEPP
Suggest you read recent thread “splitting SEPP after starting 72t” as it describes the partial transfer situation and it’s risks. In short, the IRS has not clearly clarified the partial transfer issue between IRA accounts, but thousands of these have been done for every one that they busted, so the risk is small.
As for the potential conversion, the IRS Regs clearly indicate that a 72t plan TIRA can be converted within the plan, but those Regs do not address the PARTIAL transfer issue, they assume a 100% conversion. (See IRS Reg 1.408-4 QA 12). Note that a conversion results in your plan distributing more than you need for expenses since you will be paying the conversion taxes as an additional expense above what the 72t plan distributions are already covering.
Having two types of partial transfers, one involving a bank/CU and the other a partial conversion is pushing the envelop. The CU direct transfer will not generate a 1099R unless they foul up, but the conversion must be reported on line 4 (also on 8606) making line 4 of the Form 1040 more than your 72t amount, the amount the IRS would otherwise expect to see there.
With a 10 year 72t plan, to avoid spiking your tax rate you would probably doing incremental conversions over the years, so there would be a series of partial transfers all flagged to the IRS by the 1099R forms and your 1040. These are actually much riskier than the non reportable partial transfers between your two IRA accounts, since they trigger so many additional red flags.
Based on the combination of transactions you are considering and the length of your plan, I recommend avoiding the partial conversions in particular. The conversions also present a considerable risk of failure due to either the custodian or yourself making an execution error. Banks and CUs are also known to issue 1099R forms when they shouldn’t.
2019-04-17 20:46, By: Alan S, IP: [184.108.40.206]
L3: in-kind xfers between 2 IRAs within one SEPP
I would not include the ROTH IRA in your SEPP 72-T “UNIVERSE”. I don’t see why that would be of any value.
See prior discussions or refer to IRS or other information which describe the sequence that distributions from ROTH IRAs are as follows:
ROTH IRA CONTRIBUTIONS — TAX-FREE
ROTH IRA CONVERSIONS — TAX-FREE
EARNINGS & APPRECIATION — TAXABLE if taken before 59 1/2
Basically, you can take all of your ROTH Contributions and Conversions out whenever you want, tax-free, without having to be on any fixed distribution schedule, and without being locked in until age 59 1/2.
2019-04-18 04:25, By: dlzallestaxes, IP: [220.127.116.11]
L4: in-kind xfers between 2 IRAs within one SEPP
After reading both of your opinions, I concur that attempting partial TIRA to Roth conversions within the SEPP is probably not worth the risk.
My thought had been to try to maximize the 12% tax bracket each year up to $101,400, to reduce possible future RMD’s being taxed at higher rates.
Thanks for all your help!
2019-04-18 17:00, By: beancurd, IP: [18.104.22.168]
L5: in-kind xfers between 2 IRAs within one SEPP
You can do some coordinated planning. I do not believe that it makes sense to use the ROTH IRA distributions, because ROTHs provide tax-free growth for your lifetime, your spouse’s, and your children and grandchildren.
I would defer SS benefits to age 70, and take taxable IRA distributions between 59 1/2 and 70. That will reduce the RMD from your TIRA when you start to take required SS benefits. This is what I present as “PLANNING DURING RETIREMENT” to tax and financial planning professionals.
If you insist in taking distributions from your ROTH until you are 59 1/2, then determine how much taxable income you want to take from your SEPP 72-T in the 12% tax bracket, which makes sense, and supplement it with ROTH distributions for the rest of your cash needs. Use the reverse calculator on this website before it shuts down, i.e. ASAP.
I wish my wife and I had your problem of not being able to live on $ 100K of Gross Income.
2019-04-18 17:23, By: dlzallestaxes, IP: [22.214.171.124]
L6: in-kind xfers between 2 IRAs within one SEPP
Sorry, I guess I wasn’t clear.
I project my 72t SEPP yearly distribution + my working wife’s salary will fall short of the $101,400 threshold.I thought doing a yearly TIRA to Roth conversion of the remainder of that threshold within the SEPP would be a way to move taxable TIRA money into non-taxable Roth accounts at the 12% tax rate for the next 10 years. (But I don’t think the future tax savings is worth the risk of getting on the IRS radar.)
I doubt I would ever touch the existing Roth and/or the SEPP converted Roth money, if ever. (we can live comfortably on way less than the $101k number)
I will delay any TIRA to Roth conversions until after 59 1/2 when the SEPP ends.
2019-04-18 18:47, By: beancurd, IP: [126.96.36.199]
L7: in-kind xfers between 2 IRAs within one SEPP
I guess my last response didn’t go thru.
You should use the reverse calculator on this website to determine the MINIMUM needed from your TIRA to fund your SEPP 72-T. That is the amount to put into that separate TIRA account.
Then leave the balance in a separate TIRA to be used for emergencies, or to use to do ROTH CONVERSIONS up to near the 12% limit of $ 101,400 of Gross Income before the Standard Deduction of $ 24,000.
In addition, your wife can contribute to her own 401-K up to $ 25,000 per year (if she will be 50 or older during 2019, which gives you additional flexibility in your planning, or she can contribute to a ROTH 401-K if one is available where she works.
2019-04-18 20:03, By: dlzallestaxes, IP: [188.8.131.52]