Question about Roth Contribution distributions

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L1: Question about Roth Contribution distributions
Hi – great website. This question is about a new SEPP I’m interested in starting. My birthdate is 5/7/1976. My planned first distribution is 2/1/2019. The IRA and 401K accounts I want to use in the SEPP equal 1,200,000. Approx 50% is Roth. Approx 300K is Roth contributions/rollovers.
When I use the calculator, with a 3.65 fed rate, and the full 1.2 mill balance, it says I can take annual distributions of approx. 57K per year, using the amortization method.
Okay here’s my question: Can I do a 57K distribution from taxable accounts inside my SEPP each year, and also take an additional distribution of Roth contribution dollars during the same year without busting the SEPP?
I’m trying to find a way to give myself a COLA each year. I can live on 57K in 2019. But I don’t think living on 57K in 2035 will be much fun. The 300K I have in Roth contributions and rollovers is enough to give me 3% COLAs each year until 2035.
Will the IRS allow that?
2018-11-04 01:20, By: Owen, IP: [2600:1:991f:37fa:acf6:fdb0:dd37:76b2]

L2: Question about Roth Contribution distributions
Reply from DLZ
I would not include the ROTH account(s) in any SEPP 72-T plan. I suggest that you read the rules about ROTH IRA distributions, or speak to a tax professional who can explain them to you. (I couldn’t tell if your narrative meant that you had a taxable 401-K and a ROTH 401-K, or if you had ROTH IRA accounts. Also, I couldn’t tell if you meant that you had a ROTH IRA of $ 600,000 of which $ 300,000 was CONTRIBUTIONS, and $300,000 was income and/or growth, or how much were ROLLOVERS or CONVERSIONS.)
2. Distributions from ROTH CONTRIBUTIONS are TAX-FREE whenever they are taken.
3. Distributions from ROTH ROLLOVERS or CONVERSIONS are TAX-FREE to the extent the amount was taxed upon rollover or conversion, plus any basis that might exist from any non-deductible contributions.
4. Distributions from “Earnings” (Le. from income or growth or appreciation) come out last (i.e. only after all contributions, and rollovers or conversions are distributed).
We would need more complete information, but a tax professional could probably be able to do a PLAN for you to set up a SEPP 72-T for the $600,000 that is not a ROTH. Let’s assume that would generate $28,500 each year TAX FREE for the next 11 years. That would get you to age 53. Hopefully you can figure out how to accumulate enough during those 11 years to get you until you are 59 1/2. Remember, your calculations might have been based upon taxable SEPP 72-T distributions, whereas only 1/2 of these distributions would be taxable.
You might consider just taking $ 50K-$ 60K/year for the next 5 or 6 years TAX FREE, and then start a SEPP 72-T. You didn’t mention if you are retired, or planning to. But if you work until January of the year that you will become 55, then you might be able to “separate from service”, and take taxable distributions (without any 10% early distribution penalty) from your 401-K until you are age 59 1/2, when there wouldn’t be a penalty either.
2018-11-04 13:33, By: Dlz, IP: []

L3: Question about Roth Contribution distributions
Thanks for the response Dlz. I should clarify my account information for you.
I have a Roth IRA with 220K. 80K of that is Roth contributions.
I have a traditional IRA with 115K.
I have an IRA worth 15K which I converted to Roth when it had a balance of 6K.
I have a 401K with a balance of 850K. In it, are three sub accounts, one for pre-tax, one for Roth, and one for employee contributions (pre-tax). The balances are:
Roth: 365K (204K in Roth contributions)

Pre-tax: 435K
Employee Contributions: 50K
My goal is to retire, if possible.
2018-11-04 15:09, By: Owen, IP: [2600:1:991f:37fa:acf6:fdb0:dd37:76b2]

L4: Question about Roth Contribution distributions
Your tax situation is important to consider. Whether you are married or single affects your tax bracket. The 12% federal income tax rate is up to $38,700 single or $ 77,400 married. BUT, when you add the new higher STANDARD DEDUCTION, this means you can have total GROSS INCOME of $ 50,700 single and $101,400 married, and still be in the 12% federal income tax bracket.
One plan could be to use your current $ 290,000 ( $80K+$ 6K+$ 204K) from the two ROTH IRAs and the 401-K) to avoid the 10% early distribution if you use my suggested plan to supplement a SEPP 72-T PLAN. Based upon the amount that you need, and get from the 401-K $204K used for the taxable SEPP, you could also consider doing ROTH CONVERSIONS from your IRA if done at 12%. Then after depleting the current ROTH IRA’s, you would have an additional $ 115K in new ROTH IRA CONVERSIONS that you could distribute tax free starting 5-6 years from now.
If you do not have any other sources of income, and decide to not work the rest of your life, then you can start to use your taxable accounts, and hopefully take withdrawals at 12%, even plus the 10% penalty. Of course, if you had a job making $ 25K-$ 50K, you could avoid the 10% penalty by deferring taxable distributions until you are 59 1/2.
What do you plan to do until you are 59 1/2 if you “retire” ?
Have you considered the health insurance cost while you are “retired” ? A full-time job with health insurance might be a better plan when you consider that cost, even at the wages mentioned above.
Have you considered going into some business for yourself, especially with the new exclusion of 20% of your income from federal taxes if your taxable income is less than $ 157,500 single or $ 315,000 married ?
If you haven’t, then I suggest that you retain a tax or financial advisor (not an investment advisor). By the way, if you stay in the 12% tax bracket, all Qualified Dividends and Long-Term Capital Gains are taxed at a -0- rate !!!!
2018-11-04 18:07, By: dlzallestaxes, IP: []

L5: Question about Roth Contribution distributions
Okay that’s a really interesting idea. I want to make sure I understand what you’re writing. In a year where my only income is a 50K ROTH CONTRIBUTION distribution, I can convert 50K of traditional IRA dollars to ROTH dollars, and that will result in me having a 50K gross taxable income, or 38K adjusted taxable income (after applying the standard deduction), which will be taxed at a marginal rate of 12%. If I did that for five years in a row, would I be able to take the 50K ROTH CONVERSION I did in the 1st year, as a tax free disbursement in the 6th year?
2018-11-04 19:50, By: Owen, IP: [2600:1:991f:37fa:acf6:fdb0:dd37:76b2]

L6: Question about Roth Contribution distributions
Yes. Only EARNINGS (i.e. Interest & Dividend Income, Capital Gains Dividends, Capital Gains from Sales, and growth/appreciation) within a ROTH IRA are subject to the 10% early distribution penalty if withdrawn before age 59 1/2.
All DISTRIBUTIONS from ROTH CONTRIBUTIONS, and ROTH ROLLOVERS or CONVERSIONS have been already taxed initially, and are not taxed again upon Distribution.
That is why a SYSTEMATIC PLAN is a viable consideration in your situation. FYI, you just got $ 2,500 – $ 5,000 of free consulting !!!!
2018-11-04 19:57, By: dlzallestaxes, IP: []

L7: Question about Roth Contribution distributions
To drill down on what you actually have right now, some questions:
1) You are referring to “employee contributions” to your 401k as pre tax. Actually, employee contributions are technically after tax contributions to a separate sub account in the plan. Can you further clarify this question by checking your statements?
2) Your IRA worth 15k has been converted so is now part of your Roth IRA, whether it is in a separate account or not. What year was the conversion?
3) Did you ever made non deductible TIRA contributions (reported on Form 8606)? If so, some of the 15k conversion would have been non taxable. This relates to how much of a conversion is subject to penalty if withdrawn in the first 5 years.
4) For your Roth 401k sub account of 365k, was the 204k contribution amount all elective deferrals? Or was some of it an IRR (in plan Roth rollover)? If so, how much and in what year?
Note that for planning purposes, if you include all or part of your Roth IRA in a 72t plan, the 72t penalty exception will waive the 10% penalty on conversions withdrawn in the first 5 years. If you leave part of your Roth IRA outside the 72t plan, the tax rules for NQ distributions treat your Roth as a single combined account even though part of your Roth may be in the 72t Roth IRA. The usual ordering rules apply as to what comes out first regardless of which Roth IRA you take the distribution from, but distributions taken from the 72t Roth IRA will have any penalty waived. Of course, it would be much simpler to leave your Roth entirely outside of your 72t, but you could not tap any earnings until 59.5 without owing the 10% penalty.
5) You should do a direct rollover of the entire 401k to the correct form of IRA before starting a 72t. Do not consider a 72t directly from the 401k plan.
2018-11-04 20:20, By: Alan S, IP: []

L8: Question about Roth Contribution distributions
ALAN — I think he could have made some 401-K contributions as “pre-tax”, and some as ROTH 401-K. (My son did that, and so have some clients, either purposely or inadvertently.) Also, #3 could also apply to any non-deductible IRA contributions to his $ 115K IRA.
2018-11-04 21:42, By: dlzallestaxes, IP: []

L8: Question about Roth Contribution distributions
First you guys are awesome, and I really appreciate you lending your expertise.
Alan, here are some answers to your questions:
1) I mistyped. It should have said “Employer Contributions”. That’s the match offered by my employer. It is listed in the pre-tax ledger on my account statement.
A little background on my 401K. When I was hired in the late 90s, we only had the option to do pre-tax contributions, so that’s what I did. I continued to make pre-tax contributions until around 2007 when they started offering the additional option to do Roth contributions. I switched all of my contributions to be Roth from that point forward. I’ve only done Roth 401k contributions since then. I haven’t done any conversions in my 401k. I just left the existing pre-tax balance alone. My company allows me to do all-roth contributions, all-pre-tax contributions, or a combination of both, in every pay period.
2) The conversion happened about 15 years ago.
3) No.
4) None of the 365K was a conversion. It is made up of 204K of contributions, and 161K of growth.
5) I dont think I need to do a 72t anymore. I think I’m going to do what I’m calling a “Roth Cycle”. I’ll take annual Roth contribution distributions ranging between 50K-56K over the first 5 years (3% COLAs account for the range) . During that five year period I’ll also do annual Roth conversions ranging between 58K-65K. In Year 6, I’ll take a distribution of the Roth conversion I did the first year (58K), and do a new Roth conversion of 67K which will eventually be distributed in Year 11. Rinse and repeat until 59.5, or until I want to go back to work.
2018-11-05 00:05, By: Owen, IP: [2600:1:991f:37fa:acf6:fdb0:dd37:76b2]

L9: Question about Roth Contribution distributions
Have you checkedif your employer will let you go part time? It’s worth a shot, if you are already checking out. I only say this, because I retired at 36 three years ago, set up my 72(t), and a year and a half later ended up going back to work because I had too much free time. Now I’m trying to get my employer to let me go part time.
And if you’re curious, my balances are a lot higher even with the withdrawals, because of the stock market going up.
2018-11-06 02:58, By: brkr12002, IP: [2001:5b0:50c6:3d28:697d:684b:d69b:47f7]

L5: Question about Roth Contribution distributions
I think I forgot to answer a couple of your questions dlzallestaxes.
I want to retire because I’m tired of the job I’ve had for the last 20 years. The longer I work, the more stressing it is, and I’m no longer enjoying it. It’s very possible I’ll take a period of time off (6 month? 1 year? 3 years?), andthen decide to rejoin the workforce.
However, there’s also the possibility I’ll really enjoy doing something that won’t earn income.
That’s why I wanted to go through this exercise. Now I know whatever I decide to do, I don’t have to let income drive the decision.
The healthcare issue is definitely an important one. In my state the high deductible plans on the open market are running about $425/month. The mid-deductible plans are around $575/month, and the zero deductible plans are $725/month. I’ll probably choose the high or mid deductible option. I currently have a high deductible planwith my company.I’m in good shape, not on any medication,and rarely go to the doctor. My company started offering HSAs about 10 years ago, and I opened one. I have about $35K-40K in it right now. I keep the out of pocket max in cash, and invest the rest.
My parents also gift me the individual IRA max each year. My dad just let me know it will be $6,000 in 2019. In years where I don’t have a job, I can just use this money to buy health insurance.
I haven’t considered going into business for myself. If I do, it will most likely be as a 1099 independent contractor. I’m in the IT consulting industry, and I usually work on large projects I could never complete myself.
2018-11-05 02:02, By: Owen, IP: []

L6: Question about Roth Contribution distributions
OK, the update helps.
After a direct rollover of the entire 401k to TIRA and Roth IRAs, the composition of your IRAs for future planning and reporting purposes is:
1) TIRA – 600k, all pre tax
2) Roth IRA – Basis of 284k in regular contributions and 6k in conversion contributions. This is the amount you can withdraw anytime without tax or penalty, but you would need these numbers to enter on Form 8606.
Roth IRA gains 310k – these gains come out last and are subject to tax and penalty (without a SEPP or other penalty exception). This 310 is subject to changes from investment gains or losses.
Overall summary 1.2mm in value, 50% Roth, but only 290k that you can tap tax free before 59.5.
Yes, you could probably avoid a SEPP until you decide whether you will return to work or not. But one drawback of tapping only the Roth is that you are not getting any use from your 0 and 12% brackets. You could draw some from your TIRA and pay 0 tax on the first 12k (assuming std deduction), but would owe the 10% penalty without a SEPP. Still, you would be preserving your Roth to the extent you take some TIRA distributions, which is equivalent to a conversion at 10%. That said, any medical expenses in excess of 10% of your AGI are eligible for a penalty exception. Review the IRS penalty exception chart for other exceptions. If you are on UC for awhile, there is an exception for health ins premiums.
That said, you might start a SEPP using a small portion of the 600k TIRA (partition account by direct transfer into an IRA of the right balance. Yes, you would owe taxes on the distributions in a low bracket, but no penalty. This would reduce the amount you would need from your Roth and/or HSA and use your lower bracket space. What all this aims at is to somewhat level your tax bill, because if all you do is tap your Roth up to 290k, pay 0 taxes, you are concentrating what is left into pre tax amounts and when finally distributed you would be in a higher bracket since no more tax free Roth balance would be left. Now if you had the TIRA small SEPP, and then went back to work, you could do a one time switch to the RMD method, and reduce the SEPP distribution by perhaps 1/3.
Since you have a long way to go, there is also the possibility of starting with no SEPP, then a small SEPP when you start, and then opening a second SEPP a few years later if other income does not materialize. You can run more than one SEPP concurrently, but have to be careful not to make an error due to the added complexity.
2018-11-05 17:04, By: Alan S, IP: []