Roth Conversion to Delay SEPP?

L1: Roth Conversion to Delay SEPP?I really appreciate all I’ve learned from this wonderful site. I would really appreciate any comments or input on the following scenario I’m considering. I am 44 and am a financial counselor on staff at our Church. As an employee, the Church pays for my family’s health care insurance but I do not receive a salary. My plan is to continue this relationship until age 65. We currently cover our family living costs from taxable investments which should cover the next 2-3 years. My plan was to begin taking SEPPs from my 401K afterwards. We have a 10K adoption tax credit from a 2003 adoption that we have to use within 5 years or we lose it. My idea is to do a partial direct rollover from my 401K to a traditional IRA, do a Roth conversion and pay the federal taxes due using the adoption tax credit. Do you see any problems with this plan? To me it seems to allow us to use the adoption tax credit and delay the need to take SEPP withdrawals. Am I correct in my assumption that I could not take tax and penalty free withdrawals from the Roth IRA for five years? If so I would need to cover living expenses for the next five years through a combination of reducing expenses and part-time employment. Thanks in advance for any insight anyone can give me.2004-11-26 11:33, By: Garry T, IP: [65.37.28.131]
L2: Roth Conversion to Delay SEPP?Hello Garry:
There is alot of stuff going on here; all of which is legal and basically sound. However, I think the real central issue here is multi-year tax bracket managment. The best way to do this is to pick up a copy of TurboTax (not much changes in these products year-to-year) & model out your tax bill & credits for the next 5 years always attempting to fully use your credits as well as annual exemptions & standard deduction every year & then maybe actually selectively create income in desired years to consume the 10% tax bracket.
TheBadger
wjstecker@wispertel.net
2004-11-26 14:26, By: TheBadger, IP: [66.250.23.22]

L2: Roth Conversion to Delay SEPP?Thanks, Badger.
I used Turbo Tax 2003 to estimate that I could do a Roth conversion on approximately $90K and use up the adoption tax credit and owe no out-of-pocket federal tax (I would owe ~$4K of NY State tax). If I do this in 2004, am I correct that I could take tax and penalty free withdrawals from the Roth IRA starting 1/1/2009? This path seems very preferable toletting the adoption tax credit expire unused and beginning SEPP withdrawals from my 401K at the end of 2008. The Roth conversion would postpone the need for SEPPs by about 3 years. Thanks againfor your insight.2004-11-26 15:08, By: Garry T, IP: [65.37.28.131]

L2: Roth Conversion to Delay SEPP?Good morning Gary.
Looks like a good plan to utilizetax credits to offset the tax created by making the Roth Conversion. Let me throw out a few points for you to consider in your planning. You should have IRS Pub 590 handy (available on the IRS web site) as a reference.
1. Roth conversion has an income limits for conversions and it is different for single and married couples. Check out Pub 590 for the current thresholds to be sure you can do the conversion.
2. Your idea about converting in 2004 and then being able to start withdrawals in 2009 is partially correct. While it’s true a conversion by 12-31-04 gets dated back to 01-01-04 and 01-01-2009 would be the first date available, you still have the problem of age 59 1/2. At your present age of 44, you are looking at about 2019 to satisfy the age requirement.
3. I’ll let TheBadger address this next point since it is a real tax item. There are rules which let you remove money from a Roth for which you have paid taxes but leaving the growth amounts alone.
Jim2004-11-29 08:47, By: Jim, IP: [68.1.157.228]

L2: Roth Conversion to Delay SEPP?Thanks Jim,
My understanding is that I can take the principle out tax and penalty free beginning 1/1/09. I’m less clear on how withdrawals of any gains will be treated prior to 59 1/2. I think I would only owe the 10% early withdrawal penalty. My thanks to William (aka Badger) for pointing metowards amore effective use ofour adoption tax credit, i.e. instead ofusing the creditto offsetthe taxes due on one largeRoth conversion,spread it over five years and five smaller Roth conversions, taking maximum advantage of the lower tax brackets.2004-11-29 20:51, By: Garry T, IP: [65.37.28.131]