Roth Conversion while under a 72t
L1: Roth Conversion while under a 72tDon’t know if this has been broguht up yet…If a person wanted to convert an IRA they are taking a SEPP from into a ROTH IRA (new tax law/benefits next year)…
#1 Is that a modification? Would it bust the 72(t)
#2 How would that work?? Do you stil have to take SEPP’s??
Thanks…2009-06-03 15:51, By: Pete, IP: [18.104.22.168]
L2: Roth Conversion while under a 72tYou can convert a TIRA under a SEPP plan to a Roth IRA, although you cannot convert the amount of your SEPP distribution because they are NOT eligible for rollover. This means that you would be taxed on both your SEPP distribution plus the amount you chose to convert to a Roth IRA. This could inflate your tax bracket, and you will have to budget for the tax payments within your cash flow.
Taking the most basic situation as an example:
Your SEPP TIRA is worth 400,000 and your annual distribution is 24,000. You inherit some money and therefore can pay the taxes on the conversion or you have alot of deductions and the conversion taxes will be somewhat offset. So you decide to convert 100,000 of your SEPP IRA to a Roth IRA. Your AGI will be 24,000 plus 100,000. The following year your SEPP universe will be composed of both IRA accounts, and you can choose how much of your 24,000 will come from each IRA type in accord with how much taxable income you want to have. Note that if you withdraw your conversion dollars from the Roth for your SEPP payment, they will NOT be taxable and they will NOT be penalized because the SEPP is an exception to the Roth 5 year holding requirement for conversions.
Next year, any Roth conversion will be taxed 50% in 2011 and 50% in 2012, so this presents additional planning opportunities for any TIRA owners, SEPP plan or not. The tax deferral might last longer than your SEPP plan, and therefore it could result in a better spreading out of your tax liabilities. If you convert this year, you must still be under the 100,000 modified AGI limit, but this income limit ends after 2009.
Bottom line is YES, you can convert, you still have to take your SEPP distribution, you cannot convert the SEPP distribution itself, and you have to be extra careful with all the moving parts.
2009-06-04 00:41, By: Alan S., IP: [22.214.171.124]