Roth Conversions and 72(t)
L1: Roth Conversions and 72(t)
Does anyone know where it states that you can convert a Traditional IRA to a Roth IRA that has a 72(t) SEPP on it? I understand the payments can not be modified etc. Addtionally what happens if only a partial conversion takes place. I am guessing this
would be considered a modification absent any guidance.
2011-12-07 15:55, By: Maverick, IP: [18.104.22.168]
L2: Roth Conversions and 72(t)
Following is a copy of IRS Reg 1.408A-4, Q 12:
Q12. Can an individual convert a traditional IRA to a Roth IRA if he or she is receiving substantially equal periodic payments within the meaning of section 72(t)(2)(A)(iv) from that traditional IRA?
A12. Yes. Not only is the conversion amount itself not subject to the early distribution tax under section 72(t), but the conversion amount is also not treated as a distribution for purposes of determining whether a modification within the meaning of section
72(t)(4)(A) has occurred. Distributions from the Roth IRA that are part of the original series of substantially equal periodic payments will be nonqualified distributions from the Roth IRA until they meet the requirements for being a qualified distribution,
described in 1.408A6 A1(b). The additional 10-percent tax under section 72(t) will not apply to the extent that these nonqualified distributions are part of a series of substantially equal periodic payments. Nevertheless, to the extent that such distributions
are allocable to a 1998 conversion contribution with respect to which the 4-year spread for the resultant income inclusion applies (see A8 of this section) and are received during 1998, 1999, or 2000, the special acceleration rules of 1.408A6 A6 apply.
However, if the original series of substantially equal periodic payments does not continue to be distributed in substantially equal periodic payments from the Roth IRA after the conversion, the series of payments will have been modified and, if this modification
occurs within 5 years of the first payment or prior to the individual becoming disabled or attaining age 59 1/2, the taxpayer will be subject to the recapture tax of section 72(t)(4)(A).
As you can see, a conversion is clearly allowed, although it will result in extra taxes that will have to be paid, and most 72t participants do not have the money to pay greatly increased income tax bills for state and federal. There is also a lack of clarity
regarding partial conversions, as you can see that this Reg assumes a full conversion of the 72t TIRA account. There is a small degree of risk that the IRS would object and consider a partial conversion to be a partial transfer of the type that they have ruled
on a couple occasions busted a plan. And if you did a full conversion, you will have a special set of 1099R forms if the 72t distributions were taken in combination from both types of IRAs.
Conversions within a 72t plan have been very rare, but we have not heard of any partial conversions resulting in problems, although you would now have more “moving parts” to your plan and for the tax reporting. A conversion might be useful if your 72t distributions
become far more than you need, but you still expect to be in at least as high a tax bracket in retirement as you are now. But if the 72t distribution is more than you need, you could also make the one time switch to the RMD method and reduce the distributions.
2011-12-07 21:25, By: Alan S., IP: [22.214.171.124]
L3: Roth Conversions and 72(t)
Thank you. This very thorough.
2011-12-08 13:38, By: Maverick, IP: [126.96.36.199]