Roth conversions on IRA
L1: Roth conversions on IRACan you do Roth conversions at the same time on the same IRA account you are doing 72t withdrawals?
I’m thinking you could use the 72t withdrawals to pay the taxes on the Roth conversions.
Tom2010-12-15 18:03, By: Tom, IP: [126.96.36.199]
L2: Roth conversions on IRAMost of the Roth conversion analyses I’ve read say that if you have to use the IRA account itself to pay for the taxes, then the conversion is not cost effective. Of course, YMMV.2010-12-15 19:25, By: knupug, IP: [188.8.131.52]
L3: Roth conversions on IRAYes, the IRS Regs clearly indicate that you can convert a 72t IRA to a Roth IRA, which is indicative of a situation where you either have other funds including 72t distributions already taken that can be used to pay the taxes. In other words, your 72t distribution is more than you need to live on and you would rather have a Roth conversion than to make the one time switch to the MD method to reduce your distributions.
You could withdraw your annual 72t distribution and then convert what is left OR you could convert first and then satisfy your 72t distribution from the Roth. Note that the 5 year holding requirement for Roth conversions to avoid penalty is waived since your distribution is part of a 72t (SEPP) plan.
One small risk that should be mentioned is those 2 inexplicable IRS PLRs on partial transfers of 72t plan IRA assets. So if you choose to do a partial conversion instead of a total conversion, you take on the small amount of riskresulting fromthose partial transfer rulings. The same can be said if you decide to recharacterize all or part of your conversion.
2010 is unique in that you can defer the conversion tax to 2011 and 2012, and depending on when your 72t plan ends, this may put less pressure on you to come up with the tax money. As with any conversion decisions, the prime factor to consider is that you are not paying more for your conversion than your average expected marginal rate in retirement.
One classic 72t conversion scenario would be where you started a good paying job, inherited some money etc such that you do not need your 72t distribution, but the job will end and you will be in a much lower bracket in 2011 and 2012. So you convert now, but the conversion income is reported in a low tax rate year for you. There are unlimited scenarios, but think through the decision carefully before acting. At least you know now that it is highly unlikely tax rates will increase until 2013.
2010-12-15 19:59, By: Alan S., IP: [184.108.40.206]
L4: Roth conversions on IRAThx for response:
My thinking was if I want drain an IRA as fast as possible, and 72t withdrawals were not enough, that I could do both.
This would be after retirement, I would be in a low tax bracket, and may be a little short of taxable $, so figure I would do both, getting little income, and converting so by time I’m 70 and start taking SS, I have little or no RMDs.
I would want to do the roth conversions every year, it would not be a 1 and done
Tom2010-12-16 18:55, By: Tom, IP: [220.127.116.11]
L5: Roth conversions on IRAHave you done tax projections for 2010 ?
Are you already 59 1/2 ?
You can do ROTH CONVERSIONS in 2010 regardless of income level. The taxable income will automatically be included as taxable income 50% in 2011 and 50% in 2012. If you want it all to be included in 2010, you must file an ELECTION with your 2010 tax return. This reporting is for all ROTH CONVERSIONS you make in 2010. You cannot make more than 1 conversion in order to have them treated differently.
If you are over 59 1/2, you can take an IRA DISTRIBUTION which is taxable in 2010, and separately do a ROTH CONVERSION which will be taxable in 2011 and 2012. If you are under 59 1/2, you can do this only if you use a SEPP 72-T for the distribution.2010-12-16 19:56, By: dlzallestaxes, IP: [18.104.22.168]
L6: Roth conversions on IRAif I was 59.5 I wouldn’t need to ask about the 72t?!?
This isn’t a one time thing.
I want to bleed down my IRA from the time I retire say at 52, bleeding down
the IRA a litte every year staying in the 15% tax bracket so when I turn 70,
I’m left a Roth IRA which I don’t have to do RMDs and SS and whatever is left in the IRA.
Again I want to bleed down the IRA every year, as much as I can, staying in the 15% bracket by
using 72t (until > 59.5) and roth conversions
Tom2010-12-16 23:27, By: Tom, IP: [22.214.171.124]
L7: Roth conversions on IRAI didn’t see where you had indicated your age. You could have been under 59 1/2, and you could have already had a SEPP 72-T.
Your plan is an excellent approach, provided you are in the 15% tax bracket, and can afford to live on the income, minus taxes, that you can withdraw from the SEPP 72-T.
If you provide your IRA balance and date of birth, we can make sure that the amount that you need to withdraw, net of taxes, and the taxes you will need to pay on the ROTH CONVERSIONS are sustainable by your plan, possibly supplemented by non-retirement funds.
If you do not plan to use any non-retirement funds, I find it hard for your plan to work, unless you are married.
Single taxpayer 15% tax bracket is up to $ 34,000 taxable income. If I add the single exemption of $3,650 plus the standard deduction of $ 5,700, I get a gross income of $ 43,350. The tax on $ 34,000 is $ 4,688, leaving $ 38,662 to live on. But whatever amount of your taxable income was the ROTH CONVERSION would not be available to live on, and would reduce this figure dollar for dollar. Your plan seems more feasible for a married couple, because then there is $ 77,324 to live on.2010-12-17 01:26, By: dlzallestaxes, IP: [126.96.36.199]
L8: Roth conversions on IRARight, will live off non-retirement funds + 72t when less than 59.5 and then
retirement funds and non-retirement funds until 70. I haven’t pulled the plug
yet, just weighing my options.
I saw on another web site that anyone trying the simulataneous 72t/Roth
conversions should request a letter from the IRS, which is why I asked here.
Thanks, Tom2010-12-17 13:04, By: Tom, IP: [188.8.131.52]
L9: Roth conversions on IRAI’m not sure what the other website was, but PLR (Private Letter Rulings) can cost $ 10,000 charged by the IRS, plus $ 5,000 – $ 10,000 for the professional to prepare the request.
If the suggestion was for just an informal letter sent to the IRS, lots of luck. I doubt that you would get a response. Further, the TIGTA/GAO “audit” of the IRS phone lines indicate that only 60% of IRS responses are correct.
I do not see any reason to be concerned about your approach, so long as you do it properly. Some people were planning to try to “allocate” their ROTH CONVERSION reporting the taxable incomebetween 2010, and alsodeferring part of it ton 2011 and 2012. That will not workbecause all ROTH CONVERSIONS in 2010 must be reported one way or the other.2010-12-17 15:58, By: dlzallestaxes, IP: [184.108.40.206]
L10: Roth conversions on IRAQ and A #12 in the following link to Roth IRA conversion IRS Regs confirms that it is OK to convert within a 72t plan:
However, you need to be aware of the income acceleration rules for 2010 conversions should you decide to withdraw any conversion funds, even older conversion funds under ordering rules, from your Roth IRA prior to 2012.
Eg. Assume you have no regular contributions in your Roth, just older conversions and a 40k 2010 conversion that you plan to defer income on until 2011 and 2012. The Roth is now part or the sole component of your 72t plan, and you need to take a 2011 72t distribution from the Roth of 20k. Under the income acceleration rules, you will now have to report the full 40k in 2011, losing the option to report 20k in 2012. The purpose of that rule is to prevent people from converting in 2010 just to generate cash flow by delaying the taxes, when they really plan to tap their conversions. Once 2012 arrives, this whole issue goes away. All of this is handled on the re designed 2010 8606 form. Just another wrinkle in trying to analyze all the aspects of doing a 2010 Roth conversion within a 72t plan.
2010-12-17 16:57, By: Alan S., IP: [220.127.116.11]
L2: Roth conversions on IRADo not try this until we get real world answers! I got the ‘yeah go ahead’ on this board when I asked this Question back this summer.So I let this slide until about a week ago. My trustee advised against this, strange as they never give tax advice. Roth Conversions are definedas ROLLOVERs not withdrawls so we are in a semantic quandry. you wont get a 1099I called the IRS and was advised that the rule 72t exception would not be allowed if a SEPP ‘withdrawl’ (ex.$10,000)did not occur as the IRAdesignated for SEPP was used ina (ex.$10,000(partial))conversion/ROLLOVER before 59.5. If anyone can refute this with case law or printed IRS instructions please reply. It appears one could go the one time SEPPmodification route (to reduce the SEPP tofree up IRA required balance and free up conversion funds?)but I have yet to fully reviewed this option to determine if that is a workable and practical avenue. It could besome time before we get real world results based upon IRS comment/action hopefully this Roth wrinkle will remain part of the code until clear/informed guidanceis available.
2010-12-21 21:43, By: mbsl, IP: [18.104.22.168]
L3: Roth conversions on IRADid you read Q&A 12 in the following IRS Regs section posted above?:
It addresses all of these questions from a technical standpoint, although your sources do not seem to be aware of it:
1) A Roth conversion is a two part transaction, ie. a distribution and a rollover. The above reference clarifies that the distribution figure reported on the 1099R does NOT count as part of your SEPP required distribution.
2) The Reg also states that if you later take all or part of your SEPP distribution from the Roth conversion, that the 5 year holding early withdrawal penalty under Sec 72t does NOT apply because this IS a substantially equal periodic payment and therefore excepted from this penalty
3) “Won’t get a 1099R” – you will not get a separate 1099R because a conversion distribution 1099R carries the same coding as the 1099R you would already receive. You will get one 1099R and the conversion amount will be added to your other distributions in one total. You then report the conversion amount on Form 8606, which triggers the exception noted in 1) above. The IRS and you will also receive a 5498 showing the amount of your conversion contribution to the Roth IRA, so the IRS has both your return and the 5498 to show the amount that you converted.
To summarize, you still must take out your SEPP distribution in addition to the amount you convert to the Roth IRA. The conversion does not substitute for the amount which you must distribute for yourself, it just allows you to alter the type of IRA that holds the remaining funds at the cost of an additional tax bill, that you could pay in 2011 and 2012 if you convert this year. Be sure NOT to have any taxes withheld from the conversion.
These people need to review the Reg posted above. But note that this does NOT mean a conversion is recommended for other reasons. Confusion in the industry and with the participant can lead to errors that bust your plan and also increase the chances for IRS inquiries since you will have entered into a more complex area of the IRS Regs. We have seen that many experts both in and out of the IRS are not sufficiently versed in the many facets of SEPP plans.
2010-12-22 23:07, By: Alan S., IP: [22.214.171.124]