Roth IRA’s and SEPP
L1: Roth IRA’s and SEPPCan you establish a SEPP on a Roth just the same as a traditional IRA?2010-04-27 16:06, By: jd, IP: [220.127.116.11]
L2: Roth IRA’s and SEPPProbably.But please educate me. Why would you want to do it ?Usually people set up SEPP IRAs because they need additional cash flow to supplement a reduction in income. If you set up a ROTH IRA, you must pay taxes on the amount converted. ROTH IRAs are usually set up to pay taxes now, and have all future distributions, growth and income tax free.These seem to be at cross purposes.2010-04-27 16:37, By: dlzallestaxes, IP: [18.104.22.168]
L3: Roth IRA’s and SEPPI have an IRA that I am investing that could bring me huge returns (triple digits) and wanted to pay now and ride free on the rest. What do you think?2010-04-27 16:43, By: jd, IP: [22.214.171.124]
L4: Roth IRA’s and SEPPPhilosophically you are thinking right re ROTH IRA. However, this has nothing to do with SEPP IRA 72-T.You should just do a ROTH CONVERSION in 2010. You can ELECT to have it all included in your 2010 income, especially if it is low. OR, it will AUTOMATICALLY be includable in your taxable income for 2011 and 2012 ( each 50%), with the taxes payable 4/15/2012 and 2013, subject to “safe harbor” estimated tax rules, especially for 2012.What is your age/dob, and how much are you talking about converting ?By the way, SEPP 72-T plans require annual distributions, while ROTH IRA plans are exactly the opposite, i.e. never requiring any distributions before you die.2010-04-27 17:20, By: dlzallestaxes, IP: [126.96.36.199]
L5: Roth IRA’s and SEPPApprox 90k and I am a pensioner (51 yrs old 15% tax braket) and would like to set up an SEPP when the investment comes to fruition but wanted to know if it was eligable for a Roth same as traditional. I am on the ground floor of an investment that has huge upside and thought I would cover my tax obligation before the appreciation.2010-04-27 17:36, By: jd, IP: [188.8.131.52]
L6: Roth IRA’s and SEPPPERFECT IDEA.However, is the money now in an IRA ? Do you have money outside of the IRA that you could use for the investment ? At present, for 2009 and 2010, long-term capital gains are taxed at -0- for taxpayers in the 15% tax bracket. Of course, an investment now could not be long-term if sold in 2010.Also, capital gains tax rate will probably go to 20%.All distributions from traditional IRAs are taxed at regular tax rates.I think that ROTH IRA distributions from a SEPP 72-T could be tax free and penalty free. HOWEVER, would the investment be liquid enough to make annual cash distributions ? If not, I think that you could make “distributions in kind” of the shares, but the problem could be the fact that you must make EXACT ANNUAL DISTRIBUTIONS.2010-04-27 17:51, By: dlzallestaxes, IP: [184.108.40.206]
L6: Roth IRA’s and SEPP> I am on the ground floor of an investment that has huge upside
> and thought I would cover my tax obligation before the appreciation.
In theory, this is probably a good idea. Be advised, however, that, as a practical matter, investments that can shoot up like rockets very often come down the same way… and with a terrific S-P-L-A-T upon landing.
One of the finer points of retirement investment is risk management. What are your plans if this investment goes bust? Would it destroy your retirement plans? If so, then I would advise you to be VERY circumspect with regard to betting your future on ANY single stock, property, commodity, or mutual fund investment.
Ed2010-04-28 00:36, By: Ed_B, IP: [220.127.116.11]
L7: Roth IRA’s and SEPPMoney is more than discretionary but not life altering. The investment will be pulled after expected appreciation, closely monitored. This will be gravy on the potatoes. The whole reason for the conversion is the huge windfall of this investment and with that in mind why not have the profits free from additional tax. So, the Roth can be set up for an SEPP just like a traditional, correct?2010-04-28 02:07, By: jd, IP: [18.104.22.168]
L8: Roth IRA’s and SEPPYes, the Roth IRA can definitely be used as part or all of your SEPP plan. However, I totally agree with Ed’s comments and having all your eggs in one basket is a tremendous gamble.That said, if you are determined to proceed, it would be best to do your conversion and then reassess this investment carefully in Sept, 2011 if not sooner. The reason is that if the investment tanks or for whatever other reason you do not want the tax liability, you can reverse the conversion by recharacterizing all or part of your conversion. That would put the Roth funds back in the TIRA, but would erase the tax bill that you would probably elect to pay equally in 2011 and 2012 as allowed for 2010 conversions. If you could start your SEPP after this point in time, it would reduce the possible combination of scenarios caused by the investment performance, the conversion, the amount and due date of the conversion taxes, and the need to set up a SEPP that is sufficient for your needs until age 59.5. If your plan works, note that distribution of your Roth conversion within 5 years is subject to penalty, but if done as part of a SEPP distribution, the penalty is waived. However, any amounts you take out prior to 2012 will also accelerate the tax reporting for that amount from 2012 into the year you took the distribution. That prevents people from converting just for the cash flow when they really need to take some of the money out prior to 2012.If you start the SEPP earlier than the above, you will just end up with a massive amount of variables to juggle and that will endanger your SEPP plan.2010-04-28 02:22, By: Alan S., IP: [22.214.171.124]
L9: Roth IRA’s and SEPPLet’s try a different approach to your concept.You expect to ride your “windfall”, and then cash out, re-investing the proceeds into large cap mutual funds or stocks. So far so good.If this is done by converting your TRADITIONAL IRA into a ROTH IRA CONVERSION, then the “windfall profits” are still in the ROTH IRA. The reinvestments will then generate dividend income and growth, hopefully, and none of this will ever be taxed during your lifetime, or your spouse’s, or your children or grandchildren.HOWEVER, if you set this up as a SEPP 72-T plan, then you will be required to make ANNUAL DISTRIBUTIONS in cash, or in kind. Since these distributions would be from the SEPP ROTH IRA account, they would not be taxed. HOWEVER, once these distributions leave the SEPP IRA account each year, the dividends and future capital gains will be taxed every year.For this reason, I think that your plan for using a SEPP 72-T ROTH IRA will not give you the “foolproof tax-free” approach that you have envisioned.Further, if this is truly a RETIREMENT INVESTMENT, and you do not need any of this money until you are at least 59 1/2, then your SEPP 72-T/ROTH IRA concept is a completely wrong approach, and you should really just use the straightforward ROTH IRA CONVERSION. And do it while the investment it at its lowest value now. As mentioned by others, if it does not work out by 9/2011, then you can “recharacterize” the transaction, and in effect void the conversion and the related taxes will be refunded.2010-04-28 04:13, By: dlzallestaxes, IP: [126.96.36.199]
L8: Roth IRA’s and SEPPjd
OK, I’m glad to hear that the amount you plan to invest is reasonable and that it will be monitored very closely. I don’t know how easy it will be to extricate yourself from it should things go badly. Other than that, I see no reason why your plan should not work.
I fully agree with Alan’s comments, particularly the last one about keeping your SEPP as simple as possible. My experience with a SEPP is that complications are best avoided, if at all possible. With many SEPPs, the more moving parts they contain, the greater the chance of a financially destructive error. In most cases, the IRS has not been very understanding of these errors and the resulting busted SEPP plans. If a SEPP is busted, particularly near its normal ending time, it can be a VERY expensive financial mistake.
The other bits of advice that I would offer would be to monitor your SEPP IRA account closely because custodians can and do make occasional mistakes that can cost an unwary SEPP owner a fortune. Check the annual distribution amount carefully every year and correct any mistakes ASAP.
Also, keep meticulous records of everything that relates to your SEPP. These things include but are not limited to: the amount transferred into the IRA that funds your SEPP; your initial setup plan – usually a 1-2 page letter “To whom it may concern” that describes your plan and how you are setting it up; the calculations that show the annual distribution amount; and an annual 12/31 statement printout of the SEPP account that shows the amount distributed. Much more can be added to this, of course. I used a 3″ 3-ring binder and included every scrap of paper plus computer printouts of relevant documents, letters, emails, notes of any phone calls, etc. It is divided into 7 sections for the type of info and is in chronological order from back to front within each section. Anything that relates to my now-competed SEPP can be found quickly and easily. I will keep these records until after I turn 70.5 in about 9.5 years. This is probably longer than necessary but the binder sits on an out of the way shelf so keeping it around for a while is not a problem.
2010-04-28 04:15, By: Ed_B, IP: [188.8.131.52]