SEPP from a Roth IRA set up for less than 5 years without penalty
L1: SEPP from a Roth IRA set up for less than 5 years without penaltyCan you take a 72 (t) SEPP from a Roth IRA set upless than 5 years ago without a penalty?2010-12-27 15:08, By: engr55, IP: [126.96.36.199]
L2: SEPP from a Roth IRA set up for less than 5 years without penaltyLike many people, you are confusing 2 different tax provisions.
SEPP 72-T is the provision that allows you to take “SUBSTANTIALLY EQUAL PERIODIC PAYMENTS” from an IRA before 59 1/2 without incurring the 10% penalty for early withdrawls before 59 1/2.
The ROTH IRA provisions impose a penalty on withdrawals from a ROTH IRA (which can be within a SEPP 72-T) before 59 1/2 if you take the withdrawals within 5 years OF THE INITIAL DATE ON WHICH THE PLAN WAS ORIGINALLY SET UP, but even then it is ONLY ON THE EARNINGS (i.e. growth and income) AFTER THE TOTAL CUMULATIVE CONTRIBUTIONS have been withdrawn. For example, if you put $ 100 into a ROTH IRA in 1999, and $ 5,000 a year from 2005-2009, you would have contributed $ 25,100. You could take all of that out in 2010 with -0- tax and -0- penalty. Let’s assume that it was now worth $ 35,100. Then, there is no tax or penalty on the $ 10,000 of “earnings” if you are over 59 1/2, or because of death of disability, or for first-time homebuyer. If none of those exceptions apply, then you are subject to income tax and the 10% penalty of the $ 10,000 of earnings.
However, if your ROTH IRA includes amounts that came from ROTH CONVERSIONS from Traditional IRA’s to ROTH IRA’s, then EACH CONVERSION HAS ITS OWN5 YEAR HOLDING PERIOD to avoid the 10% penalty on those funds.
This is a very technical area. Check with a tax specialist before doing anything in this area.
2010-12-27 16:40, By: dlzallestaxes, IP: [188.8.131.52]
L3: SEPP from a Roth IRA set up for less than 5 years without penaltyIf you set up a 72t plan that includes a Roth IRA, or if you establish it with a TIRA only and convert within the 72t plan period, distributions you take from your Roth IRA will never incur an early withdrawal penalty, because it is the SEPP exception itself that provides the penalty exception if you do not hold your Roth conversion funds for 5 years (Ref Pub 590, p 65 and 66).
dlz outlined the ordering rules for Roth distributions under which your earnings come out last. The only tax you would pay is on earnings if you reach them after all your regular and conversion balances have been distributed. You would pay the tax but no penalty on the earnings as long as you are distributing as part of a 72t plan.
Usually, it is better NOT to tap your Roth until much later in retirement, but there may be circumstances that override that advice. For example, if you need more money and about to bust your plan, using the Roth will reduce your tax bill and help you complete the 72t plan. You might be able to convert more funds to replace the distributions after your plan is over.
As we have said before, using a Roth IRA as part of your plan increases the complexity of your plan and the chance you might make an error in execution, so be very careful if you plan to incorporate your Roth into your plan from the outset and be even more careful if you plan to convert from a TIRA to a Roth IRA within your plan. And if you do a partial conversion, then you open up the partial transfer concerns within a SEPP plan.2010-12-27 18:24, By: Alan S., IP: [184.108.40.206]
L4: SEPP from a Roth IRA set up for less than 5 years without penaltyAlan S:
What’s an “error in ution” per line 2 of the last paragraph of your post?
Jim2010-12-28 21:19, By: Jim, IP: [220.127.116.11]
L5: SEPP from a Roth IRA set up for less than 5 years without penaltyJim,
Thanks for catching the typo. I edited it to show “execution”. Don’t know what happened to the original “exec” that apparently disappeared somehow.2010-12-28 23:31, By: Alan S., IP: [18.104.22.168]