Sepp in a new roth question
L1: Sepp in a new roth questionI have had a roth ira for 8 yrs, and i want to start a second roth ira and fund it with a onetimecash transferfrom my8 yr oldroth ira. After thissecond rothira is funded, i want to start a sepp in it, and than use the8 yr oldroth ira for anyadditional nonseppwithdrawals. Thissecond roth ira that istart the sepp in will less than 5 years old, does the 5 year rule cause any problem here?Thanks.2008-06-23 09:49, By: jawwx3, IP: [184.108.40.206]
L2: Sepp in a new roth questionYour suggested approach makes absolutely no sense to me. It appears that you do not under the benefits of ROTH IRA accounts, nor the real purpose of SEPP 72-T plans.
ROTH IRAs involve paying taxes on the amount of your contributions, or conversions, initially. Thereafter, the earnings (interest/dividends), capital gains, and/or appreciation accumulate, and will never be taxed (unless you withdraw these amounts in excess of your initial contribution within 5 years of the first year in which you made any contribution (even $100 when they started in 1996), or within 5 years of each “conversion”. These accounts will never be taxed to you, your spouse, your children, or grandchildren.
SEPP 72-T plans have the opposite purpose whereby taxpayers need some of the money that they have contributed to their Traditional IRAs to be distributed before they reach age 59 1/2. Normally, “early distributions” from IRAs before 59 1/2 are subject to a 10% penalty. However, the IRS has a provision whereby youcan set up a SEPP 72-T plan with some or all of you traditional IRA account balances, and take “SUBSTANIALLY EQUAL PERIODIC PAYMENTS” (i.e. SEPP)and not be subject to the 10% penalty. You must take these payments until the later of age 59 1/2 or 5 years, and the annual amouts distributed MUST be exactly the same (with a minor “change” provision).
So, ROTH IRAs are for accumulating wealth, and SEPP 72-Ts are for withdrawing from wealth you already accumulated.2008-06-23 10:02, By: dlzallestaxes, IP: [220.127.116.11]
L2: Sepp in a new roth questionI generally agree, but let”s assume for a moment that all you have are these Roth IRAs and no TIRA accounts, or perhaps you have so much other income, you want to use your Roth forSEPPdistributionsto keep your marginal rate from exceeding the rate you expect to pay in retirement.
In that case, it is necessary to know that all your owned Roth accounts are considered as one combined account for taxation purposes through the ordering rules. Therefore, it does not matter which Roth account you would use for the SEPP. Under the ordering rules, your distributions come first from regular contributions tax and penalty free. Next they come from conversions tax free and also penalty free because the SEPP penalty exception also eliminates the 10% early withdrawal penalty for conversion dollars distributed prior to 5 years. The earnings would come out last and would be taxable, but again no penalty due to the SEPP exception.
Therefore, if you reserved the non SEPP Roth for later distributions, any amounts that are deemed to be earnings will also be penalized since the non SEPP would not have an exception to the early withdrawal penalty.2008-06-23 20:04, By: Alan S., IP: [18.104.22.168]