SEPP Roth conversion?
L1: SEPP Roth conversion?I”m currently getting a SEPP distribution. Can I convert some of the IRA accountthat the distribution is coming from to a ROTH IRA? ROTH conversions arereported as a distribution so would that raise my “total” distributions above my substantially equal part or is consideredseparately?2008-03-27 15:44, By: SDS, IP: [126.96.36.199]
L2: SEPP Roth conversion?I don”t think that you can take any “excess” distributions above your calculated annual distribution for conversion to a ROTH IRA.
I more interesting question would be if you could make a conversion to a ROTH IRA account as part of your annual distribution. I don”t think this has ever been considered.2008-03-27 16:13, By: dlzallestaxes, IP: [188.8.131.52]
L2: SEPP Roth conversion?This can be a source of confusion, but the first premise to understand is that a Roth conversion is considered both a distribution and a rollover. Therefore:
1) You cannot convert any of the 72t annual amount, because none of that amount is rollover eligible.
2) However, amounts in excess of the 72t amount can be converted to a Roth IRA in the same fashion that distributing more than your 72t amount can be corrected if you catch it within 60 days and roll it back into the IRA. You could also roll a partial distribution over to another new TIRA with a -0- balance and you will have added a new account to your (72t) SEPP universe. Likewise, if that new IRA happens to be a Roth conversion IRA, it will be added to your SEPP universe as well.
Doing the conversion exposes a taxpayer to a risk of busting the SEPP plan. If you mess up and withholding is taken on the Roth conversion, then the withholding would bust the SEPP if you have already taken out the full 72t amount, since the withholding will obviously not be rolled over. To do the Roth conversion, you must have available funds to pay the additional taxes fromtaxable funds, and not too many 72t taxpayers have the extra funds. There is also an incremental risk from PLR 2007 20023 which busted a SEPP for doing a partial transfer. You would expect any Roth conversion to be partial, since converting the entire account would result in a considerable increase in the marginal tax rate for the year.
2008-03-27 20:12, By: Alan S., IP: [184.108.40.206]
L2: SEPP Roth conversion?Interesting- I was getting ready to post a similar question. Alan- would the taxes owed on the conversion be based on the account balance at the time? So if the SEPP had a $20k balance the taxes would not be near the amount as a $2M balance?
Also, once converted to a ROTH would the 72t withdrawals still be subject to normal income taxes as before?2008-03-28 08:20, By: Tim, IP: [220.127.116.11]
L2: SEPP Roth conversion?Tim:
The only amount subject to taxes in a Roth Conversion is the amount that you convert. It has nothing to do with the value of an account on a particular date. So if you have a $2M Traditional IRA and you convert $20K to a Roth IRA, you will pay taxes on the $20K that you convert.
Jim2008-03-28 09:51, By: Jim, IP: [18.104.22.168]
L2: SEPP Roth conversion?Jim,
I should have stated I was talking about a full account conversion to Roth, not a partial conversion.
So on my second question, if you did a full conversion of a SEPP IRA (where distributions are already occurring) to a ROTH IRA, paid the taxes separately, would the subsequent SEPP distributions be taxable as normal income (as they were before the conversion)? I think there may be more interest in this as in 2010 there is no longer an income limit on Roth conversions.
Tim2008-03-28 10:09, By: Tim, IP: [22.214.171.124]
L2: SEPP Roth conversion?Tim,
If you did a full Roth conversion of your SEPP IRA, your continued SEPP annual distributions from the Roth would be taxed under the ordering rules for all your Roth IRAs. This is tantamount to the situation where TIRA SEPP distributions are not taxable if you have basis (Form 8606) in any of your TIRAs, whether using them for the SEPP or not.
With the Roth, if you have other Roth IRAs besides the one you created by your SEPP TIRA conversion, they would affect the taxation under the ordering rules. Those rules state that any Roth distribution prior to qualification of your Roth comes first from regular contributions (tax free), then from conversions and last from earnings. If your only Roth is the newly converted account, your distributions would be tax and penalty free. They are tax free because you paid the taxes on the conversion in the year you converted, and they are penalty free due to the exception for substantially equal payments. This exception eliminates the penalty you would otherwise have for conversion distributions that you had not held for 5 years.
In summary, the Roth conversion would increase your taxes in the year of conversion, and then reduce them in all future years where you distributed the Roth to meet the SEPP requirements or for any other reason. It seems better to do this conversion early in a calendar year so you do not get hit with the taxes on a full year of SEPP withdrawals from your TIRA plus the converted amount. If done early, you would just be taxed on the conversion.
Most people have a SEPP balance several times (eg 15 times) their annual distribution, so a full conversion would be very rare due to the tax bill and lack of outside funds to pay it. But in certain cases, this could be a wise tactical move, if you have the funds to pay the taxes. Also, if your current SEPP distributions are not fully taxable because you have basis in your TIRA (Form 8606), the Roth conversion would also be less than fully taxable for that reason.
Plan on the 5329 to claim your exception if you do the conversion. Be absolutely sure to they IRA custodian does NOT take withholding on the conversion. You may need to pay quarterly estimates.
2008-03-28 14:05, By: Alan S., IP: [126.96.36.199]