SEPP and Roth IRA
Let’s say I have one million dollars in a Roth IRA (not yet). I’m 45, and I don’t want to wait till near death to take some money and have a good time.
Can I set up a SEPP and take distributions tax free?
Let’s say I have one million dollars in a Roth IRA (not yet). I’m 45, and I don’t want to wait till near death to take some money and have a good time.
Can I set up a SEPP and take distributions tax free?
Permalink Submitted by Alan Spross on Fri, 2010-01-22 00:01
Basically, Yes.
If you converted a large lump sum now and then started 72t distributions from the converted amount, the early withdrawal penalty for tapping conversions within 5 years will be waived by the SEPP exception to the penalty.
The SEPP calcs do not let you take out a high enough percentage of your initial balance to go through your converted amount in 14 years. That means that you would never reach your earnings. And if the account lost value, there would be no earnings to be taxed. If the account lost a substantial amount, you could exhaust the account, but that just ends your SEPP plan, it does not bust the plan.
On the other hand, lets say your Roth is not created now by a conversion but that you made massive gains in the past so that your Roth balance included 800,000 of earnings. In that case, you could go through your contributions and end up tapping the earnings before they were qualified and the earnings would be taxable, but again no penalty because of the SEPP exception. This scenario is really a stretch and only for purposes of illustration.
Permalink Submitted by William Reamy on Fri, 2010-01-22 00:12
earnings. It is an on line brokerage account Roth IRA, and I have had tremendous gains. So my understanding from what you say is that the earnings have to wait to 59.5 to be taken out tax free, even with a SEPP. Is this correct?
Permalink Submitted by Alan Spross on Fri, 2010-01-22 00:39
Correct. Tax free earnings requires both a 5 year holding period and one of the following:
Age 59.5
Death
Disability
Note that earnings come out last, not pro rated. So the first distributions would be tax free, and when you reach earnings, the entire distribution will be taxable from that point on.