Can all Distributions from 72t be converted to a Roth?
age 45 – $300,000 in a 401K – using a 72t – can I take all distributions using a 72t and convert that amount to a roth? Client is still working
age 45 – $300,000 in a 401K – using a 72t – can I take all distributions using a 72t and convert that amount to a roth? Client is still working
Permalink Submitted by Alan Spross on Mon, 2010-02-01 19:46
No. A 72t (SEPP) distribution is not eligible for rollover and a Roth conversion is a rollover.
72t participants using a traditional IRA account are able to take their 72t distribution and then convert any portion of the remaining TIRA account to a new Roth IRA, although they would need to have enough money in their taxable account to pay the conversion taxes. Their 72t plan would then be composed of two IRA accounts, the remainder of the TIRA and the new Roth IRA. They could then take their 72t distribution from either or both of the accounts depending on what additional tax liability they want to incur. Again, the actual 72t distribution amount itself cannot be converted, just additional amounts.
However, when a qualified retirement plan is funding the 72t plan, since this is a totally different type of plan, it cannot be combined with a Roth IRA in a single 72t plan, therefore a Roth conversion is not possible when a 401k is the source of the current 72t plan. The 401k cannot be rolled over to a traditional IRA during the term of the 72t plan either.
If client wants to reduce the distributions, they might consider the one time switch to the RMD method that is allowed under RR 2002-62. This will typically reduce the 72t calculation by 40-50% assuming no investment losses or gains over the last year.