Permalink Submitted by Alan Spross on Mon, 2010-03-22 23:14
Yes, but they must be very careful with all the extra transactions to be sure they do not bust the 72t plan. The conversion within a 72t plan is authorized by the following portion of Reg 1.408A-4:
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Q–12. Can an individual convert a traditional IRA to a Roth IRA if he or she is receiving substantially equal periodic payments within the meaning of section 72(t)(2)(A)(iv) from that traditional IRA?
A–12. Yes. Not only is the conversion amount itself not subject to the early distribution tax under section 72(t), but the conversion amount is also not treated as a distribution for purposes of determining whether a modification within the meaning of section 72(t)(4)(A) has occurred. Distributions from the Roth IRA that are part of the original series of substantially equal periodic payments will be nonqualified distributions from the Roth IRA until they meet the requirements for being a qualified distribution, described in §1.408A–6 A–1(b). The additional 10-percent tax under section 72(t) will not apply to the extent that these nonqualified distributions are part of a series of substantially equal periodic payments. Nevertheless, to the extent that such distributions are allocable to a 1998 conversion contribution with respect to which the 4-year spread for the resultant income inclusion applies (see A–8 of this section) and are received during 1998, 1999, or 2000, the special acceleration rules of §1.408A–6 A–6 apply. However, if the original series of substantially equal periodic payments does not continue to be distributed in substantially equal periodic payments from the Roth IRA after the conversion, the series of payments will have been modified and, if this modification occurs within 5 years of the first payment or prior to the individual becoming disabled or attaining age 59 1/2, the taxpayer will be subject to the recapture tax of section 72(t)(4)(A).
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Note that the client will incur a considerable tax bill and should have other funds available to pay the taxes on the conversion in addition to the taxes on the 72t distribution. This year however, the conversion income can be deferred to 2011 and 2012, but in any other year, the 1040 would be affected as follows:
1) Lines 15a and 15b would include the total 72t distribution plus the conversion reported on Form 8606.
2) This total less the amount reported on Form 8606 would have to equal the 72t plan requirement exactly.
Remember that client cannot take extra amounts out to pay the taxes, so you must have the funds available from already distributed dollars or another source other than these IRAs. If the conversion is partial, the original TIRA and the Roth IRA are both part of the 72t plan, and client has a choice of which account to take the 72t amounts from. If 72t payments come from recently converted Roth funds, the 72t penalty exception will also waive the 5 year conversion holding requirement. But for 2010 conversions, if amounts allocated to the conversion are distributed prior to 2012, the tax is accelerated into the year of distribution. If client already has a Roth IRA, he must be very careful to convert into a NEW Roth account with a 0 balance, or the 72t plan is busted.
Client must now have additional income vrs when the 72t plan was started, or would probably not be able to afford to do this due to the added tax bill.
Permalink Submitted by Alan Spross on Mon, 2010-03-22 23:14
Yes, but they must be very careful with all the extra transactions to be sure they do not bust the 72t plan. The conversion within a 72t plan is authorized by the following portion of Reg 1.408A-4:
>>>>>>>>>>>>>>>>
Q–12. Can an individual convert a traditional IRA to a Roth IRA if he or she is receiving substantially equal periodic payments within the meaning of section 72(t)(2)(A)(iv) from that traditional IRA?
A–12. Yes. Not only is the conversion amount itself not subject to the early distribution tax under section 72(t), but the conversion amount is also not treated as a distribution for purposes of determining whether a modification within the meaning of section 72(t)(4)(A) has occurred. Distributions from the Roth IRA that are part of the original series of substantially equal periodic payments will be nonqualified distributions from the Roth IRA until they meet the requirements for being a qualified distribution, described in §1.408A–6 A–1(b). The additional 10-percent tax under section 72(t) will not apply to the extent that these nonqualified distributions are part of a series of substantially equal periodic payments. Nevertheless, to the extent that such distributions are allocable to a 1998 conversion contribution with respect to which the 4-year spread for the resultant income inclusion applies (see A–8 of this section) and are received during 1998, 1999, or 2000, the special acceleration rules of §1.408A–6 A–6 apply. However, if the original series of substantially equal periodic payments does not continue to be distributed in substantially equal periodic payments from the Roth IRA after the conversion, the series of payments will have been modified and, if this modification occurs within 5 years of the first payment or prior to the individual becoming disabled or attaining age 59 1/2, the taxpayer will be subject to the recapture tax of section 72(t)(4)(A).
>>>>>>>>>>>>>>>
Note that the client will incur a considerable tax bill and should have other funds available to pay the taxes on the conversion in addition to the taxes on the 72t distribution. This year however, the conversion income can be deferred to 2011 and 2012, but in any other year, the 1040 would be affected as follows:
1) Lines 15a and 15b would include the total 72t distribution plus the conversion reported on Form 8606.
2) This total less the amount reported on Form 8606 would have to equal the 72t plan requirement exactly.
Remember that client cannot take extra amounts out to pay the taxes, so you must have the funds available from already distributed dollars or another source other than these IRAs. If the conversion is partial, the original TIRA and the Roth IRA are both part of the 72t plan, and client has a choice of which account to take the 72t amounts from. If 72t payments come from recently converted Roth funds, the 72t penalty exception will also waive the 5 year conversion holding requirement. But for 2010 conversions, if amounts allocated to the conversion are distributed prior to 2012, the tax is accelerated into the year of distribution. If client already has a Roth IRA, he must be very careful to convert into a NEW Roth account with a 0 balance, or the 72t plan is busted.
Client must now have additional income vrs when the 72t plan was started, or would probably not be able to afford to do this due to the added tax bill.