72T using Roth IRA’s

Submitted by Hank Tajkowski on Tue, 2011-06-07 16:15

Can an existing Roth IRA be included in the aggregate amount of IRA’s to be used for calculating the 72T or does it have to be a simultaneous conversion from existing IRA to Roth in order to be included…?



Submitted by Alan Spross on Tue, 2011-06-07 18:54

Good question, one that has not been specifically addressed by the IRS to my knowledge.

That said, Q&A #12 of the IRS Reg. attached clearly allows a Roth IRA conversion within the term of a 72t plan using TIRA accounts. After the conversion the Roth IRA becomes an integral part of that same 72t plan, and that means that the IRS does not view the Roth IRA as a different type of retirement plan than a TIRA. The presumption therefore is that a Roth IRA as an IRA and not a qualified plan can be included in the account balance from inception of a 72t plan, and the 72t distributions can be aggregated over the TIRA and Roth IRA accounts. That flexibility results in tax management opportunities for 72t participants, and the 5 year conversion holding period is eliminated by the substantially equal payments exception. Accordingly, a conversion within a 72t plan term can also be recharacterized back to the TIRA in a tax free transfer by the extended due date without affecting the plan.

http://www.taxalmanac.org/index.php/Treasury_Regulations,_Subchapter_A,_…

However, inclusion of a pre existing Roth IRA in a 72t plan is much more likely to be misunderstood or questioned by the IRS because of the infrequency the IRS encounters it. One solution to eliminate risk is to initiate two separate 72t plans in different months, one using TIRAs only and the other one a Roth IRA. While the tax flexibility would be lost by doing this, the benefit of using both account balances would be intact and the validity of such separate plans is on solid ground.



Submitted by Clyde Wolf on Tue, 2011-06-07 19:37

[quote=”[email protected]“]Good question, one that has not been specifically addressed by the IRS to my knowledge.

That said, Q&A #12 of the IRS Reg. attached clearly allows a Roth IRA conversion within the term of a 72t plan using TIRA accounts. After the conversion the Roth IRA becomes an integral part of that same 72t plan, and that means that the IRS does not view the Roth IRA as a different type of retirement plan than a TIRA. The presumption therefore is that a Roth IRA as an IRA and not a qualified plan can be included in the account balance from inception of a 72t plan, and the 72t distributions can be aggregated over the TIRA and Roth IRA accounts. That flexibility results in tax management opportunities for 72t participants, and the 5 year conversion holding period is eliminated by the substantially equal payments exception. Accordingly, a conversion within a 72t plan term can also be recharacterized back to the TIRA in a tax free transfer by the extended due date without affecting the plan.

http://www.taxalmanac.org/index.php/Treasury_Regulations,_Subchapter_A,_…
[/quote]
Let’s see, I pay the tax on the 72t distribution from my TIRA for the greater of 5 years or until I reach age 59 1/2.
Then I do a Roth Conversion from the same 72t TIRA, paying the tax on the Conversion amount.

Where is there an advantage?
Maybe this is one of those things that, just because you can does not mean you should?



Submitted by mk foss on Tue, 2011-06-07 19:43

I think that the original poster had an income streatm in mind that couldn’t be met with the traditional IRA alone but he also had an existing Roth IRA. In those facts, it will work with two 72t payment streams as Alan suggests.

However, if you don’t have an existing Roth before you start the 72t, I agree that it doesn’t make sense to create one.



Submitted by Alan Spross on Tue, 2011-06-07 20:03

While most taxpayers with a 72t plan do not have the extra money to pay conversion taxes in addition to the taxes on the 72t distributions, a conversion can make sense if the money is there to pay the taxes and if the conversion would otherwise make sense if there were no 72t plan. While you would not expect that 72t participants would expect their tax rates to rise in retirement, at times their financial condition can improve to the extent that this option becomes interesting to them.

The extra cash might result from an outside event like an inheritance, a spouse’s income gain, or other windfall which funds the conversion taxes. The taxpayer could decide to convert rather than use the one time switch to the RMD method to reduce the 72t payout. A conversion within a 72t plan will also reduce taxes in future years of the plan as a trade off for the increased taxes in the year of conversion if the participant opts to take the 72t distributions from the Roth IRA.

I have been surprised at the number of times this comes up on the http://www.72t.net/Forum/ForumViewPosts.aspx?1 website.



Submitted by Rich Potterton on Mon, 2018-11-12 11:53

I just wanted to ask if your statement “However, inclusion of a pre existing Roth IRA in a 72t plan is much more likely to be misunderstood or questioned by the IRS because of the infrequency the IRS encounters it.” still holds true 7 years later.That’s exactly what I want to do:  combine my Roth and TIRA for SEPP purposes, partly because I want to make the withdrawals strictly from the TIRA portion, leaving the money in the Roth portion (not possible if I make two SEPPs). 



Submitted by Alan - IRA critic on Mon, 2018-11-12 15:31

Yes, it still holds true, but not so much in your case. What you want to do meets requirements, but is rarely done. That means there is a somewhat greater chance of an IRS inquiry, but not much greater because your 1099R each year will only show distributions from the TIRA which is expected. That means the only trigger for an IRS inquiry into your plan would be if you have no other TIRAs, and the IRS compares your Form 5498 year end balance of the TIRA and sees that it is not high enough to generate your SEPP distribution. This is very unlikely to happen, but just in case it does be sure your calculation is correct and documented with copies of both TIRA and Roth IRA statements showing the initial balance on which the calculation is based. The statements should be for the same date, probably a month end.



Submitted by David Mertz on Mon, 2018-11-12 16:04

  • Beginning with a SEPP plan based on a combination of traditional and Roth IRA accounts would be equivalent to beginning with a traditional IRA only and then immediately converting part of it to a Roth IRA.  Q&A-12 appears to address the situation where the *entire* traditional IRA is converted and SEPP distributions are then continued from the Roth IRA, but it does not address the case of a partial Roth conversion.  Natalie Choate in her book “Life and Death Planning for Retirement Benefits” mentions that the IRS does not seem to have provided any guidance with regard to a partial Roth conversion and whether or not SEPP distributions would have to be made proportionately from the traditional and Roth IRAs in the plan, so it seems that there is also no guidance with regard to beginning a SEPP plan with a combination of traditional and Roth IRAs.
  • Building a SEPP plan with the balances of both a traditional IRA and a Roth IRA when there will never be any need or intent to take distributions from the Roth IRA before termination of the SEPP plan seems like, at best, a tax loophole.  Including the Roth IRA balance just to inflate the balance used to calculate the required SEPP distributions seems artificial.  However, it’s not exactly the same as simply using an artificially inflated traditional IRA balance alone since no non-SEPP distribution from the Roth IRA would be permitted (including distributions of Roth IRA contribution basis that would be free of tax or penalty if the Roth IRA was not part of the SEPP plan) without busting the SEPP plan, so you do generally give up something by including the Roth IRA.


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