72T and tax reduction in pre-59.5 retirement

Submitted by Greg Gorham on Mon, 2016-04-25 13:24

Greetings,

I am 56.5, am “retired” taking withdrawals from Roth IRA basis which avoids penalty for early pre-59.5 age distributions. All good so far, this forum was very helpful in making that decision.

Now, I enter 2016, my first full year with no income tax since I was in high school. Unlike my high school years, I have expenses that alter my tax bill, adjustments to reduce my tax paid. I have mortgage interest, I have COBRA and other health costs. I can’t think of any more, those are biggest.

With no anticipated 2016 income tax I feel like I am wasting tax adjustments. (I use that term “adjustments” to avoid what is murky terminology to me “deduction” “credit” yadda yadda.) In other words,I have ways to reduce my income tax but no income tax to apply those adjustments to from now thru the time I take Traditional IRA distributions and/or turn on my annuities. I doubt I get money back for free, I only reduce to zero my taxes, no more.

Currently, I have some Traditional IRA money in an investment account I control, $150K or so, that I was not going to use until the penalty date of 59.5 passes. In the future, post 59.5, I will get about 20% of my yearly funds from a Traditional IRA sources – annuities or the $150K straight investment account. 80% of my income post-59.5 will be from Roth IRA annuities and Social Security.

For this forum, can I get advice on setting up a 72T to distribute from the $150K Traditional IRA enough funds prior to 59.5 to create taxable income that I can apply my “adjustments” to and not squander those opportunities? Lets say my COBRA/medical for the year will be $5000. (I know this is an IRA forum, not a general tax forum but FYI the mortgage interest is $12000. I meet with a tax advisor to get the bigger picture but you can help with the 72T piece of the question)

I need to find ways now (pre-59.5) and in the future (post-59.5) to reduce my tax bill for the taxable distributions from my Traditional IRA income investment account and Traditional IRA annuities. I assume it is possible to significantly reduce or eliminate taxes on the 20% of my future yearly funds. As least in the pre-59.5 time frame I want to not waste the adjustments to my tax simply because I have no tax to adjust.

To do this in pre-59.5 I need to update my plan a little to include Traditional IRA distributions without penalty rather than rely exclusively on Roth IRA penalty-free distributions.

Thank you



Submitted by Alan - IRA critic on Mon, 2016-04-25 17:08

  • It is a good idea to take advantage of the 0 tax bracket if that is where you are. First, you need to determine how much you will need in distributions from the TIRA account and determine if a 72t plan can support that. With a balance of 150k, you will get less than 7k in annual distributions from a 72t plan. Is that enough? Also, if you start a rigid 72t plan now, it will have to run for 5 years even though you will be 59.5 in 3 years.
  • If you have enough regular contributions left in your Roth IRA, another option would be to continue to withdraw from the Roth IRA, but use your deductions to convert from the TIRA to your Roth IRA. If the conversions are non taxable, this will allow you to replenish your Roth, get tax and penalty free distributions, and take advantage of your deductions without the rigidity of a 72t plan for 5 years. Of course, it all depends on the actual numbers but if the numbers work, this is the better plan, being less risky, more flexible, and of shorter duration.

Submitted by Greg Gorham on Mon, 2016-05-02 18:43

Thank you.I follow you on the complexity of the 72T, point taken.  Might be more pain than gain if I have to maintain it for 5 years.So you are hinting the taxable event created by rolling from TIRA to ROTH IRA can be offset by my health and mortgage tax deductions?  I need a formula, a calculator, a spredsheet to help.  I plug in the $ for annual health expense, $ for annual mortgage interest and get the $ those expenses reduce my annual tax.  Take that number and work backward to see how much TIRA to ROTH conversions are needed in the year to generate exactly that tax.  That may be over simplifying but it is what I am thinking at the moment.  I roll that amount of TIRA annually to ROTH and the TIRA money becomes tax and penalty free in the pre-59.5 time … after 59.5 as well I guess. 

Submitted by Alan - IRA critic on Tue, 2016-05-03 01:21

  • Your return sounds fairly simple, so a program like this could be used after it is updated for 2016:
  • https://turbotax.intuit.com/tax-tools/calculators/taxcaster/
  • Your mortgage interest and medical deductions only benefit you to the extent that ALL your itemized deductions exceed your standard deduction. You cannot count them from dollar one.
  • As stated, you must have enough regular contributions in your Roth IRA to fund the non taxable distributions. If you run through your balance of regular contributions and have to withdraw from conversions less than 5 years old. you would incur the 10% penalty up until age 59.5

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