Roth Transfers & 72t provisions
This is a theoretical question: Assume an individual established an original Roth IRA more than 5 years ago. Through their own management and prudence, they were able to grow their self-directed investments within their Roth to over a million dollars. At some future point, can this individual then take a portion of their funds in the original Roth (let’s say 10%) and transfer it to a newly created Roth so it has 100K in it? Furthermore, if still true, let’s assume this individual is 54 yrs. old and would like to initiate an early retirement utilizing the 72t provisions. Can he initiate the 72t provisions from the newly formed Roth with 100K in it and only it exclusively? Also, does the 5-yr. waiting rule come into play here and/or are there other restrictions?
Permalink Submitted by Alan - IRA critic on Fri, 2017-03-31 23:36
A Roth owner can partition a Roth IRA into as many separate Roth accounts as they wish. The owner could also start a 72t plan for the one Roth or as many Roth accounts as he wishes. The account balance of only the Roths that will be a part of the 72t plan are used in doing the calculation. Note that for taxation of the 72t distributions reported on Form 8606, all his Roth are treated as one combined account. Since his Roth is not yet qualified (will be at 59.5) the ordering rules for distributions apply, so his regular contributions come out first tax and penalty free. Next out are conversions starting with the oldest, but if a conversion less than 5 years is tapped the 72t penalty exception will waive the 10% penalty. If only a 100k Roth is used for the plan the annual distribution will be less than 5k, so for 5 years less than 25k would be distributed. If client has at least 25k in regular Roth contributions and only needs 5k per year, there is no sense in starting a 72t plan since the distributions will be tax and penalty free anyway. So even if the Roth has a high amount of earnings in it, those earnings come out last and he would not touch them if he only needs 25k or so in distributions for the next 5 years. You would need to determine just how this Roth is composed – what is his basis in regular contributions and what is his basis in conversions and when were these conversions?