72(t) distributions from a Roth IRA

Submitted by Doug Stecklein on Mon, 2020-01-20 19:55

Hi Alan, I kept getting an error message when I tried to reply to my original thread so I started a new one.
I will try to contact the IRS directly, if possible, to ask about combining a Roth and TIRA into one 72(t) plan. This would be my preferred option.
I have a couple of other alternative ideas to make early withdrawals.
1) I could rollover +$30k each year from my TIRA to my Roth. I would withdraw any/all Roth contributions in the 1st year. This would help pay for conversion taxes and, if invested, could grow outside of my retirement accounts. After 5 years I could then start pulling out the rollover contributions every year.

2) I immediately start a 72(t) plan with a TIRA. Withdraw all Roth contributions for same reasons as above.
Option 1 offers much more flexibility. I can also start a 72(t) in my TIRA if I need more funds down the road as long as I’m finished doing ROTH conversions. Downsides – I have to wait 5 years to make any withdrawals and pay taxes on the extra income 5 years in advance.
Option 2 offers much less flexibility and smaller withdrawal amounts, but offers immediate withdrawals, less taxes, and if my balance increases significantly due to successful investments I can always switch the 72(t) withdrawal method to RMD to increase my yearly withdrawal amounts.
I am leaning towards option 2 Because it will give me immediate relief from the pressure of having to continue my current work load.
Wondering what your thoughts are on these plans and if anything seems like a bad a idea to you.
Alan, thank you again for the great responses! Do you offer paid retirement advice?



Submitted by Alan - IRA critic on Mon, 2020-01-20 23:56

  • It might take some work to locate anyone at the IRS that understands your question and knows if the IRS has a firm policy for combined TIRA/Roth 72t plans.
  • Plan 1 is known as a Roth conversion ladder and is a recognized strategy. However, it creates higher expenses from the taxes on the conversionswhich should be paid with outside funds. If you have taxes withheld from the TIRA conversion distribution you owe the penalty and tax on the taxes and your conversion is less. 
  • The one time switch to the RMD method is normally used to reduce the 72t payout. The RMD tables initially generate a distribution amount of 1/3 less than the fixed dollar methods even when you use the single life table, and your annual age increase does little of offset that. Therefore, you would need  very significant investment gains to generate the same dollar 72t distribution as a fixed dollar plan. A significant loss could also leave you short of the distribution you need. IRS will also activite new tables next year that reduce RMDs somewhat (maybe 6%) due to longer LE. It’s OK to change from joint lives to the single life table when making the switch to RMD. Single life table produces the largest distribution.
  • Sorry, I limit responses to these public forums only, and do not accept clients.

 

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