72T & Roth Conversion
I have a client looking at early retirement and utilizing 72t distributions. Can he/she also execute roth conversions while on a 72t schedule? If so, would the roth conversion amount be included in the 72t distribution amount or kept separate?
Permalink Submitted by Alan - IRA critic on Wed, 2025-01-08 19:55
IRS Reg 1.408A-4 QA 12 clearly authorizes a conversion within a 72t plan as copied below:
“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.”
However, this assumes a total conversion, not a partial, where the plan would continue from the Roth IRA. With a partial conversion you would have a plan operating from two different IRA types, and it’s not clear whether the IRS approves this or not.
Permalink Submitted by Matthew Ottusch on Fri, 2025-01-10 15:10
Understood. A follow-up question/scenario:
An individual retires at 58 and establishes a 72t distribution plan. Based on applying the various SEPP calculations, the amount to be distributed is $100,000/yr for 5 years to meet the 72t requirement.
Is the individual able to make roth conversions in addition to the 72t distribution amount? Example:
$100k 72t distribution
$100k roth conversion
= $200k total distributed from IRA
Is this permissable?
Permalink Submitted by Alan - IRA critic on Sat, 2025-01-11 20:46
This is possible, but only if the IRS will approve a partial Roth contribution instead of a total conversion as I indicated above. It’s not clear whether a partial is allowed that would result in the plan encompassing both a traditional and a Roth IRA at the same time. In that scenario the taxpayer would have the same annual 72t distribution amount but could control the tax impact when choosing to take the distributions from the traditional (taxable) and/or the Roth (non taxable).
Permalink Submitted by Matthew Ottusch on Wed, 2025-01-15 12:10
Follow up to this, wouldn’t the roth conversion be completely separate and unaffected by the 72t schedule? The hypothetical $100k traditional IRA distribution fulfills the 72t requirement.
The $100k roth conversion is in addition to the 72t IRA distribution and not a part of the calculation. Is this permissable?