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Question for the CPAs and Financial Professionals?
Old 07-04-2006, 12:35 PM   #1
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Question for the CPAs and Financial Professionals?

I know we have some CPAs and other financial professional on here so I have a question for you that I have not been able to find and answer. I used to do estate planning and I still cannot solve this one.

In a Self-Directed Roth IRA, one can hold real estate as an investment.

With an IRS 72t ruling, one can withdrawal early in substantial equal payments.

Here is the question:

If a person purchases a Triple Net Lease Commercial Property inside the Roth (a Triple Net Lease Commercial Property is a property that is owned by you and leased by a franchise for a period of usually 10-15 years and has a cap. Rate of 7-8% or roughly $90,000 per year income usually, the lessee pays all expenses, insurance, etc.)

Can you do a 72t?

Your Roth will have income of roughly $7-8K per month and an asset worth over $1M, if you could to a 72t, you would never tap into principle unless the lease expired.

Lance
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Re: Question for the CPAs and Financial Professionals?
Old 07-04-2006, 01:50 PM   #2
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Re: Question for the CPAs and Financial Professionals?

72t's are unpleasantly complicated and have hefty penalties for screwing up. You would never want something that illiquid as the sole asset of an IRA you were 72t'ing.
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Re: Question for the CPAs and Financial Professionals?
Old 07-04-2006, 05:10 PM   #3
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Re: Question for the CPAs and Financial Professionals?

Quote:
Originally Posted by brewer12345
72t's are unpleasantly complicated and have hefty penalties for screwing up. You would never want something that illiquid as the sole asset of an IRA you were 72t'ing.
Please explain?
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Re: Question for the CPAs and Financial Professionals?
Old 07-04-2006, 05:55 PM   #4
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Re: Question for the CPAs and Financial Professionals?

Quote:
Originally Posted by PsyopRanger
Please explain?
First, PsyopRanger, this question may be better answered at the 72t.net or Ed Slott's discussion boards. There are several published CPAs on both those boards who delight in answering this sort of question.

Second, let's say that you set up a 72(t). You have to pick an amount, so let's say that the IRS guidelines lead you to set your amount as $84K/year ($7000/month).

The following month Hurricane Katrina slams into your NNN building or your tenant becomes embroiled in legal controversy or some other major disaster occurs. Whatever the event, let's say that your monthly income plummets to $0/month... but under the terms of the 72(t) you are still required to withdraw $84K/year.

Now what?
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Re: Question for the CPAs and Financial Professionals?
Old 07-04-2006, 05:59 PM   #5
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Re: Question for the CPAs and Financial Professionals?

Quote:
Originally Posted by Nords
First, PsyopRanger, this question may be better answered at the 72t.net or Ed Slott's discussion boards. There are several published CPAs on both those boards who delight in answering this sort of question.

Second, let's say that you set up a 72(t). You have to pick an amount, so let's say that the IRS guidelines lead you to set your amount as $84K/year ($7000/month).

The following month Hurricane Katrina slams into your NNN building or your tenant becomes embroiled in legal controversy or some other major disaster occurs. Whatever the event, let's say that your monthly income plummets to $0/month... but under the terms of the 72(t) you are still required to withdraw $84K/year.

Now what?
I see what you are saying, so is it better to do a 72t with mutiple investments? Stocks, Real Estate, Cash, etc.? or is the 72t just not a good idea at all?

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Re: Question for the CPAs and Financial Professionals?
Old 07-04-2006, 06:09 PM   #6
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Re: Question for the CPAs and Financial Professionals?

Quote:
Originally Posted by PsyopRanger
I see what you are saying, so is it better to do a 72t with mutiple investments? Stocks, Real Estate, Cash, etc.?* or is the 72t just not a good idea at all?
You can withdraw a Roth's contributions anytime you want, and you can withdraw the gains for special circumstances (first-time home purchase, education expenses).

When you're working for a paycheck, cash flow is probably good enough that you don't need to worry about taking money out of a Roth.

When you're ER'd but not yet collecting Social Security, it might make more tax sense to live off cap gains & dividends by consuming taxable investments. Another opportunity during that time period is incrementally converting 401(k)s & IRAs to Roths, which will jack up earned income to the 10-15% tax bracket (or possibly even higher). The idea is to let the Roth compound tax-free for as long as possible while you're consuming the taxable accounts. By the time you're withdrawing SS you're also able to make tax-free Roth IRA withdrawals without fear of subjecting your SS to taxation as well.

So a 72(t) isn't necessarily a good or a bad idea as much as it may just be unnecessary. And with your projected military pension, 72(t) may be totally irrelevant.
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Re: Question for the CPAs and Financial Professionals?
Old 07-04-2006, 06:20 PM   #7
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Re: Question for the CPAs and Financial Professionals?

More simplified, the 72t probably works best when you have a large established account with limited volatility and want to tap it off because you've gotten yourself into a situation where your taxable profile looks like capital gains will will work better for you than ordinary income. Money from IRA's is usually taxed as ordinary income when withdrawn, whereas money pulled from an IRA through a 72t, then held a while, then sold, is usually taxed as a capital gain.

Some folks after retiring early are seeing that a big fat IRA distribution increasing their adjusted gross income is just not going to be their very best deal...

I'm a perfect candidate for it...but I decided its just too complicated to fiddle with and also decided that having a haven to play with tax inefficient toys is a good thing.
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Re: Question for the CPAs and Financial Professionals?
Old 07-04-2006, 06:45 PM   #8
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Re: Question for the CPAs and Financial Professionals?

Hmm
I thought the 72t money would be taxed as income. I thought the biggest reason to do the 72t is because you have a large sum in the 401k/ira and doing so could lower your overall taxes. Mostly because of the tax hit when you do mandatory distributions.
I have never actually ran numbers since I am several millions short of worrying about it.

I did just order the slotkin book. Amazon had it at a good price when I went to buy Bob's book. I even used the retire early link

Oh and I dont think you pick the number when you do the 72t isnt it based on your life expectancy ?
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Re: Question for the CPAs and Financial Professionals?
Old 07-04-2006, 06:59 PM   #9
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Re: Question for the CPAs and Financial Professionals?

Quote:
Originally Posted by spideyrdpd
I thought the 72t money would be taxed as income.
Yes it would, at the time of withdrawal. But then invested in a taxable account, then allowed to grow for 20-25 years (in my case), the withdrawals at that time are 5/15% (or whatever the heck they're going to be by that time) rather than being added to my dividends, social security income, pension income and everything else that might get thrown my way.

Its pay a little now while your tax situation is right, or get jammed in your sixties when you might not want all that extra "ordinary income".
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Re: Question for the CPAs and Financial Professionals?
Old 07-04-2006, 07:35 PM   #10
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Re: Question for the CPAs and Financial Professionals?

Here is a thread that talked about issues and problems with having income producing real estate in an IRA:

http://early-retirement.org/forums/i...3774#msg113774

There are significant tax issues if you finance the real estate.
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Re: Question for the CPAs and Financial Professionals?
Old 07-05-2006, 08:40 AM   #11
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Re: Question for the CPAs and Financial Professionals?

I also suggest reading this thread on applying the 72t concept to Roth IRAs:

http://early-retirement.org/forums/i...9258#msg149258
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