Double check me please

[SecondCor521]

I'm 50 and doing annual Roth conversions. In another thread somewhere it occurred to me that I may want to do a small SEPP from age 55 to 60.

If I did that, I think the plan would be:

1. Figure out how much I wanted my SEPP amount to be.
2. Figure out which SEPP method I wanted to use.
3. Back into an amount (and maybe an AA) for the initial IRA balance based on steps 1 and 2.
4. Split off the amount in #3 from traditional IRA #1 into a new traditional IRA #2. This would be at Vanguard.
5. Start SEPPs from IRA #2 at age 55.
6. Continue Roth conversions from IRA #1.
7. Stop SEPPs at age 60.
8. Recombine remainder of IRA #2 into IRA #1.

That's more or less right and legal, right?

(The reason for this would be to help draw down my t-IRA more. I would do this both because of the tax torpedo issue and loss of stretch IRA issue.)

 

[kgtest]

Not a SEPP expert, but that strategically appears possible, tactically there could be a catch 22 but I cannot think of what it would be.

it looks like the advantage is maintaining an A/A whilst living off of the SEPP funds, giving you further control of future tax events by separating and then later combining back IRAs?

 

[NgineER]

If you have sufficient Roth IRA contributions to live off of, I'd probably keep it simple and do a Roth ladder rather than doing both conversions as well as a SEPP. End result would be the same wouldn't it?

 

[SecondCor521]

End result would be the same wouldn't it?

Nope.

Let's say I spend $40K per year between 55 and 60. That's $200K that has to come from somewhere.

Under my current plan, I'd be spending that $200K from my taxable account while opportunistically shifting some money from my tIRA to my Roth.

Under the modified plan, if I did a $20K SEPP from my tIRA, I'd spend that SEPP money instead of taxable money.

So I'd end up with approximately $100K less in my tIRA and $100K more in my taxable than I would under my baseline plan.

(I wouldn't do the whole $40K of annual spending via SEPPs, because I don't want to commit to that level of taxable income in case something changes.)

Although now that I write that, the amount I could Roth convert would go down, because the SEPPs count 100% as taxable income, whereas the dollars I spend from taxable only count as taxable income to the extent that I have capital gains. Hmmm.

 

[HI Bill]

Have you determined the difference in tax strategy between taking from taxable accounts (possibly trying to keep the LTGS in the 0% tax bracket) versus taking the SEPP?

Part of my long-term strategy is to draw down some of the tax-deferred accounts (100% taxable) prior to RMD age to minimize the tax torpedo when your hit RMD and have SS income.

 

[SecondCor521]

Have you determined the difference in tax strategy between taking from taxable accounts (possibly trying to keep the LTGS in the 0% tax bracket) versus taking the SEPP?

Part of my long-term strategy is to draw down some of the tax-deferred accounts (100% taxable) prior to RMD age to minimize the tax torpedo when your hit RMD and have SS income.

Not yet, but I should.

Right now I'm drawing down tax-deferred through Roth conversions to minimize the tax torpedo. So I'm more looking at this SEPP idea as a tradeoff between SEPPs vs Roth conversions.

As alluded to in my previous post, because SEPPs are 100% income vs. taxable/LTCG being partly a return of principal/basis, my Roth conversions would be lower with the SEPP idea over that 5 year period than otherwise.

I probably just need to model it out.

 

[N02L84ER]

I would only do the SEPPs if I did not have enough in the taxable accounts to comfortably cover me between now and age 59.5. You can always increase the Roth conversion amount to remove more from the traditional IRAs.

 

[pb4uski]

.... (The reason for this would be to help draw down my t-IRA more. I would do this both because of the tax torpedo issue and loss of stretch IRA issue.)

Unless you need the cash flow for living expenses, why not just do larger Roth conversions? Both the Roth conversion and SEPP are taxable so I don't see the advantage of adding the SEPP.

Or is it that you have significant gains in the taxable account that if you use that for living money then it will reduce the headroom that you have to do Roth conversions?

 

[NgineER]

Nope.



Let's say I spend $40K per year between 55 and 60. That's $200K that has to come from somewhere.



Under my current plan, I'd be spending that $200K from my taxable account while opportunistically shifting some money from my tIRA to my Roth.



Under the modified plan, if I did a $20K SEPP from my tIRA, I'd spend that SEPP money instead of taxable money.



So I'd end up with approximately $100K less in my tIRA and $100K more in my taxable than I would under my baseline plan.



(I wouldn't do the whole $40K of annual spending via SEPPs, because I don't want to commit to that level of taxable income in case something changes.)



Although now that I write that, the amount I could Roth convert would go down, because the SEPPs count 100% as taxable income, whereas the dollars I spend from taxable only count as taxable income to the extent that I have capital gains. Hmmm.

How about if you use contributions from your Roth IRA for living expenses (if you have $200k in contributions). Then convert $40k/year into a Roth IRA and pay taxes $24k from your taxable. You’d have $200k less in your tIRA and keep $176k in your taxable account.

 

[SecondCor521]

Both SEPPs and Roth conversions reduce the size of my tIRA, which is one of my goals. The other goal is sustaining my cash flow. The SEPP does this in a different way than the Roth conversion. The SEPP also drains the tIRA more.

Let's do it by example. Starting with $750K tIRA, $300K taxable with $200K basis, $0 Roth, $30K annual spend. Ignore inflation and investment returns for simplicity.

Option A (current plan): Withdraw $30K from taxable and spend it. Report $10K capital gain. Do $20K Roth conversion. Result: $30K reported to IRS, spending sustained. $730K tIRA, $270K taxable with $180K basis, $20K Roth.

Option B (SEPP idea): SEPP $30K from tIRA and spend it. Zero capital gain, zero Roth conversion. Result: $30K reported to IRS, spending sustained. $720K tIRA, $300K taxable with $200K basis, $0 Roth.

So in both cases taxes, spending, and ending NW is identical. The difference is in the account balances. Option B has a smaller tIRA, smaller Roth, larger taxable compared to Option A.

[Side note: Yes, in earlier posts I did say that I would not do all my spending as SEPP. In this post I did do all spending as SEPP in order to make the math and differences between the two options easier to understand.]

 

[SecondCor521]

By way of reply to some of the comments, the way I am currently going I have enough in my taxable and in Roth contributions and conversions to last me to 59.5. Right now it looks like I have about 10 years in my Roth pipeline at my current spending rate. But I may want to spend more sometime in the next few years. I'd like to preserve that flexibility.

My goal with all of this complication is to make my tIRA smaller without paying more in taxes and keeping my Roth conversion ladder funds big enough to where I could spend more if I wanted to without running my pipeline dry. But as my previous post shows, this would have the side effect of a smaller Roth, assuming I kept my taxable income identical between the two scenarios.

@pb4uski, although the numbers in the previous post are made up, it is accurate that my taxable is about 2/3 basis, 1/3 unrealized LTCG. Larger Roth conversions are similar except that money ends up in my Roth conversion ladder and are not immediately spendable. SEPP dollars are immediately spendable. At least the way my brain is thinking right now.