72t withdrawal from IRA and Roth IRA coversion at same time?

[Al18]

I will have two traditional IRA's at the age of 56. I plan to start a 72t withdrawal from IRA rollover #1 (300K) and during the same year, convert from IRA rollover #2 (110K) to Roth IRA at a rate of 22K/year. Any problems with doing this? Has anyone done this before?

 

[respond2u]

I was going to, but the reduction in the ACA subsidy meant the marginal tax rate on doing the Roth conversion was around 25%.

I'm also inclined to wait until the Republican tax plan is in place before incurring any optional tax bills.

We can do the Roth conversion in December and it will still be 2017 for the 5 year waiting period.

(Of course, you can always do it now and recharacterize later, but that seems like too much an opportunity to mess something up for me!)

 

[gauss]

I originally looked into the 72t plan but then realized that I could take my contributions and conversions from my Roth IRA and not pay a penalty prior to age 59 1/2 as long as all the rules regarding 5 year waiting periods are met.

As far as holding off on decisions until new tax plans come along, I have started doing Roth conversions up to the top of my market tax bracket for every year going forward for the next 20 years. Some times I may pay more tax, sometimes I may pay less tax, but having a consistent plan to get it all done will work for me.

That all being said, we also have some fairly generous pension income (by Megacorp standards) available during this time that should cover 2/3 of our living expenses. As such our IRA draw downs may be smaller than average.

-gauss

 

[enginerd]

You should be ok provided that the IRAs are in two separate accounts. Although my "should be" response is not 100% certain and busting a 72(t) plan can cost you heavily in penalties. You should double check on the forum over at 72t.net.

I also plan to utilize the 72(t) many years from now. Although I am DIY on all my taxes, I know I will be nervous about the initial setup. So, I will likely have an accountant double check all my numbers.

 

[respond2u]

You should be ok provided that the IRAs are in two separate accounts. Although my "should be" response is not 100% certain and busting a 72(t) plan can cost you heavily in penalties. You should double check on the forum over at 72t.net.

I also plan to utilize the 72(t) many years from now. Although I am DIY on all my taxes, I know I will be nervous about the initial setup. So, I will likely have an accountant double check all my numbers.

That matches my understanding: just make sure the SEPP/72t funds are in a separate IRA and don't add anything to it until the plan is done. I'm 99% certain of that

As for initial setup, when I called into Fidelity to start the funds movement, they seemed pretty knowledgeable. I haven't started it yet with them, but I am optimistic they will double-check things for me.

 

[Sunset]

The 72t, restricts you and means you have to plan ahead and stick to it.

Why not take out the money from a 401K instead of rolling it over to an IRA and doing the 72t. ?

 

[respond2u]

Why not take out the money from a 401K

As far as I know, the only way to take enough money out of a 401K to live on penalty-free is to retire from the company that you have the 401K with at age 55 or after.

The 10% penalty stops me, as tax optimization is a key cost factor.

For those of us that are younger than 55, or not with the company with that 401k, or have most of our money in a SEP-IRA or regular IRA, I don't know a better way than the 72t to avoid penalties on withdrawals.

[Roth IRAs are a different story]

 

[Al18]

My 401K plan does NOT allow penalty free withdrawals at 55. I plan to live on the 72t withdrawals from 56-60.

The money converted to a Roth IRA is to reduce taxes while in a low tax bracket. It will be spent after I turn 60.

Contacting Fidelity sounds like a good idea - most of my money is there.

 

[respond2u]

Hi Al (can I call you Al?), I recommend also looking at www.72t.net if you haven't already.

There's a wealth of information, and the forums are responsive with real experts.

 

[Sunset]

My 401K plan does NOT allow penalty free withdrawals at 55. I plan to live on the 72t withdrawals from 56-60.

....

I believe you, but just asking for clarification.

And you asked them ?
Many do allow it, and the IRS allows it, so why wouldn't they as long as you retire from them ?

I can see if they don't then the 72t is a good answer, one I considered but didn't do.

 

[mathjak107]

most company's only allow a one time lump sum at age 55 if you separate from service . while the irs allows company's who want to get involved with periodic payments to do so at age 55 most do not take part and want to get involved with periodic payment plans . .

so while you can get the money rolled over to an ira in a lump sum the penalty free withdrawals option is off the table except for the usual 72t election which you can take at any age not just 55 .

other than that you would owe taxes if you took that lump sum and did not roll it over . those taxes on a lump sum may be painful .

 

[Al18]

Thanks for the advice. Withdrawals are not allowed at 55 according to the 401K Summary Plan Description, unless you worked at one specific company that was bought years ago - it's quite clear.

Not interested in a one time lump sum payment because of the tax hit.