72t withdrawals and new contributions

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michaeljc70
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72t withdrawals and new contributions

Post by michaeljc70 » Wed Nov 06, 2019 7:36 pm

I am an early retiree (age 49). I think I have enough in taxable to carry me around 4-5 years, but not to age 59.5. I am thinking for tax purposes I should start a 72t now which needs to be continued for 5 years to not be hit with penalties (to spread out the tax impact of withdrawals). My question is, if I wind up not needing the money, can I contribute some of it back to a tIRA or Roth even while taking withdrawals? My spouse still works so I would normally qualify even though I have no earned income.

curmudgeon
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Re: 72t withdrawals and new contributions

Post by curmudgeon » Wed Nov 06, 2019 7:42 pm

michaeljc70 wrote:
Wed Nov 06, 2019 7:36 pm
I am an early retiree (age 49). I think I have enough in taxable to carry me around 4-5 years, but not to age 59.5. I am thinking for tax purposes I should start a 72t now which needs to be continued for 5 years to not be hit with penalties (to spread out the tax impact of withdrawals). My question is, if I wind up not needing the money, can I contribute some of it back to a tIRA or Roth even while taking withdrawals? My spouse still works so I would normally qualify even though I have no earned income.
Another option is to do a "Roth conversion ladder", where you start doing Roth conversions now and then can draw the funds out without penalty or restrictions after five years. There are more details to it, so search here for some older threads, but it should be more flexible than 72t given that you have a few years for preparation.

02nz
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Re: 72t withdrawals and new contributions

Post by 02nz » Wed Nov 06, 2019 7:46 pm

Money is fungible. As long as you have enough earned income you can contribute to an IRA. But I agree that with time to plan it’s better to do a Roth conversion ladder.

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michaeljc70
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Re: 72t withdrawals and new contributions

Post by michaeljc70 » Wed Nov 06, 2019 7:49 pm

Roth conversions will give me no money to spend before age 59.5 as I understand it.

I also am trying to limit my income for ACA subsidies. I am only trying to take out income I really need. The issue is with the 72t you cannot just take out if you need it or not. Once you start, you have to do it for 5 years minimum. Maybe it is a bad idea until I have exhausted my taxable fund.

I think my prime Roth conversion years will be ages 65-70 since an ACA subsidy won't come into play.

Please correct me if I am wrong.

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JoMoney
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Re: 72t withdrawals and new contributions

Post by JoMoney » Wed Nov 06, 2019 8:17 pm

You can withdraw your contributions (but not the earnings) from a Roth at any age without penalty.
Amounts converted from a traditional to a Roth can be withdrawn after 5 years (just not the earnings).
The idea of the "roth conversion ladder" is to simply convert the amount you'll need to withdraw 5 years from now every year going forward.
It provides more flexibility than a 72(t) SEPP, but it doesn't kick in where money can start be withdrawn until 5 years after you've started making conversions.

If you do a search for "roth conversion ladder" you can find more detailed explanations.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

rkhusky
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Re: 72t withdrawals and new contributions

Post by rkhusky » Wed Nov 06, 2019 8:23 pm

michaeljc70 wrote:
Wed Nov 06, 2019 7:36 pm
I am thinking for tax purposes I should start a 72t now which needs to be continued for 5 years to not be hit with penalties (to spread out the tax impact of withdrawals).
You have to continue for 5 years or 59.5 years old, whichever is later. If you start when you are 50, you need to continue to age 59.5. If you start when you are 57, you have to continue for five years.

Make sure to calculate how much money you have to lock up in the 72t plan in order to get the income that you need out of it.

marcopolo
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Re: 72t withdrawals and new contributions

Post by marcopolo » Wed Nov 06, 2019 10:23 pm

michaeljc70 wrote:
Wed Nov 06, 2019 7:49 pm
Roth conversions will give me no money to spend before age 59.5 as I understand it.

I also am trying to limit my income for ACA subsidies. I am only trying to take out income I really need. The issue is with the 72t you cannot just take out if you need it or not. Once you start, you have to do it for 5 years minimum. Maybe it is a bad idea until I have exhausted my taxable fund.

I think my prime Roth conversion years will be ages 65-70 since an ACA subsidy won't come into play.

Please correct me if I am wrong.
You can access the converted dollars (not any growth) from your converted Roth after 5 years without any penalties or taxes (aside form what you paid to do the conversion 5yrs ago). If you will need to manage income for ACA subsidies, that is even more reason to do a Roth conversion ladder rather than a 72t withdrawals, you can fine tune the withdrawals to match your head room under the cliff.

The downside is you need money from other sources (taxable accounts, wife's income, etc.) to carry for the 5 years until the Roth conversions have "aged".

To answer your original question. You can make contributions to IRAs while taking money out of IRAs using 72t. But, you have to do it in different accounts. The rules say that you can not add anything, including rollovers, to the account from which you are actively taking 72t distributions, but i don't think there is anything preventing you from setting up a different IRA account and contributing to that, assuming you otherwise qualify (earned income, etc.,).
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Phineas J. Whoopee
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Re: 72t withdrawals and new contributions

Post by Phineas J. Whoopee » Thu Nov 07, 2019 5:02 pm

marcopolo is correct. Contributing to an IRA on which you have established an SEPP plan, under rule 72(t), busts the plan (that's the expression), and subjects you to back taxes, interest, and penalties to the extent you did not pay the otherwise-required 10% excise tax on early withdrawals. After the mandatory period (five years from first distribution or age 59.5, whichever comes later) contributions are again allowed from earned income.

The rule, as clarified by a tax court finding against the taxpayer, assuming you're on the five-year plan isn't just you have to take at least five distributions. You can't take a sixth until after the fifth anniversary of the first or you bust the plan and owe the money.

It is possible to split a traditional IRA into two pieces, and start SEPPs from one and not the other. The allowable annual dollar amount is based solely on the value of the drawn-from one.

The previously-useful website for individuals considering such plans has gone off the web. 72tnet.com is a lesser heir of a mightier sire, but more than nothing with respect to information. Maybe some poster has found a better site.

PJW

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michaeljc70
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Re: 72t withdrawals and new contributions

Post by michaeljc70 » Thu Nov 07, 2019 5:19 pm

Phineas J. Whoopee wrote:
Thu Nov 07, 2019 5:02 pm
marcopolo is correct. Contributing to an IRA on which you have established an SEPP plan, under rule 72(t), busts the plan (that's the expression), and subjects you to back taxes, interest, and penalties to the extent you did not pay the otherwise-required 10% excise tax on early withdrawals. After the mandatory period (five years from first distribution or age 59.5, whichever comes later) contributions are again allowed from earned income.

The rule, as clarified by a tax court finding against the taxpayer, assuming you're on the five-year plan isn't just you have to take at least five distributions. You can't take a sixth until after the fifth anniversary of the first or you bust the plan and owe the money.

It is possible to split a traditional IRA into two pieces, start SEPPs from one and not the other. The allowable dollar amount is based solely on the value of the drawn-from one.

The previously-useful website for individuals considering such plans has gone out of business. 72tnet.com is a lesser heir of a mightier sire, but better than nothing with respect to information. Maybe some poster has found a better site.

PJW
Thanks. I'll check out that website.

Since I have 10 years until 59.5, I think I will need to do a 72t. 70% of my portfolio is in tIRA. I have 10% each in an HSA, Roth and Taxable. If I don't need all the money in a particular year, I suppose I can put it into my Roth. I could probably make it to 59.5 with the taxable account and Roth, but I don't think it makes sense drawing on the Roth now. I expect my income to be highest after I take SS at age 70.

I am not sure a Roth conversion ladder will benefit me. If I do it for 5 years I cannot withdraw from the Roth until age 60ish and would still need to do a 72t for ages ~55-60.

From what I've calculated, every incremental dollar of income costs me ~10% in ACA subsidy on top of the income tax.

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Phineas J. Whoopee
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Re: 72t withdrawals and new contributions

Post by Phineas J. Whoopee » Thu Nov 07, 2019 5:38 pm

You're welcome.

I should have pointed out, not as a recommendation but as an option if it's needed, a second Traditional IRA (which includes Rollover IRAs) can be drawn from early if necessary, but any such distributions are subject to the excise tax, regardless of what's going on with the IRA the SEPP plan applies to.

The SEPP rules are strict, but manageable especially if one studies them carefully well before committing to the plan.

Congress did not give the IRS, its own creation within the Treasury department, discretion to interpret the SEPP legislative conditions. There's no ambiguity to hide behind. Do what Congress said, or do the other thing Congress said which is to pay.

For them what don't like it, our next federal election is slightly less than a year away.

PJW

retiredjg
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Re: 72t withdrawals and new contributions

Post by retiredjg » Thu Nov 07, 2019 5:44 pm

michaeljc70 wrote:
Wed Nov 06, 2019 7:36 pm
I am an early retiree (age 49). I think I have enough in taxable to carry me around 4-5 years, but not to age 59.5. I am thinking for tax purposes I should start a 72t now which needs to be continued for 5 years to not be hit with penalties (to spread out the tax impact of withdrawals). My question is, if I wind up not needing the money, can I contribute some of it back to a tIRA or Roth even while taking withdrawals? My spouse still works so I would normally qualify even though I have no earned income.
As I understand it, it must be continued for 5 years or till age 59.5...whichever is LATER. Do you want to do this for 10 years?

The money for a tIRA or Roth IRA can come from anywhere as long as your spouse's salary is large enough to cover it.

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michaeljc70
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Re: 72t withdrawals and new contributions

Post by michaeljc70 » Thu Nov 07, 2019 6:06 pm

retiredjg wrote:
Thu Nov 07, 2019 5:44 pm
michaeljc70 wrote:
Wed Nov 06, 2019 7:36 pm
I am an early retiree (age 49). I think I have enough in taxable to carry me around 4-5 years, but not to age 59.5. I am thinking for tax purposes I should start a 72t now which needs to be continued for 5 years to not be hit with penalties (to spread out the tax impact of withdrawals). My question is, if I wind up not needing the money, can I contribute some of it back to a tIRA or Roth even while taking withdrawals? My spouse still works so I would normally qualify even though I have no earned income.
As I understand it, it must be continued for 5 years or till age 59.5...whichever is LATER. Do you want to do this for 10 years?

The money for a tIRA or Roth IRA can come from anywhere as long as your spouse's salary is large enough to cover it.
Right. I had erroneously thought it was the lesser of 5 years or 59.5 and not the greater.

I can wait a few years (assuming the market doesn't tank) to start the 72t. But it seems to me taking a smaller amount over 10 years will be better than a bigger amount over 5 years for tax purposes and the ACA subsidy. Given we have to be in the 12% bracket to get the ACA subsidy, maybe it is a wash. I don't see us being under 12% whether I do a 72t or Roth conversions or not. Short of going back to work for a few years (maybe even part time), I don't see a good way around the 72t. I feel if I need to borrow against my house to retire it isn't time to retire.

rkhusky
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Re: 72t withdrawals and new contributions

Post by rkhusky » Thu Nov 07, 2019 10:02 pm

Here is a 72t calculator:
https://www.dinkytown.net/java/72t-calculator.html

It shows that if you start the 72t at age 50, you can pull about $4700/yr for each $100K in the 72t account, for an interest rate of 3% and single life expectancy and the fixed amortization method.

The site below says the Federal Mid Term Rate has dropped significantly and is now about 1.8%, which would lead to a max withdrawal of about $3940/yr for each $100K in the 72t account.
https://www.imagisoft.com/equal/federal ... rates.html

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michaeljc70
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Re: 72t withdrawals and new contributions

Post by michaeljc70 » Thu Nov 07, 2019 10:21 pm

rkhusky wrote:
Thu Nov 07, 2019 10:02 pm
Here is a 72t calculator:
https://www.dinkytown.net/java/72t-calculator.html

It shows that if you start the 72t at age 50, you can pull about $4700/yr for each $100K in the 72t account, for an interest rate of 3% and single life expectancy and the fixed amortization method.

The site below says the Federal Mid Term Rate has dropped significantly and is now about 1.8%, which would lead to a max withdrawal of about $3940/yr for each $100K in the 72t account.
https://www.imagisoft.com/equal/federal ... rates.html
It seems I can pull out $12k-$28k depending on which method I choose. I need about $20k for living expenses...but I have over 5 years of that in my taxable account. So, the question becomes do I exhaust all the taxable account before starting the 72t?

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Taz
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Re: 72t withdrawals and new contributions

Post by Taz » Fri Nov 08, 2019 7:15 am

michaeljc70 wrote:
Thu Nov 07, 2019 10:21 pm
rkhusky wrote:
Thu Nov 07, 2019 10:02 pm
Here is a 72t calculator:
https://www.dinkytown.net/java/72t-calculator.html

It shows that if you start the 72t at age 50, you can pull about $4700/yr for each $100K in the 72t account, for an interest rate of 3% and single life expectancy and the fixed amortization method.

The site below says the Federal Mid Term Rate has dropped significantly and is now about 1.8%, which would lead to a max withdrawal of about $3940/yr for each $100K in the 72t account.
https://www.imagisoft.com/equal/federal ... rates.html
It seems I can pull out $12k-$28k depending on which method I choose. I need about $20k for living expenses...but I have over 5 years of that in my taxable account. So, the question becomes do I exhaust all the taxable account before starting the 72t?
One consideration is whether or not your projected tIRA or 401(k) RMDs will be a problem at 70.5 - even with some Roth conversions. Other considerations are possible lump sum expenses before you hit 59.5 such as weddings or college where the funds in the taxable account would be needed.
The destination matters.

rkhusky
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Re: 72t withdrawals and new contributions

Post by rkhusky » Fri Nov 08, 2019 8:13 am

michaeljc70 wrote:
Thu Nov 07, 2019 10:21 pm
It seems I can pull out $12k-$28k depending on which method I choose. I need about $20k for living expenses...but I have over 5 years of that in my taxable account. So, the question becomes do I exhaust all the taxable account before starting the 72t?
Do you plan to do any Roth conversions between now and 59.5? Or any other reason that you don't want to lock up your whole tIRA in the 72t until 59.5?

If you wait to start the 72t, your can withdraw more for a given amount in the 72t plan. If you wait, interest rates might go up, again allowing you to withdraw more for a given amount in the 72t plan (but interest rates could also drop further). But if you don't mind locking up the whole tIRA, then that doesn't really matter.

I would be inclined to spend down the taxable account first, because tax-advantaged is better than taxable. But I would leave a year's worth of expense in taxable in case of an unexpected expense (or you could use your Roth IRA contributions as your backup).

However, if taxation and ACA subsidies are an issue, you could withdraw from taxable and the 72t simultaneously in order to get the right mix of capital gains and taxable income. You might want to run some tax returns with different options, including Roth conversions, and see what the taxes and ACA subsidies look like.

You can split your tIRA into multiple accounts and just put one of them into the 72t. If you need more income, you could put another one into a 72t later on. You could contribute to the tIRA accounts that are not in the 72t (or to your Roth IRA).

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