Author Topic: using Roth pipeline AND 72(t)  (Read 4464 times)

sol

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using Roth pipeline AND 72(t)
« on: November 21, 2014, 01:13:48 AM »
Skyrefuge mentioned that the 72(t) withdrawal rat is up to like 3.5% for SEPPs now, and that these withdrawals can be done in conjunction with Roth rollovers:

I agree that in some (many?) cases, the Roth Pipeline has advantages over SEPP, but it can play out both ways, and yeah, of course using the two together is also possible.

How would that work out exactly?  If you set up 72(t) SEPPs, isn't the entire balance that you base the SEPPs on then off limits to you?  Is it possible to subsequently do a Roth IRA conversion on money that you're currently receiving that 3.5% SEPP from?  That seems like something the IRS would hate.

If you can, then surely it would reduce your balance and thus the amount of your SEPP.

If you can't, then 72(t) still isn't very attractive because you have to make an up-front decision about how much you'll be able to spend every year until you're 59.5 years old, which is a loooong time for an early retiree.  You would lose all flexibility for variable expenses like a new home, or college costs, or ramping up your spending if the market goes through the roof.  Lame.


Schaefer Light

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Re: using Roth pipeline AND 72(t)
« Reply #1 on: November 21, 2014, 06:24:50 AM »
I thought you could adjust your 72(t) withdrawal rate after 5 years.  I could be wrong, though.

brooklynguy

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Re: using Roth pipeline AND 72(t)
« Reply #2 on: November 21, 2014, 07:35:09 AM »
The Mad Fientist's guest post on jlcollinsnh about early withdrawal strategies, and the post by Lucas in the comments section, deal with some of these issues.

http://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/

sol

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Re: using Roth pipeline AND 72(t)
« Reply #3 on: November 21, 2014, 08:56:15 AM »
I thought you could adjust your 72(t) withdrawal rate after 5 years.  I could be wrong, though.

You can adjust them after 5 years OR age 59.5, whichever is later.  So that's 59.5, unless you retire after ate 54.5.

The Mad Fientist's guest post on jlcollinsnh about early withdrawal strategies, and the post by Lucas in the comments section, deal with some of these issues.

http://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/

Can you provide any more direction than that?  I want to know if you can do a Roth conversion after setting up 72(t) payments from your 401k, and though there is a lot of good information in that post's comments section, this one does not appear to be addressed there.

brooklynguy

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Re: using Roth pipeline AND 72(t)
« Reply #4 on: November 21, 2014, 09:04:41 AM »
Can you provide any more direction than that?  I want to know if you can do a Roth conversion after setting up 72(t) payments from your 401k, and though there is a lot of good information in that post's comments section, this one does not appear to be addressed there.

Unfortunately I (like you, I suspect) haven't done much research and don't know much about the 72(t) route because I've zeroed in on the Roth conversion pipeline as my favored strategy, so it would be the blind leading the blind.  I am also interested in seeing any replies from the more informed folks on the board, though.

FrugalSpendthrift

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Re: using Roth pipeline AND 72(t)
« Reply #5 on: November 21, 2014, 09:09:50 AM »
I think you need to separate your IRA's, setup a SEPP withdrawal on one of them, and leave some money in another IRA that isn't part of the SEPP.

skyrefuge

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Re: using Roth pipeline AND 72(t)
« Reply #6 on: November 21, 2014, 09:39:53 AM »
I agree that in some (many?) cases, the Roth Pipeline has advantages over SEPP, but it can play out both ways, and yeah, of course using the two together is also possible.

How would that work out exactly?  If you set up 72(t) SEPPs, isn't the entire balance that you base the SEPPs on then off limits to you?  Is it possible to subsequently do a Roth IRA conversion on money that you're currently receiving that 3.5% SEPP from?  That seems like something the IRS would hate.

I'm actually surprised that I made that statement ("of course using the two together is also possible"), since I didn't actually know that was true, and I usually don't shoot off my mouth like that. But, now I've looked it up, and it is in fact possible! Phew!

However, it seems to be one of those things that the IRS has not given completely-definitive guidance on. They are definitive that it's ok to do a Roth IRA conversion while doing SEPP. But their guidance assumes that you're rolling over the *entire* IRA, and then they require your SEPP withdrawals to continue from the Roth IRA. If you only do a partial rollover, it's less-clear where your SEPP withdrawal is supposed to come from. The Roth? The Traditional? A pro-rated combination of both?

Here is the legal source (jump to "Q-12"): http://www.law.cornell.edu/cfr/text/26/1.408A-4
Here is a blog from a retirement adviser describing the issues more clearly: http://www.retirementincomevisions.com/retirement-income-visions/2010/07/considering-a-partial-72t-roth-ira-conversion-tread-lightly.html

If you can't, then 72(t) still isn't very attractive because you have to make an up-front decision about how much you'll be able to spend every year until you're 59.5 years old, which is a loooong time for an early retiree.  You would lose all flexibility for variable expenses like a new home, or college costs, or ramping up your spending if the market goes through the roof.  Lame.

Given that simultaneous SEPP and Roth conversion is allowed, you aren't giving up *all* flexibility by using SEPP, though yes, it does seem like Roth conversion allows significantly more flexibility. However, due to the 5-year seasoning period for Roth conversions, it's not like you have amazing flexibility there either. For example, should you convert $50k per year, paying more taxes than necessary each year, in order to have a significant buffer sitting in your Roth account 10 years later for a potential house purchase? Or just do $20k per year, saving on taxes, since who knows if you'll be buying a house 10 years from now?

Anyway, thanks for filtering this topic up. It's at least confirmed for me that there hasn't been enough thought given to 72(t) in our community (even by myself!), and that our ignorance is not because we've already done a complete analysis and discarded the idea, since we clearly haven't done a complete analysis. At the moment SEPP doesn't seem like too attractive of an idea, but hey, if we at least keep the idea out there as interest rates change, maybe some of the more-creative wizards amongst us will see new ways to take advantage of it.

bacchi

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Re: using Roth pipeline AND 72(t)
« Reply #7 on: November 21, 2014, 11:26:22 AM »
The RMD method adjusts at the end of each year. The other 2 SEPP methods don't alter payments until the account runs out or a withdrawal change is done (you don't have to be 59.5 to use the below exception).

Quote from: irs
Can I change from one method to another in calculating substantially equal periodic payments?

Yes. Rev. Rul. 2002-62 permits a one-time change from either the amortization method or the annuitization method to the required minimum distribution method.

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Substantially-Equal-Periodic-Payments#8

This doesn't answer the question of how to do a SEPP and conversion simultaneously. FrugalSpendThrift probably got it -- set up 2 or more tIRAs and roll over one and SEPP the other.
« Last Edit: November 21, 2014, 11:30:06 AM by bacchi »

Schaefer Light

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Re: using Roth pipeline AND 72(t)
« Reply #8 on: November 21, 2014, 12:15:24 PM »
I thought you could adjust your 72(t) withdrawal rate after 5 years.  I could be wrong, though.

You can adjust them after 5 years OR age 59.5, whichever is later.  So that's 59.5, unless you retire after ate 54.5.
Ahh.  That sucks.  It ought to be whichever is sooner.  These retirement rules just weren't written for early retirees.  Thanks for the clarification.

brooklynguy

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Re: using Roth pipeline AND 72(t)
« Reply #9 on: November 21, 2014, 01:30:50 PM »
Ahh.  That sucks.  It ought to be whichever is sooner.  These retirement rules just weren't written for early retirees.  Thanks for the clarification.

For the most part, all of these tax rules are actually so conducive to early retirement that you could be forgiven for thinking they were written for the express purpose of encouraging it.