Author Topic: Any way to access roth growth (not contributions)  (Read 2146 times)

Tdub

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Any way to access roth growth (not contributions)
« on: July 20, 2017, 05:48:29 PM »
I am starting the FI journey young (early 20s) and am trying to understand how this might impact my roth planning.

I maxed out my roth 2 years when I was under the income limit, and have since switched to backdoor roths (I'm not eligible for traditional IRA deductions).  I will be doing the mega backdoor roth starting this year.

Due to the power of compound interest, I expect the growth in my roth IRAs to ultimately be a much larger percentage of my account than money I had previously contributed/rolled over.  I know contributions can be withdrawn, and conversions can be accessed after 5 years, but what happens if I extract all of that and am just stuck with growth?  Any way to get at that penalty-free?

Hopefully 401k conversions w/ 5-year CD ladder, taxable accounts, and a side income will more than cover me, but I'd like to know my options to access a huge stash of roth earnings.

Financial.Velociraptor

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Re: Any way to access roth growth (not contributions)
« Reply #1 on: July 20, 2017, 07:25:14 PM »
There is a provision in tax code called section 72(t), that allows for "substantially equal periodic payments".  Basically, you can withdraw a variable percentage of your tax advantaged account without penalty so long as you stick to the withdrawals until eligibility age.  The calculation is a little arcane and basically annuitizes your balance.  Right now, you'd be looking at withdrawing around 3.5% a year.  That amount can rise and fall with prevailing interest rates and other factors in a set of messy tables.  Google "IRS section 72(t), or "SEPP withdrawals" for (MUCH!) more.

VoteCthulu

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Re: Any way to access roth growth (not contributions)
« Reply #2 on: July 20, 2017, 10:56:18 PM »
SEPP withdrawals are always taxed, though, so if you SEPP from a ROTH you are essentially giving up the tax advantage. Better to keep it in a traditional IRA if you want to SEPP.

A ROTH is best used moderately by early retirees to take full advantage of the tax advantage laddering from a traditional IRA provides..

MDM

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Re: Any way to access roth growth (not contributions)
« Reply #3 on: July 20, 2017, 11:05:43 PM »
You can always access the growth, but there is an extra 10% tax if you do so before age 59.5.

Have you done projections that indicate you will need to withdraw Roth growth before age 59.5?  I'd guess that due to the much larger 401k contribution limits the earnings on $5500/yr of Roth IRAs would be a relatively small fraction of your portfolio...?

sol

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Re: Any way to access roth growth (not contributions)
« Reply #4 on: July 21, 2017, 12:21:07 AM »
There is a whole list of Roth exemptions, that allow penalty free access to the entire balance.  Medical, college, first time homebuyer, there are others.

Though in many cases, just paying the 10% penalty is a better deal than the taxes you would have lost if you had not invested in the Roth, due to contributions reducing your marginal rate while working (usually your lifetime highest rate) but then coming out at your bottom rate while retired (low, possibly zero after deductions and exemptions, plus the 10% penalty).

LAGuy

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Re: Any way to access roth growth (not contributions)
« Reply #5 on: July 21, 2017, 07:23:54 AM »
There is a whole list of Roth exemptions, that allow penalty free access to the entire balance.  Medical, college, first time homebuyer, there are others.

Though in many cases, just paying the 10% penalty is a better deal than the taxes you would have lost if you had not invested in the Roth, due to contributions reducing your marginal rate while working (usually your lifetime highest rate) but then coming out at your bottom rate while retired (low, possibly zero after deductions and exemptions, plus the 10% penalty).

Roth is after tax money, so contributions have no effect on your marginal tax rate.

Anyways, Roth money (especially growth) is probably the very last bucket of money you should be accessing during your retirement. If you're in need of the growth from your Roth before you're 59 1/2, you've probably gone horribly wrong somewhere in your retirement planning. Unless you're Mitt Romney.

sol

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Re: Any way to access roth growth (not contributions)
« Reply #6 on: July 21, 2017, 08:15:36 AM »
Roth is after tax money, so contributions have no effect on your marginal tax rate.

It is precisely because the Roth is post tax that your marginal rate is so important, because you are paying it on every dollar that goes in.

When choosing between meaNing contributing to a Roth out a traditional deductible IRA, you are basically deciding whether you want to pay the taxes now or later.  I posit that "later" is usually the better choice for people with typically mustachian habits, to avoid paying their high marginal rate now by contributing to a trad IRA instead and then paying less taxes later when that money comes out.

MDM

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Re: Any way to access roth growth (not contributions)
« Reply #7 on: July 21, 2017, 09:40:00 AM »
Because the OP is "not eligible for traditional IRA deductions," any t vs. R IRA discussion for the OP is moot.

josh4trunks

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Re: Any way to access roth growth (not contributions)
« Reply #8 on: July 21, 2017, 02:35:13 PM »
SEPP withdrawals are always taxed, though, so if you SEPP from a ROTH you are essentially giving up the tax advantage. Better to keep it in a traditional IRA if you want to SEPP.

A ROTH is best used moderately by early retirees to take full advantage of the tax advantage laddering from a traditional IRA provides..

Are you sure SEPP withdrawls are always taxed?

I was doing some research on this the other day, and as far as I understand you start a SEPP on a traditional or roth IRA account. Take your yearly withdrawls, avoiding any 10% penalty.
SEPP does not affect whether the money will be taxed when withdrawn, just if the penalty is applied.

What is even more interesting is you can do roth coversions on an IRA in SEPP. This roth IRA will also be in the same SEPP. SEPP withdrawls can be from a combination of either account depending on how much tax you want to pay. Here's the more complicated part I was contimplating... these conversions can then be counted for withdrawals from another roth account 5 years later.

EDIT
Here's a page that supports your statement, but I beleve it is wrong.
http://www.moneycrashers.com/substantially-equal-periodic-payments-sepp-72t-rule/
Here's what I was reading that seems to support doing a SEPP on a Roth IRA (and not mentioning being double taxed), or doing Roth Conversions on a traditional IRA in SEPP.
https://www.irahelp.com/forum-post/14558-sepp72t-and-roth-conversion
https://www.irahelp.com/forum-post/25288-72t-sepp-roth-ira-shortly-after-conversions

EDIT2
From my understanding of the points under Aggregation (linked), withdrawls (including SEPP withdrawls) from a Roth IRA are only taxed if they are earnings.
https://www.irs.gov/publications/p590b/ch02.html#en_US_2016_publink1000231071

The first part of your statement is false, SEPP withdrawls are not always taxed.
The second part of your statement is partially true, you do lose the benefit of Roth once you start touching your earning.
« Last Edit: July 21, 2017, 03:15:45 PM by josh4trunks »