"Tad Borek" <borekfm[at]pacbell.net> wrote
- quote -

snip to get to answer

- quote -

This says that, when the earnings portion of one's Roth IRA is withdrawn
using SEPP yada (which is not a qualified distribution, and is also known as
taking distributions under Rule 72(t)), it is taxable as ordinary income.

That's enough to deter me. Thanks for the citation.

Elle wrote:
- quote -

Elle,
Not quite...72t addresses whether you are exempted from the 10% penalty
on early withdrawals, and comes up only after you've taken out more
money than you've contributed. Rather than trying to paraphrase the
rules on Roth distributions, here's a link to the relevant section of
IRS Publication 590 which does an OK job of explaining it:
http://www.irs.gov/publications/p590/ch02.html#d0e9820

I think of a Roth as a truly last-resort source of funds for someone as
young as you are. Once you take money out you'll give up future years of
tax-free earnings-on-earnings, to the extent of the withdrawn dollars.
For you that means 25+ years of compounding. It seems this would only
make sense if this is one very fat Roth and you have literally no other
source of funds.

I'll acknowledge Skip's point that the Roth's tax-free nature might get
yanked. I don't think that's likely though, I think the most we'd see is
something back-door...like, a Roth distribution might get factored into
the tax levvied on your OTHER income, or be factored into deduction
phase-outs or something like that. Or, Roths might get locked up so you
can't contribute more to them. I don't think we'll see the rules of the
game simply changed, retroactively, and so my starting point is to leave
Roths alone, and get as much as possible into them.

-Tad

"HW "Skip" Weldon" <skip5700removethis[at]hotmail.com> wrote
- quote -

I forgot (and maybe you did also) that contributions to a Roth (the
principal) may be withdrawn at any time without having to pay taxes or a
penalty.

I agree that withdrawing the earnings in a Roth IRA prior to age 59.5 etc.
(and absent 72(t)?) subjects the owner to, at a minimum, paying taxes on
those earnings.

I looked up the exact 72(t) words in the IRS Code yesterday. They're not
long and difficult, but nor do they clarify whether one would have to pay
taxes on the earnings of a Roth IRA from which one is withdrawing under
SEPP.

But like I suggest, maybe that's an academic point.

- quote -

I think my situation varies a bit from the norm, since my portfolio is
designed to pay me income (that keeps up with inflation) without cashing in
principal. The typical retirement portfolio seems to be designed with the
intent of drawing down on one's principal.

The choice to me is to live more cheaply than I think may be justified, or
live a bit more extravagantly (roughly 25% more income with the SEPP rule
72(t) distributions). The fact that I won't be able to ski and play as much
when I'm 65 years old is also a factor, to me.

Of course, nothing is certain.

Either way, I haven't run the numbers recently on how much of my Roth IRA is
contributions and how much is earnings. My guesstimate is that the better
plan (maybe just to spare me the paperwork and figuring out whether and if I
need to divide this up between the Roth and traditional IRAs!) is to
withdraw contributions in an amount equal to the dividend/interest income
I'm currently making from my Roth IRA's principal. The Roth (and
Traditional) IRAs' principals' would continue to grow but not as rapidly.
Yes, that's a concern.

Either way, I agree counseling prudence to anyone suggesting such a plan is
appropriate.

On Tue, 18 Oct 2005 04:00:49 -0500, "Elle"
<elle_navorski[at]nospam.earthlink.net> wrote:


- quote -

Most people think of Roth IRA distributions as tax-free. But
technically, distributions are only tax-free if they qualify (5 years,
age 59.5) and if the rules don't change. Until then, growth is
tax-deferred.

Also, few advisors would agree with early distributions from
retirement accounts without seriously questioning the reason. Unless
questioners volunteer complete info on themselves, I would expect
prudent advisors to be wary/have lots of questions. And even then,
absent life or death matters, I would expect serious doubt about the
wisdom of proceeding.


-HW "Skip" Weldon
Columbia, SC

"Tad Borek" <borekfm[at]pacbell.net> wrote
snip
- quote -

Over 75% of my IRA is in a Roth. So it's not tax-deferred growth for the
Roth. Instead, it's no taxes at all, should I follow the usual rules for
withdrawal starting sometime after age 59.5.

My understanding is I wouldn't pay any taxes on withdrawals from the Roth
under rule 72(t), because, for one thing, I've already paid taxes on my Roth
contributions. Have you heard otherwise?

Let me leave the other questions until this point is resolved. I agree it's
a big one.

(I have done some IRA conversions--traditional to Roth--over the years and
am aware I should check on, say, five-year time limits, before I can touch
the converted funds.)

Elle wrote:
- quote -

I assume you've considered the basic question of whether you're at the
point where you are comfortable tapping into savings at all, based on
your current net worth, anticipated future income needs, etc etc. If so,
have you weighed the downside of using the IRA as the source of funds?
You'll give up tax-deferred growth of reinvested dividends & interest,
because you'll be taking them out and (assumedly) paying tax on them, at
ordinary-income rates. Usually that makes the IRA the last-choice source
of funds.

If there's money available in taxable accounts (brokerage, savings,
etc), your depletion scenarios probably look better if you instead draw
an equivalent amount from them, while leaving the IRA money alone.
Especially so early...you have what, 25+ years before RMDs kick in? Over
that kind of time period there would be a substantial difference in your
bottom-line net worth. For a 40s client I'm more likely to be figuring
out ways to essentially shift dollars from taxable accounts INTO IRAs
rather than the other way around.

An exception is if you somehow ended up with a significant percentage of
your investment assets in IRAs, to the point where you don't feel
comfortable drawing anything at all from taxable accounts. If that's
your current position then this is more a choice of accumulating vs.
spending rather than "where should I get the money?"

-Tad

"bo peep" <cowartmisc1[at]yahoo.com> wrote
- quote -

I realize there are exact upper and lower limits for how much may be
withdrawn each year.

As for having enough to sustain withdrawals: From my reading that's only a
concern if one does not use the "Required Minimum Distribution Method" for
computing annual withdrawals. (This is the first of the three methods Rule
72(t) allows listed at the various calculator sites.) Even then, if you'll
read these web sites with 72(t) calculators, the IRS allows a one-time
switching to this first method from the other two, precisely to prevent what
you're proposing.

Thanks for your comments.

<<Can you re-phrase this? I don't know what you mean>
I was just pointing out that you are required to have enough money in
your account to sustain the withdrawls until you reach the required age
- you can't just say that you will withdraw X dollars per year because
that is how much you want.

Example - you have $500k in your account, you choose a "reasonable"
interest rate of 4.5%, and your age is 45 years. Your maximum
distribution allowed is therefore $27,481 per year per the calculator.

John Cowart

"bo peep" <cowartmisc1[at]yahoo.com> wrote
- quote -

Can you re-phrase this? I don't know what you mean.

I understand that, once one starts withdrawing under Rule 72(t), one must
continue for at least five years or until age 59.5, whichever is longer.

- quote -

Yes, this particular calculator appears in numerous places on the internet.

Note that the IRS does not allow unlimited 72(t) withdrawls. You can
calculate your maximum allowed withdrawl at
http://www.cbiz.com/page.asp?pid=4726

John Cowart

Can anyone see a _financial_ disadvantage to drawing down from one's IRA
using Rule 72(t) while one is in one's 40s (early retirement or whatever)?
Right now, I can't see a good financial/numerical reason for not,
essentially, enjoying the income from my IRA right now, as long it's penalty
free, which under Rule 72(t) it is.

I am currently not cashing in principal but living off dividends and
interest. I do not expect to have to cash in principal until my 70s, when
medical bills may become large. I have factored inflation into my planning.
I'm on top of when I'll need, say, major things like, a new roof and a new
car, or an extended visit with elderly family.

I live within my means with some room to spare but would like to take, say,
a few more ski trips a year.

I am not in any rush; I have a reserve of cash for "special" things like ski
trips and may just draw from this reserve for awhile. So for the moment,
the 72(t) is just a kind of "emergency use" option for me.

Using 72(t), I'd likely move the IRA mostly to dividend producing stocks (or
a few dividend oriented ETFs on which I have my eye*) and essentially take
out the dividends each year (assuming they meet the minimum blah blah
requirements for 72(t) withdrawals).

Also, I am studying sites that discuss 72(t) but welcome any special,
personal anecdote/experience caveats on using it.