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Author: swampwiz Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75799  
Subject: Early withdrawl of regular & Roth IRA Date: 3/31/2000 7:09 AM
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I am planning for ramping up to an early retirement. Ideally, I would like to begin taking a little money out of my IRA's and gradually take more out as I would get older. However, I want to aat all costs avoid paying penalties. The way that the laws work out may influence my present behavior with respect to contributing to which IRA, etc.

Anyway, let's say that I have three different classifications of IRA money:

- tax-deferred contributions and earnings
- Roth contributions
- Roth earnings

Now, it is my understanding that Roth contributions can be taken out at any time, tax and penalty free, and these distributions would not have any effect whatsoever on anything else. Is this accurate? If that is so, I can take all that money out first before taking out the other types.

So, with that out of the way, I know have two different classifications to consider. As I understand it, I can take distributions (without penalty) from the tax-deferred account in some sort of "equal payments" plan. No problem there. The problem comes with determining how the Roth earnings fit into this. Is the basis for determining my account balance include the Roth earnings? If so, must I take distributions from the Roth account as well in "equal proportions", or can I choose to take money only out of the tax-deferred account? If I am forced to take out Roth money in "equal payments", must I pay any penalty (such as paying taxes, which I believe is part of the penalty)? If I only take from the tax deferred account at first, and I end up running out of money there, can I start taking money out of my Roth without penalty?

I probably hve more questions, that I haven't completely thought about yet. Any commentary would be desired.
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Author: TMFExRO Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20821 of 75799
Subject: Re: Early withdrawl of regular & Roth IRA Date: 3/31/2000 11:27 AM
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<< Anyway, let's say that I have three different classifications of IRA money:

- tax-deferred contributions and earnings
- Roth contributions
- Roth earnings

Now, it is my understanding that Roth contributions can be taken out at any time, tax and penalty free, and these distributions would not have any effect whatsoever on anything else. Is this accurate? If that is so, I can take all that money out first before taking out the other types. >>

You can, but I'm not sure you want to. While this means you don't pay any tax (or penalty), it also means that those assets don't work producing TAX-FREE income any more. It seems to me that the Roth IRA is the LAST thing to tap, not the first.

<< So, with that out of the way, I know have two different classifications to consider. As I understand it, I can take distributions (without penalty) from the tax-deferred account in some sort of "equal payments" plan. No problem there. The problem comes with determining how the Roth earnings fit into this. >>

Not at all. When determining the payments under the SEPP provision you only consider the traditional IRA assets.

TMF ExRO
Phil Marti

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20837 of 75799
Subject: Re: Early withdrawl of regular & Roth IRA Date: 3/31/2000 4:30 PM
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Swampwiz wrote:

<< So, with that out of the way, I know have two different classifications to consider. As I understand it, I can take distributions (without penalty) from the tax-deferred account in some sort of "equal payments" plan. No problem there. The problem comes with determining how the Roth earnings fit into this. >>

To which Phil replied:

Not at all. When determining the payments under the SEPP provision you only consider the traditional IRA assets.>>

And Pixy adds:

Actually, SEPP can apply to a Roth as well as a tradtional IRA. The only difference is in a Roth SEPPs don't come into play until all the contributions have been used and all that's left is earnings. To take earnings when under age 59 1/2, the only way to avoid the penalty is by using SEPP. And you will pay taxes on that withdrawal. If you can avoid touching those earnings until age 59 1/2, they come out tax-free (assuming the account has been open for five tax-years). Thus, I would use any traditional IRA first because those will be taxed anyway.

Regards..Pixy



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Author: TMFExRO Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20847 of 75799
Subject: Re: Early withdrawl of regular & Roth IRA Date: 3/31/2000 9:16 PM
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<< Actually, SEPP can apply to a Roth as well as a tradtional IRA. The only difference is in a Roth SEPPs don't come into play until all the contributions have been used and all that's left is earnings. To take earnings when under age 59 1/2, the only way to avoid the penalty is by using SEPP. And you will pay taxes on that withdrawal. If you can avoid touching those earnings until age 59 1/2, they come out tax-free (assuming the account has been open for five tax-years). Thus, I would use any traditional IRA first because those will be taxed anyway. >>

Thanks for the clarification, Pixy. You answered a diffferent question than what I read, so I want to make sure that I'm right with what I think.

Let's say the original poster wants to begin SEPPing his traditional IRA. Does he include the value of his Roth IRA when calculating the SEPPs from the traditional IRA?

The point I was trying to make was that you only consider traditional IRA money when doing a traditional IRA SEPP. I didn't add that you would also consider only Roth money when calculating a Roth SEPP. The big question: am I right?

TMF ExRO

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20859 of 75799
Subject: Re: Early withdrawl of regular & Roth IRA Date: 4/1/2000 8:12 AM
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Phil asks:

<<Let's say the original poster wants to begin SEPPing his traditional IRA. Does he include the value of his Roth IRA when calculating the SEPPs from the traditional IRA?

The point I was trying to make was that you only consider traditional IRA money when doing a traditional IRA SEPP. I didn't add that you would also consider only Roth money when calculating a Roth SEPP. The big question: am I right?>>


In a broad sense, yes, you are right. SEPP are IRA-specific. From multiple IRA you may pick one and calculate the SEPP due from just that one. Or you could pick two, and do the calculations for those two while using a different SEPP method for both. So, I could have two traditional IRA and one Roth. In theory, I could select one traditional and use an annuity method for that one, select the other traditional using the amorization method, and select the Roth (which only has earnings) using the life expectancy method. I could do so all at once or in different years. All that's required is once I begin using SEPP in one or more IRA, I use the same method for that IRA or IRAs for the period required based on my beginning date(s). Aggregation of IRA is not required, only the IRA and method selection.

Regards..Pixy


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