72(t)/SEPP changes vs Roth conversions in early retirement

[CEM]

I recently heard that the 72(t) calculations for SEPP are not longer limited to 120% of the Federal mid-term rates, but can go up to 5% (more info here https://www.irs.gov/pub/irs-drop/n-22-06.pdf).  Would there still be an advantage to Roth conversions if the SEPP calculation ended up being around the Roth conversion amount?

Is there anything to consider from an optimization standpoint (traditional IRA amount and age for instance to determine which is better).

Thank you.

[gocurrycracker]

Yeah, 5% now, which can allow for larger withdrawals.

There is no limit whatsoever on Roth conversions. You can make those as big as you want.
The downside is you have to wait 4 years and a day before you can use the Roth conversion for regular spending without penalty.

If you don't have the funds to get you to the point where the first Roth conversion has seasoned (from taxable account, Roth contributions, cash), then the SEPP wins by default. No choice, you need money.
If you do, then Roth conversions will be more flexible AND you get some additional benefit from the conversion growth being tax free.

re: flexibility
Once you establish an SEPP, you have to make those annual withdrawals for 5 years or until you reach age 59.5, whichever is LONGER.

If you are age 54.5 maybe that is fine. You can predict with some confidence what your other income will look like for a short time like 5 years.

If you are age 34.5, 25 years is a long time to commit to annual taxable withdrawals. Will you want to get another job after awhile? Will a hobby start making income? Will you inherit an IRA with their mandatory distributions?



In short - age is a factor, access to other funds is a factor, Roth conversion will generally be most flexible.

[CEM]

Thank you for the reply.  I suspected as much, but appreciate hearing it from you.

[Evad]

I recently heard that the 72(t) calculations for SEPP are not longer limited to 120% of the Federal mid-term rates, but can go up to 5% (more info here https://www.irs.gov/pub/irs-drop/n-22-06.pdf).  Would there still be an advantage to Roth conversions if the SEPP calculation ended up being around the Roth conversion amount?

Is there anything to consider from an optimization standpoint (traditional IRA amount and age for instance to determine which is better).

Thank you.

Glad you posted this. I just signed up for this forum because I wanted 72T info and boom the first topic I see when I log on is regarding 72T.

 I'm 53 house rich and cash poor with some retal income.  With 6.5 years until I can access a roll over IRA without penalty. This might be a decent choice to put me in a "work optional" situation.

[gocurrycracker]

Glad you posted this. I just signed up for this forum because I wanted 72T info and boom the first topic I see when I log on is regarding 72T.

 I'm 53 house rich and cash poor with some retal income.  With 6.5 years until I can access a roll over IRA without penalty. This might be a decent choice to put me in a "work optional" situation.

Yes, this is pretty much the ideal situation for signing up for the SEPP - ~5 years to age 59.5, most funds in IRA

[Evad]

Glad you posted this. I just signed up for this forum because I wanted 72T info and boom the first topic I see when I log on is regarding 72T.

 I'm 53 house rich and cash poor with some retal income.  With 6.5 years until I can access a roll over IRA without penalty. This might be a decent choice to put me in a "work optional" situation.

Yes, this is pretty much the ideal situation for signing up for the SEPP - ~5 years to age 59.5, most funds in IRA

 The only other way that I can think of to get access to cash would be to sell the house and downsize. I could buy a less expensive home and use the extra cash as a bridge to 59 1/2. My CPA said don't do a SEPP says i'm too young but then again he also still grinding in his 70's

 I am not ready to sell the home and leave so cal yet so one crazy Idea would to take a cash out refi. Use the funds to live off for 5-6 years until I sell it. Would that be nutts ? I mean I know that I am paying a penalty in interest to get at my equity early but It would be a write off because I do itemize. Sort of like doing my own short term reverse mortage. It is not a smart money move but even a downsize in my area would be a big property tax increase as I have been in my home for 23 years. The other upside would be that my IRA would have another 5-6 years un touched.

Am I crazy to pay 3.5 % penalty to take home equity early if it improves my life ?   

[gocurrycracker]

Borrowing isn't crazy. I'm doing it too.
https://www.gocurrycracker.com/sweet-sweet-debt/

3.5% interest may work out to be less than the 10% penalty you would pay on early IRA withdrawals without the SEPP

You can't deduct the interest on a cash-out refinance unless the funds are used to make capital improvements to the property. Maybe if you borrow on one of your rentals...

If you are staying in California you might be able to keep your current low tax base on a new property if you wait a couple years
https://www.boe.ca.gov/proptaxes/prop60-90_55over.htm

Another option - get a new CPA

[Evad]

Borrowing isn't crazy. I'm doing it too.
https://www.gocurrycracker.com/sweet-sweet-debt/

3.5% interest may work out to be less than the 10% penalty you would pay on early IRA withdrawals without the SEPP

You can't deduct the interest on a cash-out refinance unless the funds are used to make capital improvements to the property. Maybe if you borrow on one of your rentals...

If you are staying in California you might be able to keep your current low tax base on a new property if you wait a couple years
https://www.boe.ca.gov/proptaxes/prop60-90_55over.htm

Another option - get a new CPA

Thanks

 The CPA is being replaced. I was under the impression that a refi would be duductable as long as it was a mortgage and not a HELOC ?

I have some research to do. I have been out of that game for a while,  I have been 100% debt free for over 10 years.

Moving the tax at 55 is an option. I know some props have changed here in California. It used to be one time over 55 if the counties reciprocate but now things have changed.

I did read your sweet sweet debt post and I sent it to a few friends as well.

Thank for the replies.

[gocurrycracker]

I was under the impression that a refi would be duductable as long as it was a mortgage and not a HELOC ?

https://www.irs.gov/publications/p936#en_US_2021_publink1000229992