Roth and Substantially Equal Payments

[Guest LB]

Can a person who is currently taking substantially equal payments from an IRA convert that IRA to a Roth? (the person is months shy of 59 1/2, at which time his 401(k) and other assets/income will cover his necessary living expenses for a good 20 years).

[BPickerCPA]

The answer is yes, provided that the entire account is transferred, and the subtantially equal payments continue after conversion.

What will happen is that the substantially equal payments eliminates the 10% penalty on withdrawal of converted amounts, but if the four year spread is utilized to report income, the withdrawals will cause acceleration of that reporting.

Be careful, because if you blow the plan at any time prior to age 59½ OR five years, you pay penalty on ALL withdrawals previously taken.

[Guest seth]

As an example..If I have $2,000,000 in my IRA..and I very little current income and am 55 years old...Can I convert $1,000,000 into a Roth (reporting $250,000 in each of the next four years) and then begin to take the required 5 years of "substantially equal" payments starting in 1999 from the Roth? I understand that those payments will accelerate the deferral of the $250,000 p.a. (i.e. if the payments are $80,000 each year...I will then have 330,000 of income in 1999, 330,000 in 2000 etc.) However...there should not be any 10% penalty doing this? Since I will only be distributing contributions during the five years there should also be no tax on earnings because none will have been distributed. This will then help pay for the taxes on the rollover of the $1,000,000 that I could not ordinarily afford. The alternative (and I would have to crunch the numbers) would be to do the same thing except take the "substantially equal payments" from my traditional IRA (which probably makes more sense....but I would just like to know what my options are!!!) Thanks