large ira conversion-substantailly equal periodic payments started

[Guest jconley]

My client is 55 years old. He has a $900,000 traditional IRA and is thinking of converting it to a Roth IRA. He has been taking periodic distributions for the last ten years of about 33,000/year.

If he converts to a Roth, will the $33,000 distribution in the year of conversion count toward the $100,000 AGI test?

Can he spread the conversion out over three or four years to take advantage of lower marginal rates without incurring the 10% penalty for modifying the distribution series, and will the 33,000 periodic payment in those years count toward the 100,000 agi test? Thanks for any guidance.

[BPickerCPA]

If you convert an IRA that you are taking SEPP from, you must continue taking the payments from the Roth IRA after the conversion. If you take the $33k from the traditional IRA BEFORE the conversion, it will count towards the $100K. I can see no reason why you cannot convert and then take the $33K from the Roth, to avoid this problem.

However if you convert an IRA that you're taking SEPP from, you must convert the entire IRA. So no piecemeal conversions of that account.

If you have other IRAs, you can convert those as you wish, subject to the income limitation.

[Guest jconley]

Thank you Mr. Picker. My concern was that the sepp would be classified as a minimum required distribution. I floundered through the statute and was pretty sure the sepp was outside the MRD definition, but needed to be sure.

What are the consequences of not converting a sepp in one swoop? Would the incremental conversions still be good conversions, the only consequence being that the penalty tax must be recaptured? Would the future SEPP distributions be deemed to come out of the Roth IRA and not affect the AGI calculation in the future conversion years? If the answers are yes, might it be preferential to trade lower marginal rates for the penalty tax, depending upon the amount of the recapture?

Agian, thanks for your input.

JohnC

[BPickerCPA]

I suspect that converting only part of the account would negate the SEPP. If you already have ten years of payments, I doubt the penalty would be worth. But you'd have to run the numbers to know.