If a couple in their mid-50s is unemployed, can they set up an IRA withdrawal using rule 72(t), claim it as income and then re-invest it into a Roth IRA?
If a couple in their mid-50s is unemployed, can they set up an IRA withdrawal using rule 72(t), claim it as income and then re-invest it into a Roth IRA? Also, would this income be counted for using it as a basis for the Affordable Care Act to get health insurance and tax credit for the insurance?
Good news, there is a way to accomplish your goal. Sort of bad news, using rule 72(t) won't help and yes, withdrawals from an IRA will impact ACA tax credit eligibility. Although the strategy you've outlined won't work, you can accomplish the same goal through converting a portion of the traditional IRA to a ROTH IRA. This is done by rolling over of a portion of your IRA balance into a ROTH IRA. Even better, while contributions are limited to $7,000 per year for each of you, conversions are unlimited. Although you can do this on your own, I recommend working with a fee-only and fiduciary financial advisor for the following reasons.
Making a mistake here will cost you heavily, both in taxes and in penalties. And unfortunately, if the mistake violates the rules for IRAs, the IRS could deem you to have withdrawn 100% of the IRA balance this year. Assuming the balance is $1 million - you would owe taxes on a million dollars of income plus an additional $100,000 due to the 10% penalty.
The amount you should convert is a pretty complicated analysis of tax law, your current tax situation, your expected tax liability in retirement, your expected Required Minimum Distributions at age 70 1/2, how the tax liability from the conversions will impact your budget, and the impact the rollover amount could have on other benefits (like an ACA tax credit).
If you do an indirect rollover where the custodian sends you a check, it creates a bunch of potential problems. One of the most annoying is you'll only receive 80% of the money you want to convert. The other 20% will be sent to the IRS as a sort of tax payment collateral. The sucky thing, though, is you still need to come up with 100% of the rollover amount to put into the ROTH IRA. To get the other 20% back you have to wait until next April when you file your tax return. All this goes away with a direct rollover.