Convert Ira To Roth Ira - At Death
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Bob Smith and Mary Smith Presented by: Mr. John Q. Smith, Jr., CLU For Evaluation Purposes Only 10735 David Taylor Drive Suite 350 Charlotte, North Carolina 28262 Email: [email protected]
Important Notes These pages depict certain wealth preservation strategies concerning possible methods for taking distributions from your qualified retirement plan. For purposes of this analysis, several of your qualified retirement plans may be aggregated and shown as one single plan. This report provides only broad, general guidelines, which may be helpful in shaping your thinking about and discussing your wealth preservation needs with your professional advisors. This report provides estimates based on our general understanding of current tax laws. Each scenario shown illustrates your current situation or an alternative strategy and its possible effects on the financial situation you provided. Inclusion of one or more of these strategies does not constitute a recommendation of that strategy over any other strategy. Calculations contained in this analysis are estimates only based on the information you provided, such as the value of your assets today, and the rate at which the assets appreciate. The actual values, rates of growth, and tax rates may be significantly different from those illustrated. These assumptions are only a “best guess.” No guarantee can be made regarding values, as all rates are the hypothetical rates you provided. These computations are not a guarantee of future performance of any asset, including insurance or other financial products. No legal or accounting advice is being rendered either by this report or through any other oral or written communications. Nothing contained in this report is intended to be used on any tax form or to support any tax deduction. Unless indicated, the tax aspect of the federal Generation-Skipping Transfer Tax (GSTT) is not reflected. The GSTT is similar to an additional level of estate tax on certain transfers to grandchildren, or individuals two or more generations removed from the transferor. State laws vary regarding the distribution of property, and individual circumstances are unique and subject to change. You should discuss all strategies, transfers, and assumptions with your legal and tax advisors. To implement a strategy, it may be necessary to restructure the ownership of property, or change designated beneficiaries before specific will or trust provisions, prepared by the client’s counsel, become effective. The transfer of a life insurance policy may not result in its removal from the estate of the prior owner for three years. Strategies may be proposed to support the purchase of various products such as insurance and other financial products. When this occurs, additional information about the specific product (including a prospectus, if required, or an insurer provided policy illustration) will be provided for your review. IMPORTANT: The projections or other information generated by this investment analysis tool (Qualified Plan Distribution Analysis) regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, this notice is to inform you that any U. S. federal tax advice contained in this presentation is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this presentation.
This presentation is not a financial plan. Presented by: Mr. John Q. Smith, Jr., CLU For Evaluation Purposes Only
Version 2.0.0 c. 6.0.0.0 August 14, 2009 2 of 17
Converting Your IRA to a Roth IRA Should you pay taxes now so that retirement distributions will be tax-free? for
Bob Smith and
Mary Smith
This presentation is not a financial plan. Presented by: Mr. John Q. Smith, Jr., CLU For Evaluation Purposes Only
August 14, 2009 3 of 17
Understanding IRAs, Roth IRAs, Conversions Key Concepts & Rules Traditional IRAs • Contributions are limited to $5,000 for 2009 ($6,000 if 50 or over) and are generally tax deductible. • If you are covered by a retirement plan at work and your modified adjusted gross income (MAGI) is $89,000 - $109,000 in 2009 (married, filing jointly), deductibility phases out and is eliminated thereafter. If your spouse is covered by a retirement plan at work, but you are not, the phase out is $166,000 - $176,000 for married, filing joint. (The phase out is $55,000 - $65,000 for single taxpayers.) • Funds grow tax-deferred, but are taxed as ordinary income upon distribution. • Minimum distributions are required annually beginning on the Required Beginning Date (RBD1), which is based on your age 70½. • Distributions taken prior to age 59½ are subject to a 10% early distribution penalty tax, with certain exceptions. • Distributions after your death (or your spouse's death) are taxed as ordinary income to the beneficiary as distributions are received. • At your death (or your spouse's death), the entire account value is includible in the gross estate for federal estate tax purposes, and may be subject to estate taxes.
Roth IRAs • Contributions are limited to $5,000 for 2009 ($6,000 if 50 or over) and are NOT income tax deductible. • Ability to contribute is phased out if you earn $166,000-$176,000 for married, filing jointly in 2009, and eliminated thereafter. The phase out is $105,000 - $120,000 for single taxpayers. • Funds grow tax deferred and are generally not taxable upon withdrawal. • No minimum distributions are required from Roth IRAs, during your (or your spouse's) lifetime. • Withdrawals of contributions to Roth IRAs, prior to age 59½, are not subject to the 10% early withdrawal penalty tax. Withdrawals of earnings within 5 years of establishing a Roth IRA are taxed as ordinary income. Earnings taken prior to age 59½ are taxed as ordinary income, and may be subject to a 10% early withdrawal penalty tax, with certain exceptions. • Distributions after your death are received by the beneficiary income-tax free. • At your death (or your spouse's death), the entire account value is includible in the gross estate for federal estate tax purposes, and may be subject to estate taxes.
Conversions (from a Traditional IRA to a Roth IRA) • A Conversion is a taxable event. The entire (or partial) amount of the Traditional IRA (less any non-deductible contributions) is taxable as ordinary income upon conversion (or distribution). The conversion amount may move you into a higher marginal income tax bracket. Due to a special provision in the tax law, for amounts converted in 2010, half the conversion can be reported as taxable income in 2011 and the other half is reported in 2012. • Prior to 2010, if your MAGI exceeds $100,000, you are not eligible to convert a Traditional IRA to a Roth IRA. After 2009, the income limit is eliminated. • If you pay the taxes out of the Traditional IRA, it will reduce the benefits of the conversion to a Roth IRA, and if you are under age 59½, the amount used to pay income taxes will be subject to the 10% early distribution penalty tax. • Withdrawals of converted amounts within 5 years of each separate conversion to Roth IRAs may be subject to a 10% early distribution penalty tax and withdrawals of earnings may be subject to a 10% early distribution penalty tax and/or taxed as ordinary income. • Distributions from a Traditional IRA must be deposited into a Roth IRA within 60 days (not applicable for trustee-to-trustee transfers). • You do not have to convert your entire Traditional IRA. A partial conversion is allowed, but you must follow the same rules as any other distribution regarding nondeductible contributions. 1
The RBD is no later than April 1st following age 70½ for traditional IRAs, SEPs, SIMPLEs. For qualified retirement plans, the later of April 1 of the year following the year in which the owner reaches age 70½ or retires, if less than a 5% owner. This presentation is not a financial plan. Presented by: Mr. John Q. Smith, Jr., CLU August 14, 2009 For Evaluation Purposes Only 4 of 17
Retirement Savings Options IRA vs. Roth vs. Taxable Accounts Pay Taxes Now or Later? The deciding factor between choosing an IRA or Roth IRA is whether you prefer paying taxes on your contributions (Roth IRA) or on your distributions (Traditional IRA). So when will your taxes be higher – during your working years or during retirement? When comparing, be sure to consider your income level during each phase (both income and withdrawals from assets), in addition to potential legislative changes.
IRA vs. Roth IRA - Values at Retirement Taxes Higher Now Traditional IRA is Better
Taxes Stay Same Options are Equal
Taxes Higher in Retirement Roth IRA is Better
The Flexibility of the Roth IRA A major advantage of the Roth IRA is the flexibility of distributions before and during retirement: Traditional IRA
Roth IRA
Traditional IRA
• Early Distributions (pre-59½) — Traditional IRAs Traditional IRA may charge a 10% penalty, with some exceptions while there is no penalty on withdrawals of contributions from a Roth IRA • Required Distributions (after 70½) — Traditional IRAs require minimum distributions each year, while a Roth IRA has no required distributions for the Roth IRA owner
The Case Against "Taxable Accounts" (Savings Accounts) Contributions to taxable accounts are made after-tax (just like a Roth IRA), but unlike a Roth IRA, interest and dividends generated are taxable each year, and capital gains taxes are due when liquidating an investment held for more than a year. This combination of taxes can significantly reduce your ability to accumulate retirement funds over the long-term, and may affect or limit your investment options and the frequency of changes to your investments over the long-term. The upside is that there are no penalties or restrictions on withdrawals from taxable accounts before retirement, making them perfect for short-term savings.
Roth IRA
Roth IRA
$600,000
$611,729
$500,000 $400,000 $300,000
$361,711
$200,000
Traditional IRA
Roth IRA
Income Taxes
These graphs compare account balances after 30 years of $5,000 annual contributions (after tax) growing at 8%. All growth in the taxable account is taxed each year at 35% while the Roth IRA grows tax free.
$100,000 $0
Use taxable accounts for short-term savings. Use IRAs and Roth IRAs for long-term retirement funding.
This presentation is not a financial plan. Presented by: Mr. John Q. Smith, Jr., CLU For Evaluation Purposes Only
Taxable
Roth IRA
August 14, 2009 5 of 17
Should Spouse Convert to Roth IRA? Providing the most tax-free accumulations and tax-free income for retirement Keep Spousal IRA Qualified Retirement Plan
Convert to Roth IRA Qualified Retirement Plan
Owner leaves retirement plan to spouse.
Owner leaves retirement plan to spouse.
Client Dies Spousal IRA
Spouse rolls over plan to Spousal IRA1.
Spousal IRA
Spouse takes at least required distributions2 during retirement and is taxed on all distributions.3
Taxes due on Spouse’s retirement distributions
IRS
Pay Later
Client Dies
Keep Spousal IRA No No Yes Decrease Required Minimum Distributions based on life expectancy Yes, distributions are considered income Income taxes due on remaining funds More rules
1
Spouse rolls over plan to Spousal IRA1, converts to Roth IRA and pays income taxes on the conversion.
Spouse may use Roth IRA for retirement. All distributions will be income tax-free.4
Vs. Income tax due at owner’s death or at conversion? Income taxes on accumulations? Income taxes on retirement distributions? Best when income tax rate will... Distributions required during Spouse’s retirement? May cause Social Security Benefits to be taxed? Taxes for Spouse’s heirs? Spouse has flexibility?
Spousal IRA
Taxes due when spouse converts IRA to Roth IRA
Pay Now
IRS
Roth IRA
Convert to Roth IRA Yes No No Increase No distributions required – more may be left to heirs No, distributions are not considered income No, no income taxes due Very Flexible
Spousal IRA is a Traditional IRA of a surviving spouse funded all or in part with the deceased spouse's qualified retirement plan. Required Minimum Distributions must start at age 70½ and are based on distributing the funds over your life expectancy. (Required distributions do not apply for the year 2009.) Generally, distributions received before age 59½, death, or being disabled will be taxed and have a 10% additional tax. 4 Monies must be in the Roth IRA for at least 5 years and you must be at least age 59½ for distributions to be income tax-free. This presentation is not a financial plan. Presented by: Mr. John Q. Smith, Jr., CLU August 14, 2009 For Evaluation Purposes Only 6 of 17 2 3
Maximizing Roth IRA Conversion at Death Pay Conversion Taxes Out of IRA
IRS Qualified Retirement Plan
Spousal IRA
Roth IRA
If IRA funds are used, less money is available in the Roth IRA to grow tax-free and be used for retirement needs. If conversion is prior to age 59½, a 10% early distribution penalty may be imposed on IRA funds used to pay taxes on the conversion.
A surviving spouse may roll over the owner's qualified retirement plan into a Traditional IRA. These IRAs are usually referred to as Spousal IRAs. The Spousal IRA may be converted to a Roth IRA.1 The Roth IRA2 will accumulate income tax-free and may be a source of tax-free income during retirement. When the Spousal IRA is converted, income taxes are due. If these taxes are paid from the IRA, the Roth IRA will be reduced. Using other assets to pay income taxes due at conversion leaves more funds in the Roth IRA: • • •
Pay Conversion Taxes Using Life Insurance Insurance
More funds to accumulate tax-free! More funds to provide tax-free income during retirement! More funds to provide tax-free income to your heirs!
Life insurance on the owner’s life can provide the funds to pay taxes on the conversion.
IRS
Qualified Retirement Plan
Spousal IRA
Roth IRA
A life insurance policy on the plan owner would provide the cash needed to pay the taxes on the conversion after the owner’s death. This would leave more money in the Roth IRA to grow tax-free and be used for retirement needs. Premiums for the life insurance policy could be paid using distributions from the Qualified Retirement Plan. Assets outside the qualified retirement plan could be used in addition to, or in place of, the life insurance.
Life insurance3 maximizes your Roth IRA!
1
Beginning in year 2010 there is no income eligibility limit for Roth IRA Conversions. There is $100,000 income limit for 2009. Withdrawals from a Roth IRA are income tax-free if the owner is over age 59½ and the funds have been in the Roth IRA 5 years. Life insurance premiums would be an additional cost. This presentation is not a financial plan. Presented by: Mr. John Q. Smith, Jr., CLU For Evaluation Purposes Only 2 3
August 14, 2009 7 of 17
Comparing IRA with Roth IRA Conversion Should I Convert to a Roth IRA? How Should I Pay the Taxes? Initial Value of IRA: $500,000
Convert in 2019 to Roth IRA
A Traditional IRA may be converted to a Roth IRA, but income taxes must be paid on the moneys transferred to the Roth IRA. In exchange distributions from the Roth IRA may be made, although not required, as tax-free income.
Traditional IRA
Roth IRA
Roth IRA
No Conversion Taxes
Using Other Assets for Taxes1
Using New Life Insurance for Taxes1
$3,600,000 3,000,000 2,400,000 1,800,000 1,200,000 600,000 0
65
70
75
80
85
65
Age
70
75
80
85
65
70
Age
Traditional IRA
Other Assets
75
80
85
Age
Roth IRA
Age
IRA2
Other Assets
Total
Roth IRA
Other Assets
Total
Roth IRA
Other Assets
Total
60 65 70 75 85
530,000 709,260 916,470 1,012,975 1,076,442
306,300 339,841 399,931 581,559 1,150,531
836,300 1,049,101 1,316,400 1,594,533 2,226,973
530,000 709,260 949,149 1,270,176 2,274,691
306,300 339,841 107,120 119,368 146,942
836,300 1,049,101 1,056,269 1,389,544 2,421,634
523,837 652,408 828,660 1,108,933 1,985,931
304,500 337,271 649,285 720,838 887,350
828,337 989,680 1,477,944 1,829,771 2,873,281
Total Funds at Age 892 $2,491,917
Total Funds at Age 89 $3,031,425
Total Funds at Age 89 $3,471,461
1
Income tax rates are assumed to be 30%. Example assumes the net distributions after taxes are deposited into the Other Assets. IRA balance would be subject to income taxation upon distribution or at death. This presentation is not a financial plan. Presented by: Mr. John Q. Smith, Jr., CLU For Evaluation Purposes Only 2
August 14, 2009 8 of 17
Keep Traditional IRA No Conversion to Roth IRA at Death Initial Value of IRA: $500,000 Life Exp.1
Earnings &2 Actual3 Contributions Distributions
Traditional IRA Values
Tax Rate
Income Taxes4 Reinvested5 Paid Distributions
Total of All Other6 Assets
Less Tax4 Liability
Net All Other7 Assets
Qualified & All Other Assets
Year
Age
2009 2010 2011 2012 2013
60 61 62 63 64
30,000 31,800 33,708 35,730 37,874
0 0 0 0 0
530,000 561,800 595,508 631,238 669,113
30% 30% 30% 30% 30%
0 0 0 0 0
0 0 0 0 0
306,300 312,732 319,300 326,005 332,851
0 0 0 0 0
306,300 312,732 319,300 326,005 332,851
836,300 874,532 914,808 957,243 1,001,964
2014 2015 2016 2017 2018
65 66 67 68 69
40,147 42,556 45,109 47,815 50,684
0 0 0 0 0
709,260 751,815 796,924 844,739 895,424
30% 30% 30% 30% 30%
0 0 0 0 0
0 0 0 0 0
339,841 346,978 354,264 361,704 369,299
0 0 0 0 0
339,841 346,978 354,264 361,704 369,299
1,049,101 1,098,793 1,151,188 1,206,443 1,264,723
Traditional IRA Values
Tax Rate
Income Taxes4 Reinvested5 Paid Distributions
Bob dies and rolls over the IRA to Mary.
1
Earnings &2 Actual3 Contributions Distributions
Total of All Other6 Assets
Less Tax4 Liability
Net All Other7 Assets
Qualified & All Other Assets
Year
Age
Life Exp.1
2019 2020 2021 2022 2023
70 71 72 73 74
27.4 27.4 26.5 25.6 24.7
53,725 54,450 55,698 56,885 58,020
32,680 33,448 35,376 37,414 39,565
916,470 937,472 957,794 977,265 995,720
30% 30% 30% 30% 30%
0 9,804 10,034 10,613 11,224
32,680 23,644 25,342 26,801 28,341
409,734 441,983 476,606 513,416 552,539
9,804 10,034 10,613 11,224 11,870
399,931 431,948 465,993 502,192 540,669
1,316,400 1,369,420 1,423,787 1,479,457 1,536,389
2024 2025 2026 2027 2028
75 76 77 78 79
23.8 22.9 22.0 21.2 20.3
59,092 60,090 61,002 61,814 62,531
41,837 44,235 46,765 49,201 52,004
1,012,975 1,028,830 1,043,067 1,055,680 1,066,207
30% 30% 30% 30% 30%
11,870 12,551 13,270 14,029 14,760
29,967 31,684 33,495 35,172 37,244
594,110 638,270 685,168 734,728 787,401
12,551 13,270 14,029 14,760 15,601
581,559 624,999 671,138 719,968 771,800
1,594,533 1,653,829 1,714,205 1,775,647 1,838,006
Life expectancy is based on the Uniform Lifetime Table. See the Assumptions page for additional information. Assumes qualified plan earns 6.00% interest. Also includes Employer Contributions and Salary Reductions, if any. Actual Distribution is the greater of the pretax distribution required to generate the Desired Distributions (see Assumptions page) or Required Minimum Distribution. 4 Taxes and any applicable penalties are paid at the start of the calendar year following the tax liability. 5 Actual Distributions less Taxes and Penalties. 6 All Other Assets and Cumulative Reinvested Distributions are assumed to earn 3.00% interest and are taxed at a 30.00% income tax rate. 7 Net of liability for income taxes and any penalties. This presentation is not a financial plan. Presented by: Mr. John Q. Smith, Jr., CLU August 14, 2009 For Evaluation Purposes Only 9 of 17 2 3
Keep Traditional IRA No Conversion to Roth IRA at Death
1
Earnings &2 Actual3 Contributions Distributions
Traditional IRA Values
Tax Rate
Income Taxes4 Reinvested5 Paid Distributions
Total of All Other6 Assets
Less Tax4 Liability
Net All Other7 Assets
Qualified & All Other Assets
Year
Age
Life Exp.1
2029 2030 2031 2032 2033
80 81 82 83 84
19.5 18.7 17.9 17.1 16.3
63,116 63,579 63,900 64,063 64,052
54,677 57,468 60,377 63,408 66,560
1,074,646 1,080,757 1,084,279 1,084,934 1,082,426
30% 30% 30% 30% 30%
15,601 16,403 17,240 18,113 19,022
39,076 41,065 43,137 45,295 47,538
843,012 901,780 963,855 1,029,391 1,098,546
16,403 17,240 18,113 19,022 19,968
826,609 884,540 945,742 1,010,368 1,078,578
1,901,255 1,965,297 2,030,020 2,095,302 2,161,003
2034 2035 2036 2037 2038
85 86 87 88 89
15.5 14.8 14.1 13.4 12.7
63,850 63,437 62,832 62,012 60,963
69,834 72,733 75,684 78,679 81,703
1,076,442 1,067,146 1,054,294 1,037,627 1,016,887
30% 30% 30% 30% 30%
19,968 20,950 21,820 22,705 23,604
49,866 51,782 53,864 55,973 58,099
1,171,481 1,247,864 1,327,934 1,411,794 1,499,541
20,950 21,820 22,705 23,604 24,511
1,150,531 1,226,045 1,305,229 1,388,190 1,475,030
2,226,973 2,293,191 2,359,523 2,425,818 2,491,917
Life expectancy is based on the Uniform Lifetime Table. See the Assumptions page for additional information. Assumes qualified plan earns 6.00% interest. Also includes Employer Contributions and Salary Reductions, if any. Actual Distribution is the greater of the pretax distribution required to generate the Desired Distributions (see Assumptions page) or Required Minimum Distribution. 4 Taxes and any applicable penalties are paid at the start of the calendar year following the tax liability. 5 Actual Distributions less Taxes and Penalties. 6 All Other Assets and Cumulative Reinvested Distributions are assumed to earn 3.00% interest and are taxed at a 30.00% income tax rate. 7 Net of liability for income taxes and any penalties. This presentation is not a financial plan. Presented by: Mr. John Q. Smith, Jr., CLU August 14, 2009 For Evaluation Purposes Only 10 of 17 2 3
Convert to Roth IRA Convert at Death Using Other Assets for Taxes Initial Value of IRA: $500,000* Life Exp.1
Convert in year 2019 to Roth IRA
Earnings &2 Actual3 Contributions Distributions
Traditional IRA Values
Tax Rate
Income Taxes4 Reinvested5 Paid Distributions
Total of All Other6 Assets
Less Tax4 Liability
Net All Other7 Assets
Qualified & All Other Assets
Year
Age
2009 2010 2011 2012 2013
60 61 62 63 64
30,000 31,800 33,708 35,730 37,874
0 0 0 0 0
530,000 561,800 595,508 631,238 669,113
30% 30% 30% 30% 30%
0 0 0 0 0
0 0 0 0 0
306,300 312,732 319,300 326,005 332,851
0 0 0 0 0
306,300 312,732 319,300 326,005 332,851
836,300 874,532 914,808 957,243 1,001,964
2014 2015 2016 2017 2018
65 66 67 68 69
40,147 42,556 45,109 47,815 50,684
0 0 0 0 0
709,260 751,815 796,924 844,739 895,424
30% 30% 30% 30% 30%
0 0 0 0 0
0 0 0 0 0
339,841 346,978 354,264 361,704 369,299
0 0 0 0 0
339,841 346,978 354,264 361,704 369,299
1,049,101 1,098,793 1,151,188 1,206,443 1,264,723
Bob dies. Mary converts IRA to a Roth IRA and pays income taxes using other assets.
Year
Age
2019 2020 2021 2022 2023
70 71 72 73 74
Life Exp.1
Earnings &2 Actual3 Contributions Distributions
949,149 56,949 60,366 63,988 67,827
0 0 0 0 0
Roth IRA Values
Tax Rate
949,149 1,006,098 1,066,464 1,130,452 1,198,279
30% 30% 30% 30% 30%
Income Taxes4 Reinvested5 Paid Distributions
0 269,935 0 0 0
0 -269,935 0 0 0
Total of All Other6 Assets
Less Tax4 Liability
Net All Other7 Assets
Qualified & All Other Assets
377,055 109,846 112,153 114,508 116,913
269,935 0 0 0 0
107,120 109,846 112,153 114,508 116,913
1,056,269 1,115,945 1,178,617 1,244,960 1,315,192
*1 Represents the amount of the Traditional IRA(s) to be converted to Roth IRA, as a total or partial Roth IRA conversion. Life expectancy is based on the Uniform Lifetime Table. See the Assumptions page for additional information. 2 Assumes qualified plan/Roth IRA earns 6.00% interest. Also includes Employer Contributions and Salary Reductions, if any. After Roth Conversion, also includes amount converted to Roth IRA. 3 Actual Distribution is the greater of the pretax distribution required to generate the Desired Distributions (see Assumptions page) or Required Minimum Distribution. After Roth Conversion, Other Assets are used to the extent possible to pay income taxes on Traditional IRA amounts converted to Roth IRA. 4 Taxes and any applicable penalties are paid at the start of the calendar year following the tax liability. After Roth Conversion, includes the estimated income taxes on the Traditional IRA amount converted to Roth IRA. 5 Actual Distributions less Taxes and Penalties. After Roth Conversion, Other Assets are used to the extent possible to pay the income taxes on Traditional IRA amounts converted to Roth IRA. 6 All Other Assets and Cumulative Reinvested Distributions are assumed to earn 3.00% interest and are taxed at a 30.00% income tax rate. 7 Net of liability for income taxes and any penalties. This presentation is not a financial plan. Presented by: Mr. John Q. Smith, Jr., CLU August 14, 2009 For Evaluation Purposes Only 11 of 17
Convert to Roth IRA Convert at Death Using Other Assets for Taxes
1
Life Exp.1
Earnings &2 Actual3 Contributions Distributions
Roth IRA Values
Tax Rate
Income Taxes4 Reinvested5 Paid Distributions
Total of All Other6 Assets
Less Tax4 Liability
Net All Other7 Assets
Qualified & All Other Assets
Year
Age
2024 2025 2026 2027 2028
75 76 77 78 79
71,897 76,211 80,783 85,630 90,768
0 0 0 0 0
1,270,176 1,346,386 1,427,170 1,512,800 1,603,568
30% 30% 30% 30% 30%
0 0 0 0 0
0 0 0 0 0
119,368 121,875 124,434 127,048 129,716
0 0 0 0 0
119,368 121,875 124,434 127,048 129,716
1,389,544 1,468,261 1,551,604 1,639,847 1,733,283
2029 2030 2031 2032 2033
80 81 82 83 84
96,214 101,987 108,106 114,592 121,468
0 0 0 0 0
1,699,782 1,801,769 1,909,875 2,024,467 2,145,935
30% 30% 30% 30% 30%
0 0 0 0 0
0 0 0 0 0
132,440 135,221 138,060 140,960 143,920
0 0 0 0 0
132,440 135,221 138,060 140,960 143,920
1,832,221 1,936,990 2,047,935 2,165,427 2,289,855
2034 2035 2036 2037 2038
85 86 87 88 89
128,756 136,481 144,670 153,351 162,552
0 0 0 0 0
2,274,691 2,411,173 2,555,843 2,709,194 2,871,746
30% 30% 30% 30% 30%
0 0 0 0 0
0 0 0 0 0
146,942 150,028 153,179 156,395 159,680
0 0 0 0 0
146,942 150,028 153,179 156,395 159,680
2,421,634 2,561,201 2,709,022 2,865,589 3,031,425
Life expectancy is based on the Uniform Lifetime Table. See the Assumptions page for additional information. Assumes qualified plan/Roth IRA earns 6.00% interest. Also includes Employer Contributions and Salary Reductions, if any. After Roth Conversion, also includes amount converted to Roth IRA. 3 Actual Distribution is the greater of the pretax distribution required to generate the Desired Distributions (see Assumptions page) or Required Minimum Distribution. After Roth Conversion, Other Assets are used to the extent possible to pay income taxes on Traditional IRA amounts converted to Roth IRA. 4 Taxes and any applicable penalties are paid at the start of the calendar year following the tax liability. After Roth Conversion, includes the estimated income taxes on the Traditional IRA amount converted to Roth IRA. 5 Actual Distributions less Taxes and Penalties. After Roth Conversion, Other Assets are used to the extent possible to pay the income taxes on Traditional IRA amounts converted to Roth IRA. 6 All Other Assets and Cumulative Reinvested Distributions are assumed to earn 3.00% interest and are taxed at a 30.00% income tax rate. 7 Net of liability for income taxes and any penalties. This presentation is not a financial plan. Presented by: Mr. John Q. Smith, Jr., CLU August 14, 2009 For Evaluation Purposes Only 12 of 17 2
Convert to Roth IRA Using New Life Insurance Convert at Death Using Life Insurance to Pay Taxes Initial Value of IRA: $500,000* Life Exp.1
Convert in year 2019 to Roth IRA
Earnings &2 Actual3 Contributions Distributions
Traditional IRA Values
Tax Rate
Income Taxes4 Reinvested5 Paid Distributions
Total of All Other6 Assets
Less Tax4 Liability
Net All Other7 Assets
Qualified & All Other Assets
Year
Age
2009 2010 2011 2012 2013
60 61 62 63 64
29,837 31,168 32,541 33,984 35,510
6,000 7,800 8,340 8,502 8,551
523,837 547,205 571,406 596,887 623,847
30% 30% 30% 30% 30%
0 1,800 2,340 2,502 2,551
0 0 0 0 0
306,300 312,732 319,300 326,005 332,851
1,800 2,340 2,502 2,551 2,565
304,500 310,392 316,798 323,454 330,286
828,337 857,597 888,203 920,342 954,133
2014 2015 2016 2017 2018
65 66 67 68 69
37,127 38,840 40,656 42,582 44,622
8,565 8,570 8,571 8,571 8,571
652,408 682,679 714,765 748,775 784,826
30% 30% 30% 30% 30%
2,565 2,570 2,571 2,571 2,571
0 0 0 0 0
339,841 346,978 354,264 361,704 369,299
2,570 2,571 2,571 2,571 2,571
337,271 344,407 351,693 359,132 366,728
989,680 1,027,086 1,066,458 1,107,907 1,151,554
Bob dies. Mary converts IRA to a Roth IRA and pays income taxes using other assets and new life insurance of $500,000.
Year
Age
2019 2020 2021 2022 2023
70 71 72 73 74
Life Exp.1
Earnings &2 Actual3 Contributions Distributions
828,660 49,720 52,703 55,865 59,217
0 0 0 0 0
Roth IRA Values
Tax Rate
828,660 878,379 931,082 986,947 1,046,164
30% 30% 30% 30% 30%
Income Taxes4 Reinvested5 Paid Distributions
2,571 236,589 0 0 0
0 -236,589 0 0 0
Total of All Other6 Assets
Less Tax4 Liability
Net All Other7 Assets
Qualified & All Other Assets
885,874 663,338 677,268 691,490 706,012
236,589 0 0 0 0
649,285 663,338 677,268 691,490 706,012
1,477,944 1,541,717 1,608,350 1,678,437 1,752,175
*1 Represents the amount of the Traditional IRA(s) to be converted to Roth IRA, as a total or partial Roth IRA conversion. Life expectancy is based on the Uniform Lifetime Table. See the Assumptions page for additional information. 2 Assumes qualified plan/Roth IRA earns 6.00% interest. Also includes Employer Contributions and Salary Reductions, if any. After Roth Conversion, also includes amount converted to Roth IRA. 3 Actual Distribution is the greater of the pretax distribution required to generate the Desired Distributions (see Assumptions page) or Required Minimum Distribution. 4 Taxes and any applicable penalties are paid at the start of the calendar year following the tax liability. After Roth Conversion, includes the estimated income taxes on the Traditional IRA amount converted to Roth IRA. 5 Actual Distributions less Taxes and Penalties. After Roth Conversion, life insurance proceeds are added to Other Assets and used to pay income taxes on Traditional IRA amount converted to Roth IRA. 6 All Other Assets and Cumulative Reinvested Distributions are assumed to earn 3.00% interest and are taxed at a 30.00% income tax rate. After Roth Conversion, life insurance proceeds are added to Other Assets and used to pay income taxes on Traditional amount converted to Roth IRA. 7 Net of liability for income taxes and any penalties. This presentation is not a financial plan. Presented by: Mr. John Q. Smith, Jr., CLU August 14, 2009 For Evaluation Purposes Only 13 of 17
Convert to Roth IRA Using New Life Insurance Convert at Death Using Life Insurance to Pay Taxes
1
Life Exp.1
Earnings &2 Actual3 Contributions Distributions
Roth IRA Values
Tax Rate
Income Taxes4 Reinvested5 Paid Distributions
Total of All Other6 Assets
Less Tax4 Liability
Net All Other7 Assets
Qualified & All Other Assets
Year
Age
2024 2025 2026 2027 2028
75 76 77 78 79
62,770 66,536 70,528 74,760 79,245
0 0 0 0 0
1,108,933 1,175,469 1,245,998 1,320,758 1,400,003
30% 30% 30% 30% 30%
0 0 0 0 0
0 0 0 0 0
720,838 735,976 751,431 767,211 783,322
0 0 0 0 0
720,838 735,976 751,431 767,211 783,322
1,829,771 1,911,445 1,997,429 2,087,969 2,183,325
2029 2030 2031 2032 2033
80 81 82 83 84
84,000 89,040 94,383 100,046 106,048
0 0 0 0 0
1,484,003 1,573,043 1,667,426 1,767,471 1,873,520
30% 30% 30% 30% 30%
0 0 0 0 0
0 0 0 0 0
799,772 816,567 833,715 851,223 869,099
0 0 0 0 0
799,772 816,567 833,715 851,223 869,099
2,283,775 2,389,611 2,501,141 2,618,695 2,742,619
2034 2035 2036 2037 2038
85 86 87 88 89
112,411 119,156 126,305 133,884 141,917
0 0 0 0 0
1,985,931 2,105,087 2,231,392 2,365,276 2,507,192
30% 30% 30% 30% 30%
0 0 0 0 0
0 0 0 0 0
887,350 905,985 925,010 944,435 964,269
0 0 0 0 0
887,350 905,985 925,010 944,435 964,269
2,873,281 3,011,071 3,156,402 3,309,711 3,471,461
Life expectancy is based on the Uniform Lifetime Table. See the Assumptions page for additional information. Assumes qualified plan/Roth IRA earns 6.00% interest. Also includes Employer Contributions and Salary Reductions, if any. After Roth Conversion, also includes amount converted to Roth IRA. 3 Actual Distribution is the greater of the pretax distribution required to generate the Desired Distributions (see Assumptions page) or Required Minimum Distribution. 4 Taxes and any applicable penalties are paid at the start of the calendar year following the tax liability. After Roth Conversion, includes the estimated income taxes on the Traditional IRA amount converted to Roth IRA. 5 Actual Distributions less Taxes and Penalties. After Roth Conversion, life insurance proceeds are added to Other Assets and used to pay income taxes on Traditional IRA amount converted to Roth IRA. 6 All Other Assets and Cumulative Reinvested Distributions are assumed to earn 3.00% interest and are taxed at a 30.00% income tax rate. After Roth Conversion, life insurance proceeds are added to Other Assets and used to pay income taxes on Traditional IRA amount converted to Roth IRA. 7 Net of liability for income taxes and any penalties. This presentation is not a financial plan. Presented by: Mr. John Q. Smith, Jr., CLU August 14, 2009 For Evaluation Purposes Only 14 of 17 2
Estate Tax Repeal Sunset Provisions Tax Relief Act Of 20011 A controversial aspect of this Act is the future repeal of the estate tax. The Act is a compromise between substantial estate tax reductions and full repeal. However, there were concerns that the cost of full repeal would use too much of the money needed for other tax cuts and spending priorities. The resulting compromise uses a slow phase-in through the year 2009 with a full repeal of the tax in 2010.
"Sunset Provisions" The Act contains a "sunset provision" that repeals this Act as of December 31, 2010. Consequently, the estate tax, gift tax, and generation-skipping transfer tax in effect in 2001 will become the law once again on January 1, 2011. Unless there is future legislation the Tax Relief Act will only be effective through the year 2010.
Phase-In Rates and Schedules Starting in 2002 the maximum rate for estate tax, gift tax, and generation-skipping transfer tax became 50%. It was reduced by 1% in each of the following years until it was 45% for years 2007 through 2009. The gift tax rate continues after 2009 at a maximum amount equal to the maximum income tax rate which would be 35%. Immediate estate, gift and generation-skipping transfer relief started in 2002 when $1,000,000 became an applicable exclusion for these taxes. For gift tax purposes it remains at $1,000,000 for 2009. For estate taxes and generation-skipping transfers it increased in 2004 to $1,500,000; in 2006 to $2,000,000; and in 2009 to $3,500,000. This exclusion reduces the amounts subject to these taxes until repeal in 2010. Of course, the law in 2001 becomes the law again in 2011 unless Congress intervenes.
Many Other Significant Provisions One of many new provisions of this complex tax act deals with the elimination of step-up basis for inherited property. This means that property inherited after estate tax repeal in 2010 may be subject to capital gains taxes when sold. Each estate will be allowed a $1.3 million exclusion of increased basis and an additional $3 million exclusion for the surviving spouse. To assist the IRS, the executors and trustees will have significant new reporting requirements. These new provisions require special planning for the closely-held business owner. The Act contains many other provisions.
Continued Need for Planning The complexities of this new legislation and the uncertainties of many of its provisions require careful planning with your tax and legal advisors.
1
The Economic Growth and Tax Relief Reconciliation Act of 2001 as adopted by Congress May 26, 2001 and signed by the President June 7, 2001 This presentation is not a financial plan. Presented by: Mr. John Q. Smith, Jr., CLU For Evaluation Purposes Only
August 14, 2009 15 of 17
Assumptions Details and Assumptions for Calculations General Assumptions Bob's DOB: January 1, 1949 and Mary's DOB: May 11, 1950 Calculations assume that the value of All Other Assets (excluding life insurance) is equal to $300,000. These assets are assumed to earn 3.00% interest. Hypothetical rates of return illustrated are not associated with any particular investment product. In some scenarios, new life insurance proceeds of $500,000 are illustrated after the death of the participant. Calculations assume an ordinary income tax rate of 30.00%. Distribution of amounts equal to non-deductible contributions to your qualified plan are not taxable. These illustrations assume all distributions are taxable income. The Account Balance and Other Assets are grown pro-rata based on the date entered. Qualified Plan Assumptions Current qualified plan amount is $500,000, with a growth rate of 6.00%. Hypothetical rates of return illustrated are not associated with any particular investment product. There are no Required Minimum Distributions from Qualified Plans for 2009 only. Elections: Distributions are at least the Required Minimum Distribution using the Uniform Lifetime Table, if applicable. Required Minimum Distributions based on the Uniform Lifetime Table. Conversion Occurs: Year 2019 Traditional IRA Contributions may be tax deductible and earnings are tax-deferred, but taxable when withdrawn. Required minimum distributions must begin by age 70½. Deductibility of contributions is based on modified adjusted gross income (MAGI) (for 2009, single $65,000 and married, filing jointly $109,000) and not being a participant in an employer sponsored retirement plan. Roth IRA Contributions are not tax deductible but earnings are tax-deferred and are generally not taxable upon withdrawal. Contributions are limited to $5,000 for 2009 ($6,000 if 50 or over). The ability to contribute is phased out if your MAGI is $166,000 - $176,000 for married, filing jointly in 2009, and eliminated thereafter. (The phase out is $105,000 - $120,000 for single taxpayers.) Withdrawals of contributions to Roth IRAs are not subject to income tax or the 10% early withdrawal penalty tax. Withdrawals of earnings within 5 years of establishing a Roth IRA are taxed as ordinary income. Earnings taken prior to age 59½ are taxed as ordinary income, and may be subject to a 10% early distribution penalty tax, with certain exceptions. There is no required minimum distributions at any age. Conversion of Traditional IRA to Roth IRA Prior to 2010, a Traditional IRA cannot be converted to a Roth IRA if MAGI exceeds $100,000. Amounts converted from the Traditional IRA are taxable in the year of the conversion. However, amounts converted to Roth IRA in 2010 only will be reported equally in 2011 and 2012; therefore, income taxes are paid equally in 2012 and 2013. Withdrawals of converted amounts within five years of each conversion to Roth IRA may be subject to the 10% early distribution penalty tax, and withdrawals of earnings may be subject to the 10% early distribution penalty tax and/or taxed as ordinary income. This presentation is not a financial plan. Presented by: Mr. John Q. Smith, Jr., CLU For Evaluation Purposes Only
August 14, 2009 16 of 17
Assumptions (Continued) Details and Assumptions for Calculations Tax Relief Act of 2001 Compliant This illustration shows the effect of this law on your estimated estate if you (and your spouse) die in the year shown. The Tax Relief Act of 2001 reduces the maximum rate and increases the applicable exclusion amount each year through 2009 with no estate tax in year 2010. A "sunset provision" voids the new law in 2011 and retroactively restores the law effective in 2001. Distribution Assumptions Early retirement distributions are not exempt from the IRC Section 72(t) penalty. Desired distributions from the plan include: Monthly premiums of $500 for new life insurance with a death benefit of $500,000 on Bob. Distributions from the Traditional IRA are taxable. For Traditional IRA/Qualified Plan, distribution calculations do not use a joint beneficiary. For Traditional/Qualified Plan, required minimum distributions are based on the Uniform Lifetime Table. Final Regulations Required Minimum Distributions are calculated based on the Uniform Lifetime Table. The Uniform Lifetime Table is permitted to be used for lifetime distributions for calendar years beginning on or after January 1, 2002 and must be used for lifetime distributions for calendar years beginning on or after January 1, 2003. If your beneficiary is your spouse (who is more than 10 years younger than you) distributions during your joint lives may be calculated using the Joint and Last Survivor Table. Compliance with Revenue Ruling 2002-62 Section 72(t) distributions are in compliance with the calculation methods stated in Revenue Ruling 2002-62. The following calculation methods may be illustrated under this ruling: 1) Extension of the existing Uniform Lifetime Table for use with the Life Expectancy Method. 2) Addition of annuity factor table for use with the Annuity Method. 3) Addition of interest rate (not more than 120% of the federal mid-term rate) for use with the Amortization and Annuity Methods.
Visit www.impact-tech.com to learn more about tools for qualified plan analysis, including complete Roth conversion tools. Or talk to a sales representative at: 1-800-438-6017
This presentation is not a financial plan. Presented by: Mr. John Q. Smith, Jr., CLU For Evaluation Purposes Only
August 14, 2009 17 of 17
Important Notes These pages depict certain wealth preservation strategies concerning possible methods for taking distributions from your qualified retirement plan. For purposes of this analysis, several of your qualified retirement plans may be aggregated and shown as one single plan. This report provides only broad, general guidelines, which may be helpful in shaping your thinking about and discussing your wealth preservation needs with your professional advisors. This report provides estimates based on our general understanding of current tax laws. Each scenario shown illustrates your current situation or an alternative strategy and its possible effects on the financial situation you provided. Inclusion of one or more of these strategies does not constitute a recommendation of that strategy over any other strategy. Calculations contained in this analysis are estimates only based on the information you provided, such as the value of your assets today, and the rate at which the assets appreciate. The actual values, rates of growth, and tax rates may be significantly different from those illustrated. These assumptions are only a “best guess.” No guarantee can be made regarding values, as all rates are the hypothetical rates you provided. These computations are not a guarantee of future performance of any asset, including insurance or other financial products. No legal or accounting advice is being rendered either by this report or through any other oral or written communications. Nothing contained in this report is intended to be used on any tax form or to support any tax deduction. Unless indicated, the tax aspect of the federal Generation-Skipping Transfer Tax (GSTT) is not reflected. The GSTT is similar to an additional level of estate tax on certain transfers to grandchildren, or individuals two or more generations removed from the transferor. State laws vary regarding the distribution of property, and individual circumstances are unique and subject to change. You should discuss all strategies, transfers, and assumptions with your legal and tax advisors. To implement a strategy, it may be necessary to restructure the ownership of property, or change designated beneficiaries before specific will or trust provisions, prepared by the client’s counsel, become effective. The transfer of a life insurance policy may not result in its removal from the estate of the prior owner for three years. Strategies may be proposed to support the purchase of various products such as insurance and other financial products. When this occurs, additional information about the specific product (including a prospectus, if required, or an insurer provided policy illustration) will be provided for your review. IMPORTANT: The projections or other information generated by this investment analysis tool (Qualified Plan Distribution Analysis) regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, this notice is to inform you that any U. S. federal tax advice contained in this presentation is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this presentation.
This presentation is not a financial plan. Presented by: Mr. John Q. Smith, Jr., CLU For Evaluation Purposes Only
Version 2.0.0 c. 6.0.0.0 August 14, 2009 2 of 17
Converting Your IRA to a Roth IRA Should you pay taxes now so that retirement distributions will be tax-free? for
Bob Smith and
Mary Smith
This presentation is not a financial plan. Presented by: Mr. John Q. Smith, Jr., CLU For Evaluation Purposes Only
August 14, 2009 3 of 17
Understanding IRAs, Roth IRAs, Conversions Key Concepts & Rules Traditional IRAs • Contributions are limited to $5,000 for 2009 ($6,000 if 50 or over) and are generally tax deductible. • If you are covered by a retirement plan at work and your modified adjusted gross income (MAGI) is $89,000 - $109,000 in 2009 (married, filing jointly), deductibility phases out and is eliminated thereafter. If your spouse is covered by a retirement plan at work, but you are not, the phase out is $166,000 - $176,000 for married, filing joint. (The phase out is $55,000 - $65,000 for single taxpayers.) • Funds grow tax-deferred, but are taxed as ordinary income upon distribution. • Minimum distributions are required annually beginning on the Required Beginning Date (RBD1), which is based on your age 70½. • Distributions taken prior to age 59½ are subject to a 10% early distribution penalty tax, with certain exceptions. • Distributions after your death (or your spouse's death) are taxed as ordinary income to the beneficiary as distributions are received. • At your death (or your spouse's death), the entire account value is includible in the gross estate for federal estate tax purposes, and may be subject to estate taxes.
Roth IRAs • Contributions are limited to $5,000 for 2009 ($6,000 if 50 or over) and are NOT income tax deductible. • Ability to contribute is phased out if you earn $166,000-$176,000 for married, filing jointly in 2009, and eliminated thereafter. The phase out is $105,000 - $120,000 for single taxpayers. • Funds grow tax deferred and are generally not taxable upon withdrawal. • No minimum distributions are required from Roth IRAs, during your (or your spouse's) lifetime. • Withdrawals of contributions to Roth IRAs, prior to age 59½, are not subject to the 10% early withdrawal penalty tax. Withdrawals of earnings within 5 years of establishing a Roth IRA are taxed as ordinary income. Earnings taken prior to age 59½ are taxed as ordinary income, and may be subject to a 10% early withdrawal penalty tax, with certain exceptions. • Distributions after your death are received by the beneficiary income-tax free. • At your death (or your spouse's death), the entire account value is includible in the gross estate for federal estate tax purposes, and may be subject to estate taxes.
Conversions (from a Traditional IRA to a Roth IRA) • A Conversion is a taxable event. The entire (or partial) amount of the Traditional IRA (less any non-deductible contributions) is taxable as ordinary income upon conversion (or distribution). The conversion amount may move you into a higher marginal income tax bracket. Due to a special provision in the tax law, for amounts converted in 2010, half the conversion can be reported as taxable income in 2011 and the other half is reported in 2012. • Prior to 2010, if your MAGI exceeds $100,000, you are not eligible to convert a Traditional IRA to a Roth IRA. After 2009, the income limit is eliminated. • If you pay the taxes out of the Traditional IRA, it will reduce the benefits of the conversion to a Roth IRA, and if you are under age 59½, the amount used to pay income taxes will be subject to the 10% early distribution penalty tax. • Withdrawals of converted amounts within 5 years of each separate conversion to Roth IRAs may be subject to a 10% early distribution penalty tax and withdrawals of earnings may be subject to a 10% early distribution penalty tax and/or taxed as ordinary income. • Distributions from a Traditional IRA must be deposited into a Roth IRA within 60 days (not applicable for trustee-to-trustee transfers). • You do not have to convert your entire Traditional IRA. A partial conversion is allowed, but you must follow the same rules as any other distribution regarding nondeductible contributions. 1
The RBD is no later than April 1st following age 70½ for traditional IRAs, SEPs, SIMPLEs. For qualified retirement plans, the later of April 1 of the year following the year in which the owner reaches age 70½ or retires, if less than a 5% owner. This presentation is not a financial plan. Presented by: Mr. John Q. Smith, Jr., CLU August 14, 2009 For Evaluation Purposes Only 4 of 17
Retirement Savings Options IRA vs. Roth vs. Taxable Accounts Pay Taxes Now or Later? The deciding factor between choosing an IRA or Roth IRA is whether you prefer paying taxes on your contributions (Roth IRA) or on your distributions (Traditional IRA). So when will your taxes be higher – during your working years or during retirement? When comparing, be sure to consider your income level during each phase (both income and withdrawals from assets), in addition to potential legislative changes.
IRA vs. Roth IRA - Values at Retirement Taxes Higher Now Traditional IRA is Better
Taxes Stay Same Options are Equal
Taxes Higher in Retirement Roth IRA is Better
The Flexibility of the Roth IRA A major advantage of the Roth IRA is the flexibility of distributions before and during retirement: Traditional IRA
Roth IRA
Traditional IRA
• Early Distributions (pre-59½) — Traditional IRAs Traditional IRA may charge a 10% penalty, with some exceptions while there is no penalty on withdrawals of contributions from a Roth IRA • Required Distributions (after 70½) — Traditional IRAs require minimum distributions each year, while a Roth IRA has no required distributions for the Roth IRA owner
The Case Against "Taxable Accounts" (Savings Accounts) Contributions to taxable accounts are made after-tax (just like a Roth IRA), but unlike a Roth IRA, interest and dividends generated are taxable each year, and capital gains taxes are due when liquidating an investment held for more than a year. This combination of taxes can significantly reduce your ability to accumulate retirement funds over the long-term, and may affect or limit your investment options and the frequency of changes to your investments over the long-term. The upside is that there are no penalties or restrictions on withdrawals from taxable accounts before retirement, making them perfect for short-term savings.
Roth IRA
Roth IRA
$600,000
$611,729
$500,000 $400,000 $300,000
$361,711
$200,000
Traditional IRA
Roth IRA
Income Taxes
These graphs compare account balances after 30 years of $5,000 annual contributions (after tax) growing at 8%. All growth in the taxable account is taxed each year at 35% while the Roth IRA grows tax free.
$100,000 $0
Use taxable accounts for short-term savings. Use IRAs and Roth IRAs for long-term retirement funding.
This presentation is not a financial plan. Presented by: Mr. John Q. Smith, Jr., CLU For Evaluation Purposes Only
Taxable
Roth IRA
August 14, 2009 5 of 17
Should Spouse Convert to Roth IRA? Providing the most tax-free accumulations and tax-free income for retirement Keep Spousal IRA Qualified Retirement Plan
Convert to Roth IRA Qualified Retirement Plan
Owner leaves retirement plan to spouse.
Owner leaves retirement plan to spouse.
Client Dies Spousal IRA
Spouse rolls over plan to Spousal IRA1.
Spousal IRA
Spouse takes at least required distributions2 during retirement and is taxed on all distributions.3
Taxes due on Spouse’s retirement distributions
IRS
Pay Later
Client Dies
Keep Spousal IRA No No Yes Decrease Required Minimum Distributions based on life expectancy Yes, distributions are considered income Income taxes due on remaining funds More rules
1
Spouse rolls over plan to Spousal IRA1, converts to Roth IRA and pays income taxes on the conversion.
Spouse may use Roth IRA for retirement. All distributions will be income tax-free.4
Vs. Income tax due at owner’s death or at conversion? Income taxes on accumulations? Income taxes on retirement distributions? Best when income tax rate will... Distributions required during Spouse’s retirement? May cause Social Security Benefits to be taxed? Taxes for Spouse’s heirs? Spouse has flexibility?
Spousal IRA
Taxes due when spouse converts IRA to Roth IRA
Pay Now
IRS
Roth IRA
Convert to Roth IRA Yes No No Increase No distributions required – more may be left to heirs No, distributions are not considered income No, no income taxes due Very Flexible
Spousal IRA is a Traditional IRA of a surviving spouse funded all or in part with the deceased spouse's qualified retirement plan. Required Minimum Distributions must start at age 70½ and are based on distributing the funds over your life expectancy. (Required distributions do not apply for the year 2009.) Generally, distributions received before age 59½, death, or being disabled will be taxed and have a 10% additional tax. 4 Monies must be in the Roth IRA for at least 5 years and you must be at least age 59½ for distributions to be income tax-free. This presentation is not a financial plan. Presented by: Mr. John Q. Smith, Jr., CLU August 14, 2009 For Evaluation Purposes Only 6 of 17 2 3
Maximizing Roth IRA Conversion at Death Pay Conversion Taxes Out of IRA
IRS Qualified Retirement Plan
Spousal IRA
Roth IRA
If IRA funds are used, less money is available in the Roth IRA to grow tax-free and be used for retirement needs. If conversion is prior to age 59½, a 10% early distribution penalty may be imposed on IRA funds used to pay taxes on the conversion.
A surviving spouse may roll over the owner's qualified retirement plan into a Traditional IRA. These IRAs are usually referred to as Spousal IRAs. The Spousal IRA may be converted to a Roth IRA.1 The Roth IRA2 will accumulate income tax-free and may be a source of tax-free income during retirement. When the Spousal IRA is converted, income taxes are due. If these taxes are paid from the IRA, the Roth IRA will be reduced. Using other assets to pay income taxes due at conversion leaves more funds in the Roth IRA: • • •
Pay Conversion Taxes Using Life Insurance Insurance
More funds to accumulate tax-free! More funds to provide tax-free income during retirement! More funds to provide tax-free income to your heirs!
Life insurance on the owner’s life can provide the funds to pay taxes on the conversion.
IRS
Qualified Retirement Plan
Spousal IRA
Roth IRA
A life insurance policy on the plan owner would provide the cash needed to pay the taxes on the conversion after the owner’s death. This would leave more money in the Roth IRA to grow tax-free and be used for retirement needs. Premiums for the life insurance policy could be paid using distributions from the Qualified Retirement Plan. Assets outside the qualified retirement plan could be used in addition to, or in place of, the life insurance.
Life insurance3 maximizes your Roth IRA!
1
Beginning in year 2010 there is no income eligibility limit for Roth IRA Conversions. There is $100,000 income limit for 2009. Withdrawals from a Roth IRA are income tax-free if the owner is over age 59½ and the funds have been in the Roth IRA 5 years. Life insurance premiums would be an additional cost. This presentation is not a financial plan. Presented by: Mr. John Q. Smith, Jr., CLU For Evaluation Purposes Only 2 3
August 14, 2009 7 of 17
Comparing IRA with Roth IRA Conversion Should I Convert to a Roth IRA? How Should I Pay the Taxes? Initial Value of IRA: $500,000
Convert in 2019 to Roth IRA
A Traditional IRA may be converted to a Roth IRA, but income taxes must be paid on the moneys transferred to the Roth IRA. In exchange distributions from the Roth IRA may be made, although not required, as tax-free income.
Traditional IRA
Roth IRA
Roth IRA
No Conversion Taxes
Using Other Assets for Taxes1
Using New Life Insurance for Taxes1
$3,600,000 3,000,000 2,400,000 1,800,000 1,200,000 600,000 0
65
70
75
80
85
65
Age
70
75
80
85
65
70
Age
Traditional IRA
Other Assets
75
80
85
Age
Roth IRA
Age
IRA2
Other Assets
Total
Roth IRA
Other Assets
Total
Roth IRA
Other Assets
Total
60 65 70 75 85
530,000 709,260 916,470 1,012,975 1,076,442
306,300 339,841 399,931 581,559 1,150,531
836,300 1,049,101 1,316,400 1,594,533 2,226,973
530,000 709,260 949,149 1,270,176 2,274,691
306,300 339,841 107,120 119,368 146,942
836,300 1,049,101 1,056,269 1,389,544 2,421,634
523,837 652,408 828,660 1,108,933 1,985,931
304,500 337,271 649,285 720,838 887,350
828,337 989,680 1,477,944 1,829,771 2,873,281
Total Funds at Age 892 $2,491,917
Total Funds at Age 89 $3,031,425
Total Funds at Age 89 $3,471,461
1
Income tax rates are assumed to be 30%. Example assumes the net distributions after taxes are deposited into the Other Assets. IRA balance would be subject to income taxation upon distribution or at death. This presentation is not a financial plan. Presented by: Mr. John Q. Smith, Jr., CLU For Evaluation Purposes Only 2
August 14, 2009 8 of 17
Keep Traditional IRA No Conversion to Roth IRA at Death Initial Value of IRA: $500,000 Life Exp.1
Earnings &2 Actual3 Contributions Distributions
Traditional IRA Values
Tax Rate
Income Taxes4 Reinvested5 Paid Distributions
Total of All Other6 Assets
Less Tax4 Liability
Net All Other7 Assets
Qualified & All Other Assets
Year
Age
2009 2010 2011 2012 2013
60 61 62 63 64
30,000 31,800 33,708 35,730 37,874
0 0 0 0 0
530,000 561,800 595,508 631,238 669,113
30% 30% 30% 30% 30%
0 0 0 0 0
0 0 0 0 0
306,300 312,732 319,300 326,005 332,851
0 0 0 0 0
306,300 312,732 319,300 326,005 332,851
836,300 874,532 914,808 957,243 1,001,964
2014 2015 2016 2017 2018
65 66 67 68 69
40,147 42,556 45,109 47,815 50,684
0 0 0 0 0
709,260 751,815 796,924 844,739 895,424
30% 30% 30% 30% 30%
0 0 0 0 0
0 0 0 0 0
339,841 346,978 354,264 361,704 369,299
0 0 0 0 0
339,841 346,978 354,264 361,704 369,299
1,049,101 1,098,793 1,151,188 1,206,443 1,264,723
Traditional IRA Values
Tax Rate
Income Taxes4 Reinvested5 Paid Distributions
Bob dies and rolls over the IRA to Mary.
1
Earnings &2 Actual3 Contributions Distributions
Total of All Other6 Assets
Less Tax4 Liability
Net All Other7 Assets
Qualified & All Other Assets
Year
Age
Life Exp.1
2019 2020 2021 2022 2023
70 71 72 73 74
27.4 27.4 26.5 25.6 24.7
53,725 54,450 55,698 56,885 58,020
32,680 33,448 35,376 37,414 39,565
916,470 937,472 957,794 977,265 995,720
30% 30% 30% 30% 30%
0 9,804 10,034 10,613 11,224
32,680 23,644 25,342 26,801 28,341
409,734 441,983 476,606 513,416 552,539
9,804 10,034 10,613 11,224 11,870
399,931 431,948 465,993 502,192 540,669
1,316,400 1,369,420 1,423,787 1,479,457 1,536,389
2024 2025 2026 2027 2028
75 76 77 78 79
23.8 22.9 22.0 21.2 20.3
59,092 60,090 61,002 61,814 62,531
41,837 44,235 46,765 49,201 52,004
1,012,975 1,028,830 1,043,067 1,055,680 1,066,207
30% 30% 30% 30% 30%
11,870 12,551 13,270 14,029 14,760
29,967 31,684 33,495 35,172 37,244
594,110 638,270 685,168 734,728 787,401
12,551 13,270 14,029 14,760 15,601
581,559 624,999 671,138 719,968 771,800
1,594,533 1,653,829 1,714,205 1,775,647 1,838,006
Life expectancy is based on the Uniform Lifetime Table. See the Assumptions page for additional information. Assumes qualified plan earns 6.00% interest. Also includes Employer Contributions and Salary Reductions, if any. Actual Distribution is the greater of the pretax distribution required to generate the Desired Distributions (see Assumptions page) or Required Minimum Distribution. 4 Taxes and any applicable penalties are paid at the start of the calendar year following the tax liability. 5 Actual Distributions less Taxes and Penalties. 6 All Other Assets and Cumulative Reinvested Distributions are assumed to earn 3.00% interest and are taxed at a 30.00% income tax rate. 7 Net of liability for income taxes and any penalties. This presentation is not a financial plan. Presented by: Mr. John Q. Smith, Jr., CLU August 14, 2009 For Evaluation Purposes Only 9 of 17 2 3
Keep Traditional IRA No Conversion to Roth IRA at Death
1
Earnings &2 Actual3 Contributions Distributions
Traditional IRA Values
Tax Rate
Income Taxes4 Reinvested5 Paid Distributions
Total of All Other6 Assets
Less Tax4 Liability
Net All Other7 Assets
Qualified & All Other Assets
Year
Age
Life Exp.1
2029 2030 2031 2032 2033
80 81 82 83 84
19.5 18.7 17.9 17.1 16.3
63,116 63,579 63,900 64,063 64,052
54,677 57,468 60,377 63,408 66,560
1,074,646 1,080,757 1,084,279 1,084,934 1,082,426
30% 30% 30% 30% 30%
15,601 16,403 17,240 18,113 19,022
39,076 41,065 43,137 45,295 47,538
843,012 901,780 963,855 1,029,391 1,098,546
16,403 17,240 18,113 19,022 19,968
826,609 884,540 945,742 1,010,368 1,078,578
1,901,255 1,965,297 2,030,020 2,095,302 2,161,003
2034 2035 2036 2037 2038
85 86 87 88 89
15.5 14.8 14.1 13.4 12.7
63,850 63,437 62,832 62,012 60,963
69,834 72,733 75,684 78,679 81,703
1,076,442 1,067,146 1,054,294 1,037,627 1,016,887
30% 30% 30% 30% 30%
19,968 20,950 21,820 22,705 23,604
49,866 51,782 53,864 55,973 58,099
1,171,481 1,247,864 1,327,934 1,411,794 1,499,541
20,950 21,820 22,705 23,604 24,511
1,150,531 1,226,045 1,305,229 1,388,190 1,475,030
2,226,973 2,293,191 2,359,523 2,425,818 2,491,917
Life expectancy is based on the Uniform Lifetime Table. See the Assumptions page for additional information. Assumes qualified plan earns 6.00% interest. Also includes Employer Contributions and Salary Reductions, if any. Actual Distribution is the greater of the pretax distribution required to generate the Desired Distributions (see Assumptions page) or Required Minimum Distribution. 4 Taxes and any applicable penalties are paid at the start of the calendar year following the tax liability. 5 Actual Distributions less Taxes and Penalties. 6 All Other Assets and Cumulative Reinvested Distributions are assumed to earn 3.00% interest and are taxed at a 30.00% income tax rate. 7 Net of liability for income taxes and any penalties. This presentation is not a financial plan. Presented by: Mr. John Q. Smith, Jr., CLU August 14, 2009 For Evaluation Purposes Only 10 of 17 2 3
Convert to Roth IRA Convert at Death Using Other Assets for Taxes Initial Value of IRA: $500,000* Life Exp.1
Convert in year 2019 to Roth IRA
Earnings &2 Actual3 Contributions Distributions
Traditional IRA Values
Tax Rate
Income Taxes4 Reinvested5 Paid Distributions
Total of All Other6 Assets
Less Tax4 Liability
Net All Other7 Assets
Qualified & All Other Assets
Year
Age
2009 2010 2011 2012 2013
60 61 62 63 64
30,000 31,800 33,708 35,730 37,874
0 0 0 0 0
530,000 561,800 595,508 631,238 669,113
30% 30% 30% 30% 30%
0 0 0 0 0
0 0 0 0 0
306,300 312,732 319,300 326,005 332,851
0 0 0 0 0
306,300 312,732 319,300 326,005 332,851
836,300 874,532 914,808 957,243 1,001,964
2014 2015 2016 2017 2018
65 66 67 68 69
40,147 42,556 45,109 47,815 50,684
0 0 0 0 0
709,260 751,815 796,924 844,739 895,424
30% 30% 30% 30% 30%
0 0 0 0 0
0 0 0 0 0
339,841 346,978 354,264 361,704 369,299
0 0 0 0 0
339,841 346,978 354,264 361,704 369,299
1,049,101 1,098,793 1,151,188 1,206,443 1,264,723
Bob dies. Mary converts IRA to a Roth IRA and pays income taxes using other assets.
Year
Age
2019 2020 2021 2022 2023
70 71 72 73 74
Life Exp.1
Earnings &2 Actual3 Contributions Distributions
949,149 56,949 60,366 63,988 67,827
0 0 0 0 0
Roth IRA Values
Tax Rate
949,149 1,006,098 1,066,464 1,130,452 1,198,279
30% 30% 30% 30% 30%
Income Taxes4 Reinvested5 Paid Distributions
0 269,935 0 0 0
0 -269,935 0 0 0
Total of All Other6 Assets
Less Tax4 Liability
Net All Other7 Assets
Qualified & All Other Assets
377,055 109,846 112,153 114,508 116,913
269,935 0 0 0 0
107,120 109,846 112,153 114,508 116,913
1,056,269 1,115,945 1,178,617 1,244,960 1,315,192
*1 Represents the amount of the Traditional IRA(s) to be converted to Roth IRA, as a total or partial Roth IRA conversion. Life expectancy is based on the Uniform Lifetime Table. See the Assumptions page for additional information. 2 Assumes qualified plan/Roth IRA earns 6.00% interest. Also includes Employer Contributions and Salary Reductions, if any. After Roth Conversion, also includes amount converted to Roth IRA. 3 Actual Distribution is the greater of the pretax distribution required to generate the Desired Distributions (see Assumptions page) or Required Minimum Distribution. After Roth Conversion, Other Assets are used to the extent possible to pay income taxes on Traditional IRA amounts converted to Roth IRA. 4 Taxes and any applicable penalties are paid at the start of the calendar year following the tax liability. After Roth Conversion, includes the estimated income taxes on the Traditional IRA amount converted to Roth IRA. 5 Actual Distributions less Taxes and Penalties. After Roth Conversion, Other Assets are used to the extent possible to pay the income taxes on Traditional IRA amounts converted to Roth IRA. 6 All Other Assets and Cumulative Reinvested Distributions are assumed to earn 3.00% interest and are taxed at a 30.00% income tax rate. 7 Net of liability for income taxes and any penalties. This presentation is not a financial plan. Presented by: Mr. John Q. Smith, Jr., CLU August 14, 2009 For Evaluation Purposes Only 11 of 17
Convert to Roth IRA Convert at Death Using Other Assets for Taxes
1
Life Exp.1
Earnings &2 Actual3 Contributions Distributions
Roth IRA Values
Tax Rate
Income Taxes4 Reinvested5 Paid Distributions
Total of All Other6 Assets
Less Tax4 Liability
Net All Other7 Assets
Qualified & All Other Assets
Year
Age
2024 2025 2026 2027 2028
75 76 77 78 79
71,897 76,211 80,783 85,630 90,768
0 0 0 0 0
1,270,176 1,346,386 1,427,170 1,512,800 1,603,568
30% 30% 30% 30% 30%
0 0 0 0 0
0 0 0 0 0
119,368 121,875 124,434 127,048 129,716
0 0 0 0 0
119,368 121,875 124,434 127,048 129,716
1,389,544 1,468,261 1,551,604 1,639,847 1,733,283
2029 2030 2031 2032 2033
80 81 82 83 84
96,214 101,987 108,106 114,592 121,468
0 0 0 0 0
1,699,782 1,801,769 1,909,875 2,024,467 2,145,935
30% 30% 30% 30% 30%
0 0 0 0 0
0 0 0 0 0
132,440 135,221 138,060 140,960 143,920
0 0 0 0 0
132,440 135,221 138,060 140,960 143,920
1,832,221 1,936,990 2,047,935 2,165,427 2,289,855
2034 2035 2036 2037 2038
85 86 87 88 89
128,756 136,481 144,670 153,351 162,552
0 0 0 0 0
2,274,691 2,411,173 2,555,843 2,709,194 2,871,746
30% 30% 30% 30% 30%
0 0 0 0 0
0 0 0 0 0
146,942 150,028 153,179 156,395 159,680
0 0 0 0 0
146,942 150,028 153,179 156,395 159,680
2,421,634 2,561,201 2,709,022 2,865,589 3,031,425
Life expectancy is based on the Uniform Lifetime Table. See the Assumptions page for additional information. Assumes qualified plan/Roth IRA earns 6.00% interest. Also includes Employer Contributions and Salary Reductions, if any. After Roth Conversion, also includes amount converted to Roth IRA. 3 Actual Distribution is the greater of the pretax distribution required to generate the Desired Distributions (see Assumptions page) or Required Minimum Distribution. After Roth Conversion, Other Assets are used to the extent possible to pay income taxes on Traditional IRA amounts converted to Roth IRA. 4 Taxes and any applicable penalties are paid at the start of the calendar year following the tax liability. After Roth Conversion, includes the estimated income taxes on the Traditional IRA amount converted to Roth IRA. 5 Actual Distributions less Taxes and Penalties. After Roth Conversion, Other Assets are used to the extent possible to pay the income taxes on Traditional IRA amounts converted to Roth IRA. 6 All Other Assets and Cumulative Reinvested Distributions are assumed to earn 3.00% interest and are taxed at a 30.00% income tax rate. 7 Net of liability for income taxes and any penalties. This presentation is not a financial plan. Presented by: Mr. John Q. Smith, Jr., CLU August 14, 2009 For Evaluation Purposes Only 12 of 17 2
Convert to Roth IRA Using New Life Insurance Convert at Death Using Life Insurance to Pay Taxes Initial Value of IRA: $500,000* Life Exp.1
Convert in year 2019 to Roth IRA
Earnings &2 Actual3 Contributions Distributions
Traditional IRA Values
Tax Rate
Income Taxes4 Reinvested5 Paid Distributions
Total of All Other6 Assets
Less Tax4 Liability
Net All Other7 Assets
Qualified & All Other Assets
Year
Age
2009 2010 2011 2012 2013
60 61 62 63 64
29,837 31,168 32,541 33,984 35,510
6,000 7,800 8,340 8,502 8,551
523,837 547,205 571,406 596,887 623,847
30% 30% 30% 30% 30%
0 1,800 2,340 2,502 2,551
0 0 0 0 0
306,300 312,732 319,300 326,005 332,851
1,800 2,340 2,502 2,551 2,565
304,500 310,392 316,798 323,454 330,286
828,337 857,597 888,203 920,342 954,133
2014 2015 2016 2017 2018
65 66 67 68 69
37,127 38,840 40,656 42,582 44,622
8,565 8,570 8,571 8,571 8,571
652,408 682,679 714,765 748,775 784,826
30% 30% 30% 30% 30%
2,565 2,570 2,571 2,571 2,571
0 0 0 0 0
339,841 346,978 354,264 361,704 369,299
2,570 2,571 2,571 2,571 2,571
337,271 344,407 351,693 359,132 366,728
989,680 1,027,086 1,066,458 1,107,907 1,151,554
Bob dies. Mary converts IRA to a Roth IRA and pays income taxes using other assets and new life insurance of $500,000.
Year
Age
2019 2020 2021 2022 2023
70 71 72 73 74
Life Exp.1
Earnings &2 Actual3 Contributions Distributions
828,660 49,720 52,703 55,865 59,217
0 0 0 0 0
Roth IRA Values
Tax Rate
828,660 878,379 931,082 986,947 1,046,164
30% 30% 30% 30% 30%
Income Taxes4 Reinvested5 Paid Distributions
2,571 236,589 0 0 0
0 -236,589 0 0 0
Total of All Other6 Assets
Less Tax4 Liability
Net All Other7 Assets
Qualified & All Other Assets
885,874 663,338 677,268 691,490 706,012
236,589 0 0 0 0
649,285 663,338 677,268 691,490 706,012
1,477,944 1,541,717 1,608,350 1,678,437 1,752,175
*1 Represents the amount of the Traditional IRA(s) to be converted to Roth IRA, as a total or partial Roth IRA conversion. Life expectancy is based on the Uniform Lifetime Table. See the Assumptions page for additional information. 2 Assumes qualified plan/Roth IRA earns 6.00% interest. Also includes Employer Contributions and Salary Reductions, if any. After Roth Conversion, also includes amount converted to Roth IRA. 3 Actual Distribution is the greater of the pretax distribution required to generate the Desired Distributions (see Assumptions page) or Required Minimum Distribution. 4 Taxes and any applicable penalties are paid at the start of the calendar year following the tax liability. After Roth Conversion, includes the estimated income taxes on the Traditional IRA amount converted to Roth IRA. 5 Actual Distributions less Taxes and Penalties. After Roth Conversion, life insurance proceeds are added to Other Assets and used to pay income taxes on Traditional IRA amount converted to Roth IRA. 6 All Other Assets and Cumulative Reinvested Distributions are assumed to earn 3.00% interest and are taxed at a 30.00% income tax rate. After Roth Conversion, life insurance proceeds are added to Other Assets and used to pay income taxes on Traditional amount converted to Roth IRA. 7 Net of liability for income taxes and any penalties. This presentation is not a financial plan. Presented by: Mr. John Q. Smith, Jr., CLU August 14, 2009 For Evaluation Purposes Only 13 of 17
Convert to Roth IRA Using New Life Insurance Convert at Death Using Life Insurance to Pay Taxes
1
Life Exp.1
Earnings &2 Actual3 Contributions Distributions
Roth IRA Values
Tax Rate
Income Taxes4 Reinvested5 Paid Distributions
Total of All Other6 Assets
Less Tax4 Liability
Net All Other7 Assets
Qualified & All Other Assets
Year
Age
2024 2025 2026 2027 2028
75 76 77 78 79
62,770 66,536 70,528 74,760 79,245
0 0 0 0 0
1,108,933 1,175,469 1,245,998 1,320,758 1,400,003
30% 30% 30% 30% 30%
0 0 0 0 0
0 0 0 0 0
720,838 735,976 751,431 767,211 783,322
0 0 0 0 0
720,838 735,976 751,431 767,211 783,322
1,829,771 1,911,445 1,997,429 2,087,969 2,183,325
2029 2030 2031 2032 2033
80 81 82 83 84
84,000 89,040 94,383 100,046 106,048
0 0 0 0 0
1,484,003 1,573,043 1,667,426 1,767,471 1,873,520
30% 30% 30% 30% 30%
0 0 0 0 0
0 0 0 0 0
799,772 816,567 833,715 851,223 869,099
0 0 0 0 0
799,772 816,567 833,715 851,223 869,099
2,283,775 2,389,611 2,501,141 2,618,695 2,742,619
2034 2035 2036 2037 2038
85 86 87 88 89
112,411 119,156 126,305 133,884 141,917
0 0 0 0 0
1,985,931 2,105,087 2,231,392 2,365,276 2,507,192
30% 30% 30% 30% 30%
0 0 0 0 0
0 0 0 0 0
887,350 905,985 925,010 944,435 964,269
0 0 0 0 0
887,350 905,985 925,010 944,435 964,269
2,873,281 3,011,071 3,156,402 3,309,711 3,471,461
Life expectancy is based on the Uniform Lifetime Table. See the Assumptions page for additional information. Assumes qualified plan/Roth IRA earns 6.00% interest. Also includes Employer Contributions and Salary Reductions, if any. After Roth Conversion, also includes amount converted to Roth IRA. 3 Actual Distribution is the greater of the pretax distribution required to generate the Desired Distributions (see Assumptions page) or Required Minimum Distribution. 4 Taxes and any applicable penalties are paid at the start of the calendar year following the tax liability. After Roth Conversion, includes the estimated income taxes on the Traditional IRA amount converted to Roth IRA. 5 Actual Distributions less Taxes and Penalties. After Roth Conversion, life insurance proceeds are added to Other Assets and used to pay income taxes on Traditional IRA amount converted to Roth IRA. 6 All Other Assets and Cumulative Reinvested Distributions are assumed to earn 3.00% interest and are taxed at a 30.00% income tax rate. After Roth Conversion, life insurance proceeds are added to Other Assets and used to pay income taxes on Traditional IRA amount converted to Roth IRA. 7 Net of liability for income taxes and any penalties. This presentation is not a financial plan. Presented by: Mr. John Q. Smith, Jr., CLU August 14, 2009 For Evaluation Purposes Only 14 of 17 2
Estate Tax Repeal Sunset Provisions Tax Relief Act Of 20011 A controversial aspect of this Act is the future repeal of the estate tax. The Act is a compromise between substantial estate tax reductions and full repeal. However, there were concerns that the cost of full repeal would use too much of the money needed for other tax cuts and spending priorities. The resulting compromise uses a slow phase-in through the year 2009 with a full repeal of the tax in 2010.
"Sunset Provisions" The Act contains a "sunset provision" that repeals this Act as of December 31, 2010. Consequently, the estate tax, gift tax, and generation-skipping transfer tax in effect in 2001 will become the law once again on January 1, 2011. Unless there is future legislation the Tax Relief Act will only be effective through the year 2010.
Phase-In Rates and Schedules Starting in 2002 the maximum rate for estate tax, gift tax, and generation-skipping transfer tax became 50%. It was reduced by 1% in each of the following years until it was 45% for years 2007 through 2009. The gift tax rate continues after 2009 at a maximum amount equal to the maximum income tax rate which would be 35%. Immediate estate, gift and generation-skipping transfer relief started in 2002 when $1,000,000 became an applicable exclusion for these taxes. For gift tax purposes it remains at $1,000,000 for 2009. For estate taxes and generation-skipping transfers it increased in 2004 to $1,500,000; in 2006 to $2,000,000; and in 2009 to $3,500,000. This exclusion reduces the amounts subject to these taxes until repeal in 2010. Of course, the law in 2001 becomes the law again in 2011 unless Congress intervenes.
Many Other Significant Provisions One of many new provisions of this complex tax act deals with the elimination of step-up basis for inherited property. This means that property inherited after estate tax repeal in 2010 may be subject to capital gains taxes when sold. Each estate will be allowed a $1.3 million exclusion of increased basis and an additional $3 million exclusion for the surviving spouse. To assist the IRS, the executors and trustees will have significant new reporting requirements. These new provisions require special planning for the closely-held business owner. The Act contains many other provisions.
Continued Need for Planning The complexities of this new legislation and the uncertainties of many of its provisions require careful planning with your tax and legal advisors.
1
The Economic Growth and Tax Relief Reconciliation Act of 2001 as adopted by Congress May 26, 2001 and signed by the President June 7, 2001 This presentation is not a financial plan. Presented by: Mr. John Q. Smith, Jr., CLU For Evaluation Purposes Only
August 14, 2009 15 of 17
Assumptions Details and Assumptions for Calculations General Assumptions Bob's DOB: January 1, 1949 and Mary's DOB: May 11, 1950 Calculations assume that the value of All Other Assets (excluding life insurance) is equal to $300,000. These assets are assumed to earn 3.00% interest. Hypothetical rates of return illustrated are not associated with any particular investment product. In some scenarios, new life insurance proceeds of $500,000 are illustrated after the death of the participant. Calculations assume an ordinary income tax rate of 30.00%. Distribution of amounts equal to non-deductible contributions to your qualified plan are not taxable. These illustrations assume all distributions are taxable income. The Account Balance and Other Assets are grown pro-rata based on the date entered. Qualified Plan Assumptions Current qualified plan amount is $500,000, with a growth rate of 6.00%. Hypothetical rates of return illustrated are not associated with any particular investment product. There are no Required Minimum Distributions from Qualified Plans for 2009 only. Elections: Distributions are at least the Required Minimum Distribution using the Uniform Lifetime Table, if applicable. Required Minimum Distributions based on the Uniform Lifetime Table. Conversion Occurs: Year 2019 Traditional IRA Contributions may be tax deductible and earnings are tax-deferred, but taxable when withdrawn. Required minimum distributions must begin by age 70½. Deductibility of contributions is based on modified adjusted gross income (MAGI) (for 2009, single $65,000 and married, filing jointly $109,000) and not being a participant in an employer sponsored retirement plan. Roth IRA Contributions are not tax deductible but earnings are tax-deferred and are generally not taxable upon withdrawal. Contributions are limited to $5,000 for 2009 ($6,000 if 50 or over). The ability to contribute is phased out if your MAGI is $166,000 - $176,000 for married, filing jointly in 2009, and eliminated thereafter. (The phase out is $105,000 - $120,000 for single taxpayers.) Withdrawals of contributions to Roth IRAs are not subject to income tax or the 10% early withdrawal penalty tax. Withdrawals of earnings within 5 years of establishing a Roth IRA are taxed as ordinary income. Earnings taken prior to age 59½ are taxed as ordinary income, and may be subject to a 10% early distribution penalty tax, with certain exceptions. There is no required minimum distributions at any age. Conversion of Traditional IRA to Roth IRA Prior to 2010, a Traditional IRA cannot be converted to a Roth IRA if MAGI exceeds $100,000. Amounts converted from the Traditional IRA are taxable in the year of the conversion. However, amounts converted to Roth IRA in 2010 only will be reported equally in 2011 and 2012; therefore, income taxes are paid equally in 2012 and 2013. Withdrawals of converted amounts within five years of each conversion to Roth IRA may be subject to the 10% early distribution penalty tax, and withdrawals of earnings may be subject to the 10% early distribution penalty tax and/or taxed as ordinary income. This presentation is not a financial plan. Presented by: Mr. John Q. Smith, Jr., CLU For Evaluation Purposes Only
August 14, 2009 16 of 17
Assumptions (Continued) Details and Assumptions for Calculations Tax Relief Act of 2001 Compliant This illustration shows the effect of this law on your estimated estate if you (and your spouse) die in the year shown. The Tax Relief Act of 2001 reduces the maximum rate and increases the applicable exclusion amount each year through 2009 with no estate tax in year 2010. A "sunset provision" voids the new law in 2011 and retroactively restores the law effective in 2001. Distribution Assumptions Early retirement distributions are not exempt from the IRC Section 72(t) penalty. Desired distributions from the plan include: Monthly premiums of $500 for new life insurance with a death benefit of $500,000 on Bob. Distributions from the Traditional IRA are taxable. For Traditional IRA/Qualified Plan, distribution calculations do not use a joint beneficiary. For Traditional/Qualified Plan, required minimum distributions are based on the Uniform Lifetime Table. Final Regulations Required Minimum Distributions are calculated based on the Uniform Lifetime Table. The Uniform Lifetime Table is permitted to be used for lifetime distributions for calendar years beginning on or after January 1, 2002 and must be used for lifetime distributions for calendar years beginning on or after January 1, 2003. If your beneficiary is your spouse (who is more than 10 years younger than you) distributions during your joint lives may be calculated using the Joint and Last Survivor Table. Compliance with Revenue Ruling 2002-62 Section 72(t) distributions are in compliance with the calculation methods stated in Revenue Ruling 2002-62. The following calculation methods may be illustrated under this ruling: 1) Extension of the existing Uniform Lifetime Table for use with the Life Expectancy Method. 2) Addition of annuity factor table for use with the Annuity Method. 3) Addition of interest rate (not more than 120% of the federal mid-term rate) for use with the Amortization and Annuity Methods.
Visit www.impact-tech.com to learn more about tools for qualified plan analysis, including complete Roth conversion tools. Or talk to a sales representative at: 1-800-438-6017
This presentation is not a financial plan. Presented by: Mr. John Q. Smith, Jr., CLU For Evaluation Purposes Only
August 14, 2009 17 of 17
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