For Producer Use Only

IRD, NUA and Life Insurance

IRA Tax Fundamentals and Strategies

Presenter Title

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70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 1000%

2%

4%

6%

8%

10%

12%

14%

16%

18%

RMD as % of Account Value

RMDs vs. Account Value

6%8%

10%12%

14%

3.6%

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Projected IRA Values

$100,000 IRA; 7% hypothetical annual return

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

70 75 80 85 90 95 100 105 110 115

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RMD Table

Age

Uniform Table

Divisor

Single-Life Table

Divisor Age

Uniform Table

Divisor

Single-Life Table

Divisor Age

Uniform Table

Divisor

Single-Life Table

Divisor

70 27.4 17.0 86 14.1 7.1 102 5.5 2.5

71 26.5 16.3 87 13.4 6.7 103 5.2 2.3

72 25.6 15.5 88 12.7 6.3 104 4.9 2.1

73 24.7 14.8 89 12.0 5.9 105 4.5 1.9

74 23.8 14.1 90 11.4 5.5 106 4.2 1.7

75 22.9 13.4 91 10.8 5.2 107 3.9 1.5

76 22.0 12.7 92 10.2 4.9 108 3.7 1.4

77 21.2 12.1 93 9.6 4.6 109 3.4 1.2

78 20.3 11.4 94 9.1 4.3 110 3.1 1.1

79 19.5 10.8 95 8.6 4.1 111 2.9 1.0

80 18.7 10.2 96 8.1 3.8 112 2.6

81 17.9 9.7 97 7.6 3.6 113 2.4

82 17.1 9.1 98 7.1 3.4 114 2.1

83 16.3 8.6 99 6.7 3.1 115 + 1.9

84 15.5 8.1 100 6.3 2.9

85 14.8 7.6 101 5.9 2.7

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I.R.D.Income in Respect of a Decedent

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IRD: The Bad News Is. . .1. No step-up in basis at death

2. Beneficiary pays income tax at owner’s death– Taxes are calculated at Beneficiary’s tax rate

3. Deceased IRA owner must include the entire IRA value in his / her estate for estate taxes– Even though the $$ pass directly to the designated

beneficiary!

This is what’s known as the “Double-Tax”

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IRD: The Good News Is. . .You can overcome these problems

The IRS gives you tools to do it!

1. Stretch the inheritance to spread the taxes over many years and continue tax deferral

2. Consider charitable beneficiaries

3. NUA – more about this in a few minutes!

4. Beneficiary receives an income tax deduction for estate taxes paid by owner

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Estate Taxes & IRD IRA values included in decedent’s gross estate

– Decedent’s estate pays the estate taxes– Beneficiary pays the income taxes

Unlimited Marital Deduction (since 1982)– Allows first-decedent-spouse to pass IRA to surviving spouse

without incurring estate tax

IRD income-tax-deduction for beneficiary’s– For the estate taxes attributable to the IRA

The Problem? ? ?– Decedent’s CPA vs. Beneficiary’s CPA

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IRA Value: $1,000,000

Estate Tax (40%): – $400,000

To Be Income Taxed: $600,000

Income Tax (40%): – $240,000

Net Inheritance: $360,000

Total Taxes: $640,000

% Lost to Tax: 64%

IRA Estate Tax Example:Theory vs. Reality

Net Remaining

Income Tax

Estate Tax

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Decedent Beneficiary

IRA Value: $1,000,000 $1,000,000

Estate Tax (40%): – $400,000 – $0

Net Value: $600,000 $1,000,000

Income Tax (40%): – $0 – $400,000

Total Taxes: $800,000

% Lost to Tax: 80%

IRA Estate Tax Example:Theory vs. Reality

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IRA Estate Tax Example:Theory vs. Reality

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

$900,000

$1,000,000

Net Remaining

Income Tax

Estate Tax

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Net Remaining

Income Tax

Estate Tax

Net Remaining

Income Tax

Estate Tax

IRA Estate Tax Example:Theory vs. Reality

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Estate Tax Exclusion:Then and Now

1997:$600,000

Per Person

2013:$5,250,000Per Person

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Stretching The IRD Deduction Recall the previous example:

– IRA Value = $1,000,000– Estate Tax (40%) = $400,000

Children inherit $1,000,000– Stretch = $80,000 per year for 30 years (over-simplified)– Estate Tax Deduction = 40%

• Calculation: $400,000 Estate Tax / $1,000,000 IRA Value– So 40% of each stretch payment is excused from income

tax until the deduction is used up

Each stretch payment is 40% income-tax-free for 12.5 years!– Unlimited deduction carry-forward– Can amend prior 3-years’ tax-returns

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Stretching The IRD Deduction

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

Taxable Tax-Free

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N.U.A.Net Unrealized Appreciation

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NUA – What is it? It’s the appreciation on the “employer stock” in your 401(k)

Upon separation from service, you can distribute your employer stock (in-kind distribution) from your 401(k) your brokerage account.

When you distribute your NUA, you only pay income tax on the value of the stock when it was originally purchased in your 401(k)

If you then hold the NUA stock for more than one year, you receive Long-Term Capital Gains tax treatment on any appreciation in the shares you sell

You can still roll the balance of your 401(k) into a Rollover IRA

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NUA – Benefits

Long-term capital gains tax treatment– All gains in excess of “basis” are taxed as Long-

Term Capital Gains– There ARE Step-Up-In-Basis opportunities with

NUA!

There is no “RMD” on NUA stock– No requirement to sell it after age 70½ – Defer the growth for the rest of your life!– Pass it on!

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NUA – 3 Components

Appreciation Outside the

Plan

Appreciation Inside the

Plan

Original Stock Price

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NUA – 3 Components

Any appreciation on your NUA stock that occurs after you’ve removed it from your 401(k) DOES

get a step-up in basis at your death

NUA appreciation that occurred while the company stock was in your 401(k) does NOT get a step-up in basis at your death, but is taxed at

long-term capital gains tax rates when sold

The original stock price becomes “cost basis” when withdrawn from the 401(k) and taxed

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NUA – 3 Components

Appreciation Outside the

Plan: $400,000

Appreciation Inside the

Plan:$400,000

Basis:$200,000

Long-Term Capital Gains

Tax Rates

No RMD’s

Step-Up in Basis

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NUA – Caveats Be careful about selling the employer stock in

your 401(k) and investing it in something else

– Even if you later “buy back” some employer stock, the newly purchased stock will have a new “basis”

• Functionally eliminates the value of the NUA distribution

– Continually remind your clients of the importance of NUA:

1. Before they roll their 401(k) into an IRA; and

2. Before they sell employer stock inside of their 401(k)

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Story SellingAnd IRA Wealth Transfer Strategies

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3 Circles

2 Questions

3-Point Value Proposition

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Cross out the one you would least liketo get your money when you’re done with it.

XL.O. C G

Your money can go to threeplaces when you’re done with it:

3 Circles

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Client Questions & Value PropositionTwo questions:

1. Mr. & Mrs. Jones, if things go the way you have planned, what’s going to happen to your IRA?

2. Why don’t you give it to them right now?

Three-point value proposition:

3. We’ll keep your IRA in your Care, Custody and Control;

4. Potentially double, triple or quadruple the value to your beneficiaries; and

5. Take no additional investment risk in your portfolio

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2 IRAWealth Transfer

Strategies

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Typical IRA Transfer

IRA Owner(s)

Children

Grandchildren

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Typical IRA Transfer

IRA Owner(s)$500,000

Children$300,000

Grandchildren

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1. IRA Income Tax Offset

IRA

RMD’s

Life Insurance(equal to taxes)

Taxes

Beneficiaries

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1. IRA Income Tax Offset

IRA$500,000

RMD’s

Life Insurance$200,000

Taxes

Beneficiaries$500,000

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2. IRA Income Tax Elimination

IRA

RMD’s

Life Insurance(equal to IRA)

Beneficiaries

Charity

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2. IRA Income Tax Elimination

IRA$500,000

RMD’s

Life Insurance$500,000

Beneficiaries

Charity$500,000

Tax-Free Total:$1,000,000

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The “Soft” Close

“I know you qualify for this program financially, but. . .

I don’t know if you qualify medically.”

You have time to think about it.

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IRD, NUA and Life Insurance

IRA Tax Fundamentals and Strategies

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Important Information

Policies issued by American General Life Insurance Company (AGL), a member of American International Group, Inc. (AIG)

The underwriting risks, financial and contractual obligations and support functions associated with the products issued by AGL its responsibility. Guarantees are subject to the claims-paying ability of the issuing insurance company. AGL does not solicit business in New York.

Policies and riders not available in all states. Keep in mind that American General Life Insurance Company and their distributors and representatives may not give tax, accounting or legal advice. Any tax statements in this material are not intended to suggest the avoidance of U.S. federal, state or local tax penalties. Such discussions generally are based upon the company’s understanding of current tax rules and interpretations. Tax laws are subject to legislative modification, and while many such modifications will have only a prospective application, it is important to recognize that a change could have retroactive effect as well. Individuals should seek the advice of an independent tax advisor or attorney for more complete information concerning their particular circumstances and any tax statements made in this material.

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