the stretch ira - keeping minimum required distributions to a minimum

11

The Stretch IRA - The Stretch IRA - Keeping Minimum Keeping Minimum

Required Required Distributions to a Distributions to a

MinimumMinimum

Presented by:Robert S. Keebler, CPA, MST1400 Lombardi Ave., Ste 200

P.O. Box 11997Green Bay, WI 54307-1997

Ph: (920) 490-5626Fax: (920) 499-1050

E-mail: [email protected]

22

Potential tax exposure to IRA without planning

Federal & State Estate Tax, 50.00%

Income Tax, 21.00%

Net to Family 29.00%

Why Retirement Distribution Planning is Important

33

Perhaps one of the most important Perhaps one of the most important decisions a retiree must make is to decisions a retiree must make is to determine from which retirement assets to determine from which retirement assets to withdraw funds to meet everyday living withdraw funds to meet everyday living expensesexpenses


44

Qualified Retirement Account vs. Non-Qualified Retirement Account vs. Non-Qualified Account Distributions Qualified Account Distributions

Decision factorsDecision factors Size of accountsSize of accounts Investment mix / performanceInvestment mix / performance Marginal income tax bracketMarginal income tax bracket Time horizonTime horizon


55

OPTION 1 - Withdraw 100% From IRA

Husband's Age 64 65 66 67 68Wife's Age 59 60 61 62 63

ASSETS 2007 2008 2009 2010 2011IRABeginning Balance 1,300,000$ 1,216,000$ 1,127,620$ 1,034,553$ 936,472$ Income 7.00% 91,000 85,120 78,933 72,419 65,553 Distributions (175,000) (173,500) (172,000) (170,500) (169,000) Ending Balance 1,216,000$ 1,127,620$ 1,034,553$ 936,472$ 833,025$

Brokerage AccountBeginning Balance 1,400,000$ 1,474,010$ 1,551,707$ 1,633,325$ 1,719,113$ Yield (Interest & Dividends) 2.00% 28,000 29,480 31,034 32,667 34,382 Growth 5.00% 70,000 73,701 77,585 81,666 85,956 Subtotal 1,498,000$ 1,577,191$ 1,660,327$ 1,747,658$ 1,839,451$ Yield Disributed (28,000) (29,480) (31,034) (32,667) (34,382) Stock Sales - - - - - Net Cash Flow Reinvested 4,010 3,997 4,033 4,122 4,266 Ending Balance 1,474,010$ 1,551,707$ 1,633,325$ 1,719,113$ 1,809,335$

Total Assets 2,690,010$ 2,679,327$ 2,667,879$ 2,655,585$ 2,642,360$

CASH FLOW 2007 2008 2009 2010 2011IRA Distribution 175,000$ 173,500$ 172,000$ 170,500$ 169,000$ Interest & Dividends 28,000 29,480 31,034 32,667 34,382 Stock Sales Proceeds - - - - - Subtotal 203,000$ 202,980$ 203,034$ 203,167$ 203,382$ Less: Income Tax (66,990) (66,983) (67,001) (67,045) (67,116) Less: Living Expenses (132,000) (132,000) (132,000) (132,000) (132,000) Net Cash Flow 4,010$ 3,997$ 4,033$ 4,122$ 4,266$


66

OPTION 2 - Withdraw 100% From Brokerage Account

Husband's Age 64 65 66 67 68Wife's Age 59 60 61 62 63

ASSETS 2007 2008 2009 2010 2011IRABeginning Balance 1,300,000$ 1,391,000$ 1,488,370$ 1,592,556$ 1,704,035$ Income 7.00% 91,000 97,370 104,186 111,479 119,282 Distributions - - - - - Ending Balance 1,391,000$ 1,488,370$ 1,592,556$ 1,704,035$ 1,823,317$

Brokerage AccountBeginning Balance 1,400,000$ 1,344,910$ 1,285,459$ 1,221,390$ 1,152,431$ Yield (Interest & Dividends) 2.00% 28,000 26,898 25,709 24,428 23,049 Growth 5.00% 70,000 67,245 64,273 61,070 57,622 Subtotal 1,498,000$ 1,439,053$ 1,375,441$ 1,306,887$ 1,233,101$ Yield Disributed (28,000) (26,898) (25,709) (24,428) (23,049) Stock Sales (130,000) (131,500) (133,000) (134,500) (136,000) Net Cash Flow Reinvested 4,910 4,803 4,659 4,472 4,238 Ending Balance 1,344,910$ 1,285,459$ 1,221,390$ 1,152,431$ 1,078,291$

Total Assets 2,735,910$ 2,773,829$ 2,813,946$ 2,856,466$ 2,901,608$

CASH FLOW 2007 2008 2009 2010 2011IRA Distribution -$ -$ -$ -$ -$ Interest & Dividends 28,000 26,898 25,709 24,428 23,049 Stock Sales Proceeds 130,000 131,500 133,000 134,500 136,000 Subtotal 158,000$ 158,398$ 158,709$ 158,928$ 159,049$ Less: Income Tax (21,090) (21,595) (22,051) (22,456) (22,810) Less: Living Expenses (132,000) (132,000) (132,000) (132,000) (132,000) Net Cash Flow 4,910$ 4,803$ 4,659$ 4,472$ 4,238$


77

Total Assets

$-

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

$4,500,000

5 10 20 30

Year

100% IRA Distribution 100% Brokerage Account Distribution


88

Wills control probate assetsWills control probate assets

Trusts control trust assetsTrusts control trust assets

IRAs and qualified retirement plans are IRAs and qualified retirement plans are controlled by beneficiary designation form controlled by beneficiary designation form

or or default provisions of contractdefault provisions of contract

Foundation ConceptsFoundation Concepts

99


IRAs are not taxed until distributedIRAs are not taxed until distributed Distributions must begin no later than Distributions must begin no later than

one’s Required Beginning Date (RBD)one’s Required Beginning Date (RBD) IRA Elections are required after deathIRA Elections are required after death Roth IRA conversions must be analyzedRoth IRA conversions must be analyzed Use of life insurance to prolong Use of life insurance to prolong

distributionsdistributions

1010

To the extentTo the extent that an IRA has only that an IRA has only deductible contributions (plus income and deductible contributions (plus income and growth), 100% of each IRA distribution will growth), 100% of each IRA distribution will be subject to income tax in the year of be subject to income tax in the year of distributiondistribution

To the extent that an IRA has non-To the extent that an IRA has non-deductible contributions, a portion of each deductible contributions, a portion of each IRA distribution will not be subject to taxIRA distribution will not be subject to tax

Taxation of IRA DistributionsTaxation of IRA DistributionsFoundation ConceptsFoundation Concepts

1111

When an IRA has non-deductible contributions, When an IRA has non-deductible contributions, a portion of each IRA distribution will be a a portion of each IRA distribution will be a return of non-taxable “basis” to the IRA ownerreturn of non-taxable “basis” to the IRA owner

In determining the non-taxable portion of an In determining the non-taxable portion of an IRA distribution, all IRAs and IRA distributions IRA distribution, all IRAs and IRA distributions during the year (including outstanding during the year (including outstanding rollovers) must be combined for apportioning rollovers) must be combined for apportioning “basis”“basis”– See IRS Form 8606See IRS Form 8606


1212

““Basis” Apportionment Formula - ExampleBasis” Apportionment Formula - ExampleCurrent year non-deductible IRA contributions 1,000$ Prior year non-deductible IRA contributions 6,000 Total non-deductible IRA contributions 7,000$

FMV of all IRAs 320,000$ Outstanding rollovers 20,000 Distributions 10,000 Roth IRA conversions - Total value of IRAs, distributions and Roth IRA conversions 350,000$

"Basis" apportionment formula 0.0200

Gross IRA distribution 10,000$ Non-taxable portion (200) Taxable IRA distribution 9,800$


1313


Generally, April 1 of the year Generally, April 1 of the year following the year the owner following the year the owner turns age 70½ is the RBDturns age 70½ is the RBD

Once at RBD, required minimum Once at RBD, required minimum distributions (RMD) must begindistributions (RMD) must begin

1414

Example-Birthdate is October 18, Example-Birthdate is October 18, 19371937– Turn age 70 on October 18, 2007Turn age 70 on October 18, 2007– Turn age 70½ on April 18, 2008Turn age 70½ on April 18, 2008– RBD -- April 1, 2009RBD -- April 1, 2009

Example-Birthdate is April 18, 1937Example-Birthdate is April 18, 1937– Turn age 70 on April 18, 2007Turn age 70 on April 18, 2007– Turn age 70½ on October 18, 2007Turn age 70½ on October 18, 2007– RBD -- April 1, 2008RBD -- April 1, 2008

Required Beginning Date - ExampleRequired Beginning Date - ExampleFoundation ConceptsFoundation Concepts

1515

RMDs are calculated based upon RMDs are calculated based upon prior year ending account balance prior year ending account balance divided by life expectancy factordivided by life expectancy factor

Prior Year12/31 BalanceLife Expectancy Factor

RMD =


1616

Life expectancy tablesLife expectancy tables– Uniform Lifetime TableUniform Lifetime Table– Single Life TableSingle Life Table– Joint and Last Survivor TableJoint and Last Survivor Table

Available where the spouse is the Available where the spouse is the sole beneficiary and is greater than sole beneficiary and is greater than 10 years younger than the account 10 years younger than the account ownerowner

Foundation Concepts

1717

Uniform Lifetime TableUniform Lifetime TableAge Divisor Age Divisor Age Divisor

70 27.4 86 14.1 102 5.5

71 26.5 87 13.4 103 5.2

72 25.6 88 12.7 104 4.9

73 24.7 89 12.0 105 4.5

74 23.8 90 11.4 106 4.2

75 22.9 91 10.8 107 3.9

76 22.0 92 10.2 108 3.7

77 21.2 93 9.6 109 3.4

78 20.3 94 9.1 110 3.1

79 19.5 95 8.6 111 2.9

80 18.7 96 8.1 112 2.6

81 17.9 97 7.6 113 2.4

82 17.1 98 7.1 114 2.183 16.3 99 6.7 115 and older 1.9

84 15.5 100 6.385 14.8 101 5.9

Foundation Concepts

1818

Single Life TableSingle Life TableAge Divisor Age Divisor Age Divisor Age Divisor Age Divisor Age Divisor Age Divisor

0 82.4 16 66.9 32 51.4 48 36.0 64 21.8 80 10.2 96 3.8

1 81.6 17 66.0 33 50.4 49 35.1 65 21.0 81 9.7 97 3.6

2 80.6 18 65.0 34 49.4 50 34.2 66 20.2 82 9.1 98 3.4

3 79.7 19 64.0 35 48.5 51 33.3 67 19.4 83 8.6 99 3.1

4 78.7 20 63.0 36 47.5 52 32.3 68 18.6 84 8.1 100 2.9

5 77.7 21 62.1 37 46.5 53 31.4 69 17.8 85 7.6 101 2.7

6 76.7 22 61.1 38 45.6 54 30.5 70 17.0 86 7.1 102 2.5

7 75.8 23 60.1 39 44.6 55 29.6 71 16.3 87 6.7 103 2.3

8 74.8 24 59.1 40 43.6 56 28.7 72 15.5 88 6.3 104 2.1

9 73.8 25 58.2 41 42.7 57 27.9 73 14.8 89 5.9 105 1.9

10 72.8 26 57.2 42 41.7 58 27.0 74 14.1 90 5.5 106 1.7

11 71.8 27 56.2 43 40.7 59 26.1 75 13.4 91 5.2 107 1.5

12 70.8 28 55.3 44 39.8 60 25.2 76 12.7 92 4.9 108 1.4

13 69.9 29 54.3 45 38.8 61 24.4 77 12.1 93 4.6 109 1.2

14 68.9 30 53.3 46 37.9 62 23.5 78 11.4 94 4.3 110 1.1

15 67.9 31 52.4 47 37.0 63 22.7 79 10.8 95 4.1 111 1.0


1919

Post-death critical questions:Post-death critical questions: Did the participant die before his RBD?Did the participant die before his RBD? Is the spouse the sole beneficiary?Is the spouse the sole beneficiary? Are there multiple beneficiaries?Are there multiple beneficiaries? Are all beneficiaries “designated Are all beneficiaries “designated

beneficiaries”?beneficiaries”? What does the IRA/qualified plan allow? What does the IRA/qualified plan allow?


2020

Permissible “designated Permissible “designated beneficiaries”:beneficiaries”:– IndividualsIndividuals

SpouseSpouse ChildChild GrandchildGrandchild ParentParent Brother/sisterBrother/sister Niece/NephewNiece/Nephew NeighborNeighbor

− Certain TrustsCertain Trusts


2121

Death before age 70½Death before age 70½– Five-year ruleFive-year rule– Exceptions to the five-year ruleExceptions to the five-year rule– Delayed distributions – spousal beneficiaryDelayed distributions – spousal beneficiary– Spousal beneficiary – special trust problemSpousal beneficiary – special trust problem

Death after age 70½Death after age 70½– Life expectancy distributions if you have a designated Life expectancy distributions if you have a designated

beneficiarybeneficiary

– Distributions must begin by December 31st of the year after Distributions must begin by December 31st of the year after

deathdeath

– Year of death distribution – life expectancy of IRA ownerYear of death distribution – life expectancy of IRA owner


2222

Life Expectancy Life Expectancy

RuleRuleLife Expectancy Life Expectancy

RuleRule

Five-Year RuleFive-Year Rule

Death Death BeforeBefore Required Required Beginning DateBeginning Date

Death Death On or AfterOn or After Required Required Beginning DateBeginning Date

Designated Designated BeneficiaryBeneficiary

Non-Non-Designated Designated BeneficiaryBeneficiary

““Ghost” Life Ghost” Life Expectancy Expectancy

RuleRule

Foundation Concepts

2323

Critical dates:Critical dates: September 30September 30 of the year following the year of of the year following the year of

deathdeath– Date at which the beneficiaries are identifiedDate at which the beneficiaries are identified

October 31October 31 of the year following the year of death of the year following the year of death– Date at which trust documentation (in the case where as trust is Date at which trust documentation (in the case where as trust is

named as a designated beneficiary) must be filed named as a designated beneficiary) must be filed

December 31December 31 of the year following the year of of the year following the year of deathdeath– Date at which the first distribution must be made by each IRA Date at which the first distribution must be made by each IRA

beneficiarybeneficiary– Date at which separate shares must be createdDate at which separate shares must be created


2424

““Inherited” IRAInherited” IRA

ObjectiveObjective: Prolong IRA : Prolong IRA payments over longest possible payments over longest possible period of time, thus increasing period of time, thus increasing wealth to future generationswealth to future generations

2525


An IRA is treated as “inherited” if the An IRA is treated as “inherited” if the individual for whose benefit the IRA individual for whose benefit the IRA is maintained acquired the IRA on is maintained acquired the IRA on account of the death of the original account of the death of the original owner.owner.

Under the tax law the IRA assets can Under the tax law the IRA assets can be distributed based upon the life be distributed based upon the life expectancy of the beneficiary.expectancy of the beneficiary.

2626

Two StrategiesTwo Strategies– Spousal RolloverSpousal Rollover– Inherited IRAInherited IRA

Advantages Advantages – Rollover delays RMD until spouse’s own Rollover delays RMD until spouse’s own

RBDRBD– Inherited IRA provisions allow Inherited IRA provisions allow

beneficiary’s life expectancy to be used beneficiary’s life expectancy to be used for distributions after death of IRA ownerfor distributions after death of IRA owner


2727

Beneficiary Designation FormsBeneficiary Designation Forms Tax ApportionmentTax Apportionment Irrevocable Life Insurance Trust Irrevocable Life Insurance Trust

(ILIT)(ILIT)

Key Issues in Making the “Inherited IRA” Work““Inherited” IRAInherited” IRA

2828

Exception to Inherited IRA rulesException to Inherited IRA rules Only available to surviving spouseOnly available to surviving spouse Allows spouse to roll over assets received Allows spouse to roll over assets received

as beneficiary to a new IRA in his/her own as beneficiary to a new IRA in his/her own namename

Spouse’s age used to determine when Spouse’s age used to determine when required minimum distributions must beginrequired minimum distributions must begin

Spouse may use the Uniform Lifetime Table Spouse may use the Uniform Lifetime Table to determine distributionsto determine distributions

Spousal Beneficiary - RolloverSpousal Beneficiary - Rollover““Inherited” IRAInherited” IRA

2929

Utilizes the exemption to the five year ruleUtilizes the exemption to the five year rule Avoids IRA assets being subject to estate Avoids IRA assets being subject to estate

tax in spouse’s estatetax in spouse’s estate Achieves Achieves ““Inherited IRAInherited IRA” ” to the degree to the degree

that distributions occur over life that distributions occur over life expectancy of the designated beneficiaryexpectancy of the designated beneficiary

Child / Grandchild BeneficiaryChild / Grandchild Beneficiary““Inherited” IRAInherited” IRA

3030

Life expectancy of child and/or Life expectancy of child and/or grandchild determined in year after grandchild determined in year after year of the IRA owner’s death by year of the IRA owner’s death by reference to the Single Life Table and reference to the Single Life Table and then is reduced by a value of one each then is reduced by a value of one each subsequent yearsubsequent year

Child /Child / Grandchild BeneficiaryGrandchild Beneficiary““Inherited” IRAInherited” IRA

3131

Beginning in 2007, non-spousal Beginning in 2007, non-spousal beneficiaries (e.g. children, beneficiaries (e.g. children, grandchildren, friends, etc.) are permitted grandchildren, friends, etc.) are permitted to roll over a qualified retirement plan to roll over a qualified retirement plan (e.g. 401(k)), via a trustee-to-trustee (e.g. 401(k)), via a trustee-to-trustee transfer, into an “inherited” IRAtransfer, into an “inherited” IRA

““Designated beneficiary” trusts are also Designated beneficiary” trusts are also permitted to roll over qualified retirement permitted to roll over qualified retirement plans to “inherited” IRAsplans to “inherited” IRAs

Pension Protection Act of 2006Pension Protection Act of 2006““Inherited” IRAInherited” IRA

3232

Incorrect titlingIncorrect titling Failure to take RMDsFailure to take RMDs Failure to utilize disclaimers when Failure to utilize disclaimers when appropriateappropriate Failure to analyze contingent Failure to analyze contingent beneficiaries beneficiaries when utilizing disclaimerswhen utilizing disclaimers Taking a lump-sum distributionTaking a lump-sum distribution

Common Mistakes to AvoidCommon Mistakes to Avoid““Inherited” IRAInherited” IRA

3333

Spousal rollover before age 59 ½Spousal rollover before age 59 ½– Will cause pre-59 ½ distributions to be Will cause pre-59 ½ distributions to be

subject to the 10% early distribution penalty.subject to the 10% early distribution penalty.

– If no rollover occurred, pre-59 ½ distributions If no rollover occurred, pre-59 ½ distributions can be taken penalty free.can be taken penalty free.

SolutionSolution– Do not perform spousal rollover until spouse Do not perform spousal rollover until spouse

reaches age 59 ½.reaches age 59 ½.

Common Mistakes to AvoidCommon Mistakes to Avoid““Inherited” IRAInherited” IRA

3434

For non-spousal beneficiaries, it is For non-spousal beneficiaries, it is criticalcritical to to keep inherited IRA in the name of the keep inherited IRA in the name of the deceased IRA owner.deceased IRA owner.

Example (Individual):Example (Individual):

““John Smith, deceased, IRA for the benefit of James John Smith, deceased, IRA for the benefit of James Smith”Smith”

Example (Trust):Example (Trust): ““John Smith, deceased, IRA for the benefit of James John Smith, deceased, IRA for the benefit of James Smith as Trustee of the Smith Family Trust dated Smith as Trustee of the Smith Family Trust dated 1/1/2007.”1/1/2007.”

““Inherited” IRAInherited” IRACommon Mistakes to AvoidCommon Mistakes to Avoid

3535

BenefitsBenefits– Effectively shows the additional wealth Effectively shows the additional wealth

generated by naming a qualified generated by naming a qualified designated beneficiary of an IRA designated beneficiary of an IRA

– Provides a framework as to how to Provides a framework as to how to structure the IRA Truststructure the IRA Trust

– Serves as a guide for post-mortem Serves as a guide for post-mortem distributionsdistributions

““Inherited” IRAInherited” IRA “ “Inherited” IRA Analysis – Case StudyInherited” IRA Analysis – Case Study

3636

ScenariosScenarios– Immediate distributionImmediate distribution– IRA payable to non-qualified IRA payable to non-qualified

beneficiary (five-year rule)beneficiary (five-year rule)– IRA payable to surviving spouse IRA payable to surviving spouse

(spousal rollover)(spousal rollover)– IRA payable to childIRA payable to child


3737

AssumptionsAssumptions– IRA owner’s age - 68IRA owner’s age - 68– Spouse’s age – 67 Spouse’s age – 67 – Child’s age – 35Child’s age – 35

– IRA balance - $500,000IRA balance - $500,000– Brokerage account balance - $0 Brokerage account balance - $0

– Pre-tax growth rate – 8%Pre-tax growth rate – 8%– Ordinary income tax rate – 40%Ordinary income tax rate – 40%– Capital gains tax rate – 20% Capital gains tax rate – 20%

“ “Inherited” IRA Analysis – Case StudyInherited” IRA Analysis – Case Study““Inherited” IRAInherited” IRA

3838

YrImmediate Distribution

IRA Payable to Non-

Qualified Beneficiary (Five-Year

Rule)

IRA Payable to Surviving

Spouse (Spousal Rollover)

IRA Payable to Child

5 424,713$ 734,664$ 712,898$ 709,235$ 10 601,269$ 624,042$ 965,679$ 993,194$ 15 851,222$ 883,462$ 1,296,715$ 1,384,000$ 20 1,205,083$ 1,250,725$ 1,727,638$ 1,917,956$ 25 1,706,047$ 1,770,662$ 2,313,679$ 2,641,305$ 30 2,415,265$ 2,506,742$ 3,210,501$ 3,611,318$ 35 3,419,312$ 3,548,817$ 4,434,486$ 4,896,101$ 40 4,840,750$ 5,024,091$ 6,093,099$ 6,571,657$


3939

IRA Transfer to Family

$-

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

$7,000,000

5 10 15 20 25 30 35 40

Year

Immediate DistributionIRA P ayable to Non-Qualified Beneficiary (Five-Year Rule)IRA P ayable to Surviving Spouse (Spousal Rollover)IRA P ayable to Child


4040


$601,269 $624,042

$965,679 $993,194

$500,000

$600,000

$700,000

$800,000

$900,000

$1,000,000

$1,100,000

10

Year



4141


$1,205,083 $1,250,725

$1,727,638

$1,917,956

$1,000,000

$1,250,000

$1,500,000

$1,750,000

$2,000,000

20

Year



4242


$4,840,750$5,024,091

$6,093,099

$6,571,657

$4,500,000

$5,000,000

$5,500,000

$6,000,000

$6,500,000

$7,000,000

40

Year



4343

IRA distributions IRA distributions over the life over the life expectancy of the expectancy of the oldest beneficiaryoldest beneficiary

Trust

IRABeneficiary Designation Form

Spouse

Children

IRAs Payable to Trusts How an IRA is Payable to a TrustHow an IRA is Payable to a Trust

4444

Spendthrift protectionSpendthrift protection Creditor protectionCreditor protection Divorce protectionDivorce protection Special needs Special needs Investment managementInvestment management Estate planningEstate planning ““Dead-hand” controlDead-hand” control

IRAs Payable to Trusts Benefits of Using a TrustBenefits of Using a Trust

4545

Trust tax ratesTrust tax rates Legal and trustee feesLegal and trustee fees Income tax returnsIncome tax returns Greater complexityGreater complexity

IRAs Payable to Trusts Disadvantages of Using a TrustDisadvantages of Using a Trust

4646

Disclaimer PlanningDisclaimer Planning

Disclaimer must be “qualified.”Disclaimer must be “qualified.” IIn writingn writing Within 9 monthsWithin 9 months No acceptance of the interest or No acceptance of the interest or any of any of its benefits,its benefits, Interest passes without any Interest passes without any direction on direction on the part of the person the part of the person making the making the disclaimerdisclaimer

4747

Alex dies at age 70. Alex’s wife disclaims Alex dies at age 70. Alex’s wife disclaims amount of Alex’s unified credit to bypass amount of Alex’s unified credit to bypass trust for benefit of herself and their childrentrust for benefit of herself and their children

– Disclaimer must occur within nine months Disclaimer must occur within nine months from from date of deathdate of death– Disclaimer must be served to the IRA Disclaimer must be served to the IRA custodiancustodian– Disclaimer must be fractional to avoid Disclaimer must be fractional to avoid immediate immediate income taxationincome taxation

Disclaimer Planning ExampleExample

4848

Roth IRAs

100% of growth is tax-exempt100% of growth is tax-exempt No required minimum distributions at age 70½No required minimum distributions at age 70½

– NOTE: Distributions from Roth IRAs cannot be used NOTE: Distributions from Roth IRAs cannot be used to fulfill the RMD from a traditional IRAto fulfill the RMD from a traditional IRA

$100,000 Modified Adjusted Gross Income $100,000 Modified Adjusted Gross Income (MAGI) limitation (MAGI) limitation

RMDs on Inherited Roth IRAsRMDs on Inherited Roth IRAs Roth 401(k) plansRoth 401(k) plans

4949

Starting in 2010, the $100,000 Adjusted Starting in 2010, the $100,000 Adjusted Gross Income (AGI) limitation no longer Gross Income (AGI) limitation no longer appliesapplies– The tax incurred on a Roth IRA conversion in The tax incurred on a Roth IRA conversion in

2010 may be spread over the following two tax 2010 may be spread over the following two tax years (i.e. 2011 and 2012)years (i.e. 2011 and 2012)

Married Filing Separately taxpayers can Married Filing Separately taxpayers can convert to a Roth IRAconvert to a Roth IRA

Roth IRAs

5050

Convertible accountsConvertible accounts– Traditional IRAsTraditional IRAs– 401(k) plans (Starting in 2008)401(k) plans (Starting in 2008)– Profit sharing plans (Starting in 2008)Profit sharing plans (Starting in 2008)– 403(b) annuity plans (Starting in 2008)403(b) annuity plans (Starting in 2008)– 457 plans (Starting in 2008)457 plans (Starting in 2008)

Non-Convertible accountsNon-Convertible accounts– ““Inherited” IRAsInherited” IRAs– Education IRAsEducation IRAs

Roth IRAs

5151

Basis Can be Withdrawn Tax-Free (FIFO Method)Basis Can be Withdrawn Tax-Free (FIFO Method) Distributions are not subject to income tax if they do Distributions are not subject to income tax if they do

not exceed aggregate contributions and/or not exceed aggregate contributions and/or conversions to the Roth IRAconversions to the Roth IRA

Withdrawals made within five years of conversion if Withdrawals made within five years of conversion if owner under age 59½ and no other exception owner under age 59½ and no other exception appliesapplies

Five-year period independent of five-year period for Five-year period independent of five-year period for qualified distributionqualified distribution

Taxation of DistributionsTaxation of DistributionsRoth IRAs

5252

(1)(1) Taxpayers have special favorable tax attributes Taxpayers have special favorable tax attributes including including charitable deduction carry-forwards, charitable deduction carry-forwards, investment tax credits, investment tax credits, etc. etc.

(2) Suspension of the minimum distribution rules at age (2) Suspension of the minimum distribution rules at age 70½ 70½ provides a considerable advantage to the Roth provides a considerable advantage to the Roth IRA holder. IRA holder.

(3) Taxpayers benefit from paying income tax before (3) Taxpayers benefit from paying income tax before estate estate tax (when a Roth IRA election is made) tax (when a Roth IRA election is made)

compared to the compared to the income tax deduction income tax deduction obtained when a traditional IRA is obtained when a traditional IRA is subject to estate subject to estate tax.tax.

(4) Taxpayers who can pay the income tax on the IRA (4) Taxpayers who can pay the income tax on the IRA from non from non IRA funds benefit greatly from the Roth IRA IRA funds benefit greatly from the Roth IRA because of the because of the ability to enjoy greater tax-free ability to enjoy greater tax-free yields.yields.

Roth IRAs Seven Reasons to Convert to Roth IRAsSeven Reasons to Convert to Roth IRAs

5353

(5) Taxpayers who need to use IRA assets to fund their (5) Taxpayers who need to use IRA assets to fund their Unified Unified Credit bypass trust are well advised to Credit bypass trust are well advised to consider consider making a making a Roth IRA election for that Roth IRA election for that portion of their overall IRA funds. portion of their overall IRA funds.

(6) Taxpayers making the Roth IRA election during their (6) Taxpayers making the Roth IRA election during their lifetime reduce their overall estate, thereby lifetime reduce their overall estate, thereby

lowering the lowering the effect of higher estate tax rates. effect of higher estate tax rates. (7) Because federal tax brackets are more favorable for (7) Because federal tax brackets are more favorable for

married couples filing joint returns than for single married couples filing joint returns than for single individuals, Roth IRA distributions won’t cause an individuals, Roth IRA distributions won’t cause an increase in tax rates for the surviving spouse increase in tax rates for the surviving spouse

when one when one spouse is deceased because the spouse is deceased because the distributions are tax-distributions are tax- free.free.

Roth IRAs Seven Reasons to Convert to Roth IRAsSeven Reasons to Convert to Roth IRAs

5454

The key to successful Roth IRA conversions The key to successful Roth IRA conversions is to keep as much of the conversion is to keep as much of the conversion

income income as possible in the as possible in the current marginal tax current marginal tax bracketbracket

– However, there are times when it may make However, there are times when it may make sense to convert more and go into higher tax sense to convert more and go into higher tax bracketsbrackets

Roth IRAs Understanding the MechanicsUnderstanding the Mechanics

5555

10% tax 10% tax bracketbracket






Current Current taxable taxable incomeincome

Target Roth IRA Target Roth IRA conversion amountconversion amount

Optimum Roth IRA Optimum Roth IRA conversion amount?conversion amount?


5656

Traditional IRA

Brokerage Account Total Roth IRA

Brokerage Account Total

Difference ($)

Beginning Balance 1,000,000$ 400,000$ 1,400,000$ 1,000,000$ 400,000$ 1,400,000$ Income Tax on Withdrawal (400,000)$ -$ (400,000)$ -$ (400,000)$ (400,000)$ After-Tax Balance 600,000$ 400,000$ 1,000,000$ 1,000,000$ -$ 1,000,000$ -$

Balance in 10 Years 1,967,151$ 786,861$ 2,754,012$ 1,967,151$ -$ 1,967,151$ Income Tax on Withdrawal (786,861)$ -$ (786,861)$ -$ -$ -$ After-Tax Balance 1,180,291$ 786,861$ 1,967,151$ 1,967,151$ -$ 1,967,151$ -$

Balance in 20 Years 3,869,684$ 1,547,874$ 5,417,558$ 3,869,684$ -$ 3,869,684$ Income Tax on Withdrawal (1,547,874)$ -$ (1,547,874)$ -$ -$ -$ After-Tax Balance 2,321,811$ 1,547,874$ 3,869,684$ 3,869,684$ -$ 3,869,684$ -$

Balance in 30 Years 7,612,255$ 3,044,902$ 10,657,157$ 7,612,255$ -$ 7,612,255$ Income Tax on Withdrawal (3,044,902)$ -$ (3,044,902)$ -$ -$ -$ After-Tax Balance 4,567,353$ 3,044,902$ 7,612,255$ 7,612,255$ -$ 7,612,255$ -$

ASSUMPTIONS:Pre-Tax Grow th Rate on IRA = 7.00%

After-Tax Grow th Rate on Brokerage Account = 7.00%

Combined Income Tax Rate - Withdraw al Years = 40.00%

Combined Income Tax Rate - Conversion Year = 40.00%

No Conversion Roth IRA Conversion

Roth IRAs Understanding the MechanicsUnderstanding the MechanicsExample 1 – Same Growth & Tax RatesExample 1 – Same Growth & Tax Rates

5757

Roth IRAs Understanding the MechanicsUnderstanding the MechanicsExample 2 – Same Tax Rates / Different Growth RatesExample 2 – Same Tax Rates / Different Growth Rates

Traditional IRA


Brokerage Account Total Difference $

Beginning Balance 1,000,000$ 400,000$ 1,400,000$ 1,000,000$ 400,000$ 1,400,000$ Income Tax on Withdrawal (400,000)$ -$ (400,000)$ -$ (400,000)$ (400,000)$ After-Tax Balance 600,000$ 400,000$ 1,000,000$ 1,000,000$ -$ 1,000,000$ -$

Balance in 10 Years 1,967,151$ 683,258$ 2,650,409$ 1,967,151$ -$ 1,967,151$ Income Tax on Withdrawal (786,861)$ -$ (786,861)$ -$ -$ -$ After-Tax Balance 1,180,291$ 683,258$ 1,863,549$ 1,967,151$ -$ 1,967,151$ 103,603$

Balance in 20 Years 3,869,684$ 1,167,103$ 5,036,787$ 3,869,684$ -$ 3,869,684$ Income Tax on Withdrawal (1,547,874)$ -$ (1,547,874)$ -$ -$ -$ After-Tax Balance 2,321,811$ 1,167,103$ 3,488,914$ 3,869,684$ -$ 3,869,684$ 380,771$

Balance in 30 Years 7,612,255$ 1,993,581$ 9,605,836$ 7,612,255$ -$ 7,612,255$ Income Tax on Withdrawal (3,044,902)$ -$ (3,044,902)$ -$ -$ -$ After-Tax Balance 4,567,353$ 1,993,581$ 6,560,934$ 7,612,255$ -$ 7,612,255$ 1,051,322$





Roth IRA ConversionNo Conversion

5858

Roth IRAs Understanding the MechanicsUnderstanding the MechanicsExample 3 – Different Growth & Tax RatesExample 3 – Different Growth & Tax Rates(Higher Tax Rate in Future Years)(Higher Tax Rate in Future Years)

Traditional IRA


Brokerage Account Total

Difference ($)

Beginning Balance 1,000,000$ 400,000$ 1,400,000$ 1,000,000$ 400,000$ 1,400,000$ Income Tax on Withdrawal (400,000)$ -$ (400,000)$ -$ (300,000)$ (300,000)$ After-Tax Balance 600,000$ 400,000$ 1,000,000$ 1,000,000$ 100,000$ 1,100,000$ 100,000$

Balance in 10 Years 1,967,151$ 683,258$ 2,650,409$ 1,967,151$ 170,814$ 2,137,966$ Income Tax on Withdrawal (786,861)$ -$ (786,861)$ -$ -$ -$ After-Tax Balance 1,180,291$ 683,258$ 1,863,549$ 1,967,151$ 170,814$ 2,137,966$ 274,417$

Balance in 20 Years 3,869,684$ 1,167,103$ 5,036,787$ 3,869,684$ 291,776$ 4,161,460$ Income Tax on Withdrawal (1,547,874)$ -$ (1,547,874)$ -$ -$ -$ After-Tax Balance 2,321,811$ 1,167,103$ 3,488,914$ 3,869,684$ 291,776$ 4,161,460$ 672,547$

Balance in 30 Years 7,612,255$ 1,993,581$ 9,605,836$ 7,612,255$ 498,395$ 8,110,650$ Income Tax on Withdrawal (3,044,902)$ -$ (3,044,902)$ -$ -$ -$ After-Tax Balance 4,567,353$ 1,993,581$ 6,560,934$ 7,612,255$ 498,395$ 8,110,650$ 1,549,717$





No Conversion Roth IRA Conversion

5959

Taxpayers may recharacterize (i.e. “undo”) the Taxpayers may recharacterize (i.e. “undo”) the Roth IRA conversion in current year or by the Roth IRA conversion in current year or by the filing date of the current year’s tax returnfiling date of the current year’s tax return– Recharacterization can take place as late as 10/15 in Recharacterization can take place as late as 10/15 in

the year following the year of conversion the year following the year of conversion Taxpayers may choose to “reconvert” their Taxpayers may choose to “reconvert” their

recharacterizationrecharacterization– Reconversion may only take place at the later of the Reconversion may only take place at the later of the

following two dates:following two dates:• The tax year following the original conversion The tax year following the original conversion OROR• 30 days after the recharacterization30 days after the recharacterization


6060

Conversion Period Recharacterization Period

1/1/2007 – First day

conversion can take place

2007

12/31/2007 – Last day

conversion can take place

4/15/2008 – Normal filing date for 2007

tax return

10/15/2008 – Latest filing

date for 2007 tax return / last day to

recharacterize 2007 Roth IRA

conversion

12/31/2008

2008

Roth IRAs Roth IRA Conversion TimetableRoth IRA Conversion Timetable

6161

Additional IRA ResourcesAdditional IRA Resources

BooksBooks: : − ““Life and Death Planning for Retirement Benefits” by Life and Death Planning for Retirement Benefits” by

Natalie ChoateNatalie Choate− ““The Retirement Savings Time Bomb … and How to The Retirement Savings Time Bomb … and How to

Defuse It” by Ed SlottDefuse It” by Ed Slott− ““Individual Retirement Account Answer Book” by Individual Retirement Account Answer Book” by

Fleisher, Lippe and LevyFleisher, Lippe and Levy WebsitesWebsites::

− www.ataxplan.com (Natalie Choate’s website)www.ataxplan.com (Natalie Choate’s website)− www.wealthcounsel.com www.wealthcounsel.com − www.IRAhelp.comwww.IRAhelp.com

Training / CLE:Training / CLE:− ““Practice Building Bootcamp” (presented by Phil Kavesh)Practice Building Bootcamp” (presented by Phil Kavesh)− WealthCounsel’s Two-Day IRA SeminarWealthCounsel’s Two-Day IRA Seminar− ““Sophisticated Planning and Drafting for IRA & Qualified Sophisticated Planning and Drafting for IRA & Qualified

Plan Distributions” (private two-day IRA seminar Plan Distributions” (private two-day IRA seminar presented by Robert S. Keebler, CPA, MST)presented by Robert S. Keebler, CPA, MST)

6262

Training CDsTraining CDs:: − ““IRAs Payable to Trusts” (offered through WealthCounsel)IRAs Payable to Trusts” (offered through WealthCounsel)

SoftwareSoftware::− WealthDocsWealthDocsTM TM byby WealthCounselWealthCounsel− Inherited IRA Analysis by Robert S. Keebler (offered through Inherited IRA Analysis by Robert S. Keebler (offered through

WealthCounsel)WealthCounsel)

NewslettersNewsletters::− ““Ed Slott’s IRA Advisor”Ed Slott’s IRA Advisor”− ““Choate’s Notes” by Natalie ChoateChoate’s Notes” by Natalie Choate− ““Employee Benefits and Retirement Planner Newsletter” by Employee Benefits and Retirement Planner Newsletter” by

Leimberg Information Services Inc. (e-mail only)Leimberg Information Services Inc. (e-mail only)

Additional IRA ResourcesAdditional IRA Resources

the stretch ira - keeping minimum required distributions to a minimum

Documents

retirement assets

accountbeginning balance

tax exposure

income tax21

stretch ira

minimum required distributions

everyday living expenses

mst1400 lombardi