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Roth Revolution

Roth Revolution. Brought to you by Legacy!. Challenges and Opportunities. Ed Slott, “Roth Conversion Planning for 2009 and 2010,” Ed Slott’s IRA Advisor (July 2009). . “It appears more than likely that federal taxes will be increasing at record levels, and very soon.”. Tax Bracket Increase?.

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Roth Revolution

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  1. Roth Revolution Brought to you by Legacy! FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  2. Challenges and Opportunities Ed Slott, “Roth Conversion Planning for 2009 and 2010,” Ed Slott’s IRA Advisor(July 2009). “It appears more than likely that federal taxes will be increasing at record levels, and very soon.” FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  3. Tax Bracket Increase? Michael Miller, Dallas Morning News Expert Financial Advice Blog, “2010 Roth IRA Conversion, New Rules, and Tax Strategy” (November 3, 2009). http://www.house.gov/list/press/tx05_hensarling/rsc/020608TaxManCometh.html “Unless Congress passes new legislation, the top four federal tax brackets will revert from the current 25%, 28%, 33%, and 35% levels to their pre-2001 levels of 28%, 31%, 36%, and 39.6%.” This is scheduled to occur in 2011. FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  4. History of Federal Tax Brackets Sources: IRS and taxfoundation.org. FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  5. Retirement Traffic Light • Red light = taxable. • Yellow light = tax-deferred. • Green light = tax-free. FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  6. Stop • Stop building a fully taxable retirement strategy. • IRA. • 401(k). • SEP IRA • Keogh. FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  7. Slow Down • Slowly build tax-deferred retirement assets. • Cash Value Life Insurance. • Annuities. FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  8. Go Ahead! • Go ahead with strategies that offer potentially tax-free retirement income. • Roth IRA. • Tax-free bonds. FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  9. Tax Diversification FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  10. Ask Your Clients… “Would you rather pay taxes on the seed or the harvest?” –Douglas R. Andrew FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  11. The Roth Conversion Opportunity 1. Brandon Buckingham, “Countdown to 2010: Roth conversions present opportunity,” Life and Health Advisor (May 2009), http://lifehealth.com/retirement_income.htm#buckingam. • $1.4 trillion opportunity. • In 2010, nearly $1.4 trillion of retirement assets will become eligible for conversion to Roth IRAs.1 FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  12. CPA Financial Planners Report Loss of Confidence in Stock Market, Greater Risk Aversion; AICPA Survey 1 Clark M. Blackman II, chair of the AICPA's Personal Financial Planning Executive Committee. “This new survey of CPA financial planners shows that wealthy investors still feel nervous about the stock market and are being conservative in their investment decisions.”1 Six in 10 of the CPAs surveyed, 58%, reported that anticipation of higher future federal tax rates was most likely to trigger 2010 conversions of traditional Individual Retirement Accounts to a Roth IRA. Nearly as many, 54%, say they are advising clients to pay tax on Roth IRA conversions in 2010 despite an IRS allowance that allows taxes to be paid over three years. FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  13. Funding a Roth IRA Roth IRAs can be funded with a variety of accounts, such as annuities, mutual funds, certificates of deposit, and more. Annuities provide tax deferral already, so there is no extra tax deferral if clients fund their IRA or Roth IRA with an annuity. FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  14. Why a Fixed Annuity? • Excellent vehicle to fund a Roth IRA: • Offers safety of principal and protection of previously credited gains, plus upside potential. • Offers the ability to provide a lifetime of income though settlement options and riders. • Offers the ability to stretch distributions to Roth beneficiaries. • For Legacy product highlights, please refer to the product highlight sheet in your kit. FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  15. What Is a Roth IRA? An individual retirement account in which a person can set aside after-tax income up to a specified amount each year. Earnings on the account are tax-free, and tax-free withdrawals may be made after age 59½. FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  16. Ed Slott Says… Ed Slott, “Roth Conversion Planning for 2009 and 2010,” Ed Slott’s IRA Advisor(July 2009). “Since their creation more than a decade ago, Roth IRAs have been among the best tax breaks available.” FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  17. Why a Roth? • Under current tax laws: • After-tax contributions. • Tax-free distributions: • Available after five years have elapsed and upon disability or death, becoming a first-time home buyer, or reaching age 59½. • Tax-free retirement savings. • No required minimum distributions at 70½. • Income is not included for purposes of determining whether Social Security benefits are taxable. FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  18. 2010 New Laws Removes $100K income limit for conversions. Removes conversion restrictions for those who are married filing separately. Allows owners the choice to defer and split the taxable impact of a 2010 conversion into 2011 and 2012. FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  19. Why Is the Time Right for a Roth IRA? Under a new law effective January 1, 2010, anyone, regardless of income, can convert from a traditional IRA to a Roth IRA starting in 2010. The value of traditional IRAs has likely declined over the past months, years, and even for some compared to a decade ago. Some speculate that the market is likely to start heading back up. Clients will likely spend less in taxes by converting now, while their Roth IRA grows tax free. Roth IRAs are “on sale.” FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  20. Would You Rather Pay Uncle Sam $25K Now or Close to $88K Later? FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  21. Questions for Clients To Consider: • Do you think taxes are going up? • Should you convert while retirement assets are down? • Do you have the money in the next 12–24 months to pay the taxes? • Do you want to create a tax hedge? FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  22. Why Should Your Clients Consider Roth IRAs? Tax-free qualified distributions available five years following conversion. Potentially lower taxes on Social Security benefits. No required minimum distributions. Potential estate planning benefits. The longer the time horizon before needing access, the more powerful the benefits of a Roth IRA. FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  23. Who Might Not Convert? Older clients who need their money. Don’t go broke converting! Clients who think they will be in much lower tax brackets later. Clients who cannot afford to pay taxes now or have a hard time bringing themselves to do it. Clients who are concerned about changing tax laws. Clients who need access to their retirement assets within five years. FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  24. How Do I Find Prospects? • Go through your current book of business and identify clients who: • Can benefit from a Roth IRA conversion. • Want to leave a tax-free legacy. • Do not need RMDs. • Want penalty-free access to retirement contributions. FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  25. Great Questions for Clients • Are your taxes expected to increase? • Has the value of your IRA decreased? • Do you need to live on your IRA in the next few years? • Do you need access to monies prior to age 59½? • Do you want to continue adding to your IRA after age 70½. • Can you pay the taxes on conversion? • Would a partial conversion be preferable in this situation? FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  26. Sales Opportunities FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  27. Something To Think About… Does partial tax-free retirement make more sense? FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  28. Partial Conversion Example $100,000 IRA. Deposit $33,333.34 into one annuity. Deposit $66,666.66 into a second annuity. Convert first annuity and claim the conversion as income in 2010 (file by April 15, 2011). Convert the second annuity by December 31, 2010 and elect the two year split taxation. Claim half of annuity #2 on 2011 taxes (due April 15, 2012). Claim remaining half on 2012 taxes (due April 15, 2013). FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  29. The Result Manage bracket creep. Spread taxation over three tax years. Clients enjoy lower taxes than if converting and paying taxes all at once, in many cases. More palatable to many due to time frame before the total tax bill must be paid (up to three years). FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  30. Social Security Taxation What does it mean to your clients? If your clients’ tax bracket changes from 28% to 31%, they may pay as much as 57 cents in taxes for every dollar taken from theirretirement plan. FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  31. Social Security Taxation Up to 85% of Social Security benefits can be taxable, depending on modified adjustedgross income. Under current tax law, if MAGI is under $32K, Social Security benefits are tax-free. FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  32. 28% Example • Impact of each additional dollar withdrawn from a traditional IRA: $1 withdrawn. $0.85 of Social Security is taxed. = $1.85 of taxable income. x 28% (marginal tax bracket). = 52 cents in tax on each additional dollar. FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  33. 31% Example • Impact of each additional dollar withdrawn from a traditional IRA: $1 withdrawn. $0.85 of Social Security is taxed. = $1.85 of taxable income. x 31% (marginal tax bracket). = 57 cents in tax on each additional dollar. FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  34. Roth/Annuity Rider Combo • Optional health-related annuity rider. • Helps clients pay for unexpected expenses, including the cost of long-term care. • Easy qualification. • Within a Roth, all qualifying distributions are entirely tax free at the federal level. • And in most states. FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  35. Roth/Annuity Rider Example FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS. • Assume: • Age at conversion: 55. • IRA value: $100,000. • Tax bracket: 15%. • Interest earned per year: 5%. • Number of years before rider benefit is triggered: 7. • Annual withdrawal amount after Year 10: 5%.

  36. Roth/Annuity Rider Example (cont’d) * Taxes paid from source other than the annuity.** Annuity value includes cost of the rider. † If the rider benefit is triggered, the client can elect to keep the monthly payment amount in the annuity, at which time it becomes part of the annuity value. Any benefits that are not withdrawn will remain in the annuity value, will grow tax-deferred, and will earn no less than1% annually. FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  37. Estate-Planning Opportunities A Roth IRA conversion can reduce the size of a taxable estate. Because there are no required minimum distributions, clients can eventually pass the full value of a Roth to beneficiaries income tax-free. Note: Non-spouse IRA beneficiaries can continue to accrue tax-free growth in an inherited Roth IRA, but must take required distributions based on their own life expectancy. FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  38. What About 401(k)s? Jilian Mincer, “GETTING PERSONAL: Future taxes make 401(k) less Advantageous,” Dow Jones Newswire (November 5, 2009). “Since 401(k)s were created in the early 1980s, the general assumption was that a saver would pay lower taxes in retirement, when their income was certain to be lower. So saving pretax dollars and delaying taxes made sense. Now, particularly for higher earners with the largest 401(k) balances, that assumption is fading as hikes in tax rates seem likely.” FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  39. The Expectation of Higher Taxes… Jilian Mincer, “GETTING PERSONAL: Future taxes make 401(k) less advantageous,” Dow Jones Newswire (November 5, 2009). “The expectation of higher taxes is taking some of the shine off 401(k) retirement plans, and haspre-retirees looking for more post-tax options.” FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  40. Client Doesn’t Have a 401(k)? Jilian Mincer, “GETTING PERSONAL: Future taxes make 401(k) less advantageous,” Dow Jones Newswire (November 5, 2009). Consider a Roth IRA instead. 50% of American workers don’t have an employer-sponsored retirement plan. Typically, most financial planners will suggest a Roth because it allows for decades of tax-free growth. FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  41. Earnings Too High? Kimberly Lankford, “Ask Kim: 2010 Retirement-Account Contribution Limits,” Kiplinger(October 19, 2009) http://www.kiplinger.com/columns/ask/archive/2009/q1019.htm. “So even if you earn too much to contribute to a Roth IRA in 2010, you can still contribute to a traditional IRA and immediately roll the traditional IRA over to a Roth.” FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  42. Non-Deducted IRA? Kelly Greene, “Money Matters: Nest Egg Maneuvers,” The Wall Street Journal, (September 19, 2009) http://online.wsj.com/article/SB10001424052970204563304574314432331164304.html. “As long as none of your original IRA contributions were tax-deductible, and as long as your retirement assets are worth the same or less than your original contribution amount at the time you convert, you would owe no tax if you convert the remaining assets to a Roth.” FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  43. New Roth Opportunities for 2010 • Non-deductible IRA conversions: • Income limits for Roth IRA conversions have gone away, but income limits for Roth contributions remain in place. • If the client is not eligible for a deductible IRA or non-deductible Roth IRA contributions, consider funding a non-deductible traditional IRA and then converting to a Roth IRA. FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  44. Roth IRA Mechanics Please refer to IRS Publication 590 for detailed information and rules. FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  45. Roth Contributions FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  46. Roth Contribution Mechanics • IRA must be designated as a Roth when set up. • A SEP or a SIMPLE IRA cannot be designated as a Roth IRA. • Roth contributions are not tax deductible. • There is no age limit on Roth contributions: • Clients can contribute to a Roth even after age 70½. • Clients can leave their money in a Roth for as long as they live. • Currently, spouses filing jointly may contribute to a Roth if their modified AGI is less than $177,000. FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  47. Who Can Contribute to aRoth IRA? • Currently those who have taxable compensation and whose modified adjusted gross income isless than: • $177,000 for married filing jointly or qualifying widow(er). • $120,000 for single, head of household, or married filing separately and did not live with spouse during the year. • $10,000 for married filing separately and lived with spouse during the year. FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  48. 2010 Federal Contribution Limits • Contributions made only to Roth IRAs: • Lesser of $5,000 ($6,000, if 50 or older) or taxable compensation. • If modified AGI is above a certain amount, contribution may be limited. FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  49. 2010 Federal Contribution Limits (cont’d) See IRS Publication 590 at www.irs.gov. FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

  50. 2010 Federal Contribution Limits (cont’d) • Contributions made to both Roth and traditional IRAs: • Roth limit minus contributions made to other IRAs, excluding other Roth IRAs and employer contributions under a SEP or SIMPLE IRA plan. FOR BROKER USE ONLY. NOT FOR USE WITH CONSUMERS.

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