an opportunity to fund retirement with a roth ira
DESCRIPTION
Please note that this presentation has been designed to provide general information. Neither Pacific Life nor its representatives offer legal or tax advice. Clients should consult their attorneys and tax advisers as to the applicability of this information to their specific circumstances and for complete up-to-date information concerning federal and state tax law. [Name of Financial Professional] and [Company] are not affiliated with Pacific Life or its affiliated companies. Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. No bank guarantee • Not a deposit • May lose value • Not FDIC/NCUA insured • Not insured by any federal government agencyTRANSCRIPT
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An Opportunity to Fund Retirement with a Roth IRA
1/16E24043-16A
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No bank guarantee • Not a deposit • May lose value • Not FDIC/NCUA insured • Not insured by any federal government agency
Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state.
Please note that this presentation has been designed to provide general information. Neither Pacific Life nor its representatives offer legal or tax advice. Clients should consult their attorneys and tax advisers as to the applicability of this information to their specific circumstances and for complete up-to-date information concerning federal and state tax law.
[Name of Financial Professional] and [Company] are not affiliated with Pacific Life or its affiliated companies.
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Agenda
Funding PlanningDistributions
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Established 1/1/98 Governed by IRA rules, except:
– No deductible contributions– Tax-free qualified distributions – Owner has no required distributions
Roth IRAs
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Funding
Contributions Conversions
Rollovers from Employer Plans
Rollovers from Roth 401(k)/403(b)
FOUR WAYS
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$5,500 (or $6,500 if 50 or older by end of year) Two requirements
– Earned income at least equal to amount contributed – Below modified adjusted gross income (MAGI) thresholds
Contributions for 2016
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MAGI Phase-Out Ranges
$117,000 – $132,000$184,000 – $194,000
Married Filing Jointly Single
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What Is MAGI for Roth IRA?
Adjusted Gross
Income (From IRS Form
1040 Series)
•Roth Conversion Amounts
•Roth Rollovers from Employer Plans
Certain Deductions
& Exclusions For example:
•Traditional IRA•Qualified Bond Interest
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Rollover of assets from a traditional IRA,SEP-IRA or SIMPLE IRA to a Roth IRA– Two-year period must be met if converting a SIMPLE IRA
IRA owner pays taxes on pretax dollars Additional 10% federal tax does not apply
Conversions
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Conversion Process
2. Direct rollover• 1099R reporting• No 60-day rule
1. Redesignation• 1099R reporting
3. Indirect rollover• 1099R reporting• 60-day rule applies• No 12-month restriction
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All Conversions in 2010 and Onward
Convert traditional IRA to Roth IRA
IRA Roth IRA
No MAGI limitsAnyone can convert regardless of income level
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American Taxpayer Relief Act of 2012 Makes permanent for 2013 and beyond the lower
Bush-era income-tax rates (for most individuals) Top income-tax rate 39.6%
Tax Changes for Top Income Earners
Year Single Married Filing Jointly
2013 $400,000 $450,000
2014 $406,750 $457,600
2015 $413,200 $464,850
2016 $415,050 $466,950
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Using assets outside of the IRA to pay tax:– Reduces taxable estate– Maximizes long-term tax deferral
Using IRA assets to pay tax may:– Subject some assets to income taxation– Incur an additional 10% federal tax
Conversion Caution
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Converting IRAs After Age 70½
Required minimum distribution (RMD) amounts cannot be converted or rolled to a Roth IRA
IRA 2. Roth IRA
1. Distribute RMD amount from IRA
2. Convert balance to Roth IRA
1. RMD
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Beginning 1/1/08Two sets of rules:1. Conversion rules2. Rollover rules of the plan from
which rollover occurred
Converting from an Employer Plan
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IRS Notice 2014-54 Description: The IRS issued notice 2014-54 that addresses
the question “If my 401(k) has both pre-tax money and post-tax money, can I just take the post-tax money and convert to a Roth IRA tax-free?”
Impacted Areas: Qualified Retirement Plans, IRAs, and Roth IRAs
Changes: Clarifies the IRS’s prior position of applying the pro-rata rule
Effective Date: January 1, 2015
Converting from an Employer Plan
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IRS Notice 2014-54 Details: Permits participants to direct the pre-tax and
post-tax when disbursements are made to multiple destinations (e.g., to an IRA and Roth IRA) and not require application of the pro-rata rule
Converting from an Employer Plan
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Converting from an Employer Plan
Examples:Pre-IRS Notice 2014-54 Post-IRS Notice 2014-54• $100,000 401(k) Plan
• $80,000 pre-tax• $20,000 post-tax
• Receives pro-rata treatment when converting to Roth IRA• If you convert $20,000 into a
Roth IRA, then $16,000 would be subject to tax
• $100,000 401(k) Plan• $80,000 pre-tax• $20,000 post-tax
• Can pick which bucket of assets (pre-tax or post-tax) to convert/distribute• If you convert $20,000 into a Roth
IRA, then you can choose that all $20,000 come from the post-tax bucket and process a tax-free conversion
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Converting inherited accounts Applies only to eligible rollover distributions from
employer plans May be rolled to an inherited Roth IRA Distributions must be taken from a Roth IRA Does it make sense to convert?
Who Let the Roth Out?
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Section 691(c) deduction Itemized deduction for estate taxes paid Conversion causes you to pay income taxes sooner,
BUT also accelerates use of this deduction, potentially reducing tax bill in half
Are You Looking to Accelerate a Deduction?
According to the American Taxpayer Relief Act of 2012, the federal estate, gift, and generation-skipping transfer (GST) tax exemption amounts are all $5,000,000 (indexed for inflation effective for tax years after 2011); the maximum estate, gift, and GST tax rates are 40%. The exemption amount for 2016 is $5,450,000.
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Recharacterization– By tax return due date,
including extensions (October 15)
Reconversion (later of)Doing over the do-over
– In year following year of conversion, or– 30 days after recharacterization
Conversion Do-Overs
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Do-Over Timeline
Scenario Conversion Recharacterization Reconversion
1 4/1/15 8/1/15 1/1/16
2 4/1/15 12/25/15 1/24/16
3 4/1/15 4/15/16 5/15/16
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Established 1/1/06 No MAGI limits for contributions Required distributions Tricky rollover rules
Roth 401(k) and 403(b)
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Qualified Nonqualified Required (for beneficiaries)
Roth IRA Distributions
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Two requirements:1. Five years since you established a Roth IRA2. Distribution is made for one of the following reasons:
– Age 59½ or older– Disability– Death of owner– First-time home buyer
Qualified (Tax-Free) Distributions
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If you take a distribution but fail to meet requirements for a qualified distribution, then the distribution is made in the following order: Regular contributions Conversion and rollover contributions
– Additional 10% federal tax if within five years Earnings
– Taxes and 10% if no exception
Nonqualified Distributions
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New Roth IRA, then new five-year period Existing Roth IRA, then rollover tracks Roth IRA
five-year period
Tricky Rollover Rules
Roth401(k)/403(b)
Roth IRA
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Tricky Rollover Rules
Qualified Distribution
Rollover amount treated as basis in
Roth IRA
Nonqualified Distribution
Rollover amount divided into basis and earnings in
Roth IRA
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Amount includes $65,000 after-tax contributions and $35,000 earningsQualified distribution
– $100,000 included as Roth IRA basis
Nonqualified distribution– Basis and earnings track to the Roth IRA
DRAC Rollover Example
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You May Wish to Get Started
In anticipation of a DRAC rollover, establish a Roth IRA now with either: Contributory Roth IRA Nondeductible IRA that is then converted to Roth IRA
– BUT beware of the aggregation rule
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Required Distributions at Death
Death before required beginning date (RBD) rules– Designated beneficiary (DB)▪ May use five-year rule or life expectancy
– No DB▪ Must use five-year rule
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Roth IRA owner dies before end of five-year period beginning with: First taxable year for which a contribution was made Year of conversion contribution from traditional IRA
or rollover
Nonqualified Death Distributions
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Spousal rollover– Earlier of spouse’s or decedent’s five-year holding period
All others– Decedent’s five-year holding period
Qualified Death Distributions
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Designated beneficiary (DB)– Spouse– Non-spousal individual– Qualifying trusts
Non-DB—estates, charities, etc.
Who’s Your Beneficiary?
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Lump sum Five-year rule Inherited Roth IRA
– Annuitization– Spouse’s recalculated life expectancy ▪ Delayed until owner would have reached age 70½
Rollover
Spouse
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Lump sum Five-year rule Inherited Roth IRA
– Annuitization– Life expectancy of beneficiary
Non-Spousal Individual
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Valid under state law Irrevocable at death Identifiable beneficiaries Trust documentation by 10/31 of the year following
the year of death
Qualifying Trusts and Designated Beneficiaries (DBs)
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Lump sum Five-year rule Trust-owned inherited Roth IRA
– Life expectancy of oldest trust beneficiary
Qualifying Trusts
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Non-Designated Beneficiaries
Lump Sum Five-Year Payout
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Important Dates for the Year AFTER Death
9/30 12/31
DB Determination
Separate Accounts
10/31
Trust Document
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Case Study$750,000 Roth IRA
75-year-old owner dies having named two beneficiaries
Age 25 Begins
Distributions
Granddaughter
Age 50 Begins
Distributions
Son
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Separate accounts established by 12/31 of the year following the year of the owner’s death
Son has 34.2 years during which to take distributions Granddaughter has 58.2 years during which to take
distributions
Opportunity for Separate Accounts
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Disclaimers Son executes a qualified disclaimer His sons, ages 22 and 20, may inherit his interest Separate accounts established by 12/31 deadline 22-year-old son’s distribution period is 61.1 years 20-year-old son’s distribution period is 63 years
Thanks, but No Thanks
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Beginning in 2013, the Health Care Reform Act created a new 3.8% federal tax on net investment income
3.8% federal tax will apply to the LESSER of:1. Net investment income2. The excess of MAGI thresholds–$200,000 for single
taxpayers; $250,000 for married taxpayers filing a joint tax return
Managing the 3.8% Net Investment Income Tax (NIIT)
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Potential for earnings without tax No required lifetime distributions Not included in definition of income
for taxation of Social Security benefits Management of NIIT
Roth IRA Advantages
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No deduction for contributions Pay tax on conversions
Roth IRA Disadvantages
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Before moving assets from qualified plan to a Roth IRA consider: Investment options (may vary) Fees and expenses (may vary) Services offered (may differ) Loan access (Roth IRA does not allow Loans) Creditor protection (may differ)
Additional Considerations
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Do the Math
Conversion calculators Tools to help analyze a Roth IRA conversionAssumptions include: When distributions will be taken What tax rates will be at the time of distributions Earnings during the interim
Analysis is required, because everyone’s situation is different
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Possible Opportunities
You don’t need your traditional IRA for income and wish to leave it to someone
You need your IRA to fund a trust You are willing to pay income tax on conversion to
reduce your estate (and thus your estate tax) You have charitable deduction carryovers, investment
tax credits, etc., that will offset income on conversion
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In Summary
Better understanding of funding Roth IRAs Roth conversions Distributions and beneficiary options Decisions should be reviewed with your tax and legal
advisors before making any changes
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This material is not intended to be used, nor can it be used by any taxpayer, for the purpose of avoiding U.S. federal, state, or local tax penalties. This material is written to support the promotion or marketing of the transaction(s) or matter(s) addressed by this material. Pacific Life, its affiliates, their distributors, and respective representatives do not provide tax, accounting, or legal advice. Any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor or attorney.
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Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity Company. Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the products it issues.
Pacific Life Insurance CompanyP.O. Box 2378
Omaha, NE 68103-2378(800) 722-4448
In New York, Pacific Life & Annuity CompanyP.O. Box 2829
Omaha, NE 68103-2829(800) 748-6907
www.PacificLife.com