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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]
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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
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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
Why Retirement Distribution Planning is Important
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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
Why Retirement Distribution Planning is Important
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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$
Why Retirement Distribution Planning is Important
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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$
Why Retirement Distribution Planning is Important
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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
Why Retirement Distribution Planning is Important
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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
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Foundation ConceptsFoundation Concepts
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
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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
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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
Taxation of IRA DistributionsTaxation of IRA DistributionsFoundation ConceptsFoundation Concepts
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““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$
Taxation of IRA DistributionsTaxation of IRA DistributionsFoundation ConceptsFoundation Concepts
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Foundation ConceptsFoundation Concepts
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
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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
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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 =
Foundation ConceptsFoundation Concepts
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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
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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
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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
Foundation ConceptsFoundation Concepts
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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?
Foundation ConceptsFoundation Concepts
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2020
Permissible “designated Permissible “designated beneficiaries”:beneficiaries”:– IndividualsIndividuals
SpouseSpouse ChildChild GrandchildGrandchild ParentParent Brother/sisterBrother/sister Niece/NephewNiece/Nephew NeighborNeighbor
− Certain TrustsCertain Trusts
Foundation ConceptsFoundation Concepts
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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
Foundation ConceptsFoundation Concepts
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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
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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
Foundation ConceptsFoundation Concepts
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““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
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““Inherited” IRAInherited” IRA
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.
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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
““Inherited” IRAInherited” IRA
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
““Inherited” IRAInherited” IRA “ “Inherited” IRA Analysis – Case StudyInherited” IRA Analysis – Case Study
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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 - $0
– Pre-tax growth rate – 8%Pre-tax growth rate – 8%– Ordinary income tax rate – 40%Ordinary income tax rate – 40%– Capital gains tax rate – 20% Capital gains tax rate – 20%
“ “Inherited” IRA Analysis – Case StudyInherited” IRA Analysis – Case Study““Inherited” IRAInherited” IRA
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3838
YrImmediate Distribution
IRA Payable to Non-
Qualified Beneficiary (Five-Year
Rule)
IRA Payable to Surviving
Spouse (Spousal Rollover)
IRA Payable to Child
5 424,713$ 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$
““Inherited” IRAInherited” IRA “ “Inherited” IRA Analysis – Case StudyInherited” IRA Analysis – Case Study
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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
““Inherited” IRAInherited” IRA “ “Inherited” IRA Analysis – Case StudyInherited” IRA Analysis – Case Study
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4040
IRA Transfer to Family
$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
Immediate DistributionIRA P ayable to Non-Qualified Beneficiary (Five-Year Rule)IRA P ayable to Surviving Spouse (Spousal Rollover)IRA P ayable to Child
““Inherited” IRAInherited” IRA “ “Inherited” IRA Analysis – Case StudyInherited” IRA Analysis – Case Study
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4141
IRA Transfer to Family
$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
Immediate DistributionIRA P ayable to Non-Qualified Beneficiary (Five-Year Rule)IRA P ayable to Surviving Spouse (Spousal Rollover)IRA P ayable to Child
““Inherited” IRAInherited” IRA “ “Inherited” IRA Analysis – Case StudyInherited” IRA Analysis – Case Study
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4242
IRA Transfer to Family
$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
Immediate DistributionIRA P ayable to Non-Qualified Beneficiary (Five-Year Rule)IRA P ayable to Surviving Spouse (Spousal Rollover)IRA P ayable to Child
““Inherited” IRAInherited” IRA “ “Inherited” IRA Analysis – Case StudyInherited” IRA Analysis – Case Study
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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5555
10% tax 10% tax bracketbracket
15% tax 15% tax bracketbracket
25% tax 25% tax bracketbracket
28% tax 28% tax bracketbracket
33% tax 33% tax bracketbracket
35% tax 35% 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?
Roth IRAs Understanding the MechanicsUnderstanding the Mechanics
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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
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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 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$ 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$
ASSUMPTIONS:Pre-Tax Grow th Rate on IRA = 7.00%
After-Tax Grow th Rate on Brokerage Account = 5.50%
Combined Income Tax Rate - Withdraw al Years = 40.00%
Combined Income Tax Rate - Conversion Year = 40.00%
Roth IRA ConversionNo Conversion
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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 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)$ -$ (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$
ASSUMPTIONS:Pre-Tax Grow th Rate on IRA = 7.00%
After-Tax Grow th Rate on Brokerage Account = 5.50%
Combined Income Tax Rate - Withdraw al Years = 40.00%
Combined Income Tax Rate - Conversion Year = 30.00%
No Conversion Roth IRA Conversion
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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
Roth IRAs Understanding the MechanicsUnderstanding the Mechanics
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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
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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)
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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