the roth ira - america's next new tax break

<First and last name> is a Registered Representative with and, Securities offered through LPL Financial, Member FINRA/SIPC.

The Roth IRA in 2010 –America‟s New Next Tax Break

Edward R. Doughty, CFP®

1

What experts are saying…

“The Roth IRA is the single best gift

Congress has ever presented to the

American taxpayer.”

2

What the experts are saying…

“By allowing Roth IRAs, they also

created the single most powerful

estate building and wealth transfer

vehicle available today.”

“…By not imposing RMDs

on the owner, they gave the

American taxpayer one of the

greatest income tax „loop-

holes‟ in existence today.”

3

“The advantage of a Roth IRA over a regularly-taxed account is obvious.

Either way you pay income tax up front. But with Roth, you‟re then done paying taxes; with a regular account you‟re just getting started.”


4


“The essence of a Roth IRA

is that you pay tax on the seed,

but reap the harvest tax-free.”

5

“One of the smartest money moves a

young person can make is to invest

in a Roth IRA.

Follow the rules and any money you put

into one of these retirement-savings

accounts grows absolutely tax

free...Plus, an IRA is more flexible than

a 401(k) and other retirement plans

because you can invest it in almost

whatever you want, from stocks …

to bonds and real estate.”


6


7

IRA basics

Regularly-taxed account

Traditional IRA Roth IRA

You pay income tax,

and then make your

contribution with post-tax

dollars

You may get a tax

deduction, essentially

letting you deposit

pre-tax dollars

You pay income tax,

and then make your

contribution with

post-tax dollars

Your principal may be

subject to taxes on

dividends and capital gains

as it grows

Any growth of principal is

tax-deferred*

Any growth of principal is

tax-free*

You pay capital gains or

ordinary income tax on your

gain at withdrawal

You pay income tax on the

entire amount of

your withdrawal

You pay no further

taxes on qualified

withdrawals

* Principal is subject to market fluctuation and may lose value.

8

Traditional IRA deductibility rules

Active participant status

Modified adjusted gross income

Tax filing status

Deduction allowed

Individual is active More than $89k but less than $109k

$89k or less

No limit

Married

- filing

jointly

$109k or more

Individual is not active and

individual’s spouse is active

More than $166k but less than

$176k

$166k or less

$176k or more

Partial deduction

Full deduction

Full deduction

No deduction

Partial deduction

Full deduction

No deduction

Individual is not active and

individual’s spouse is not active

Traditional IRA deductibility limits for 2009

Individual is active

Individual is not active

More than $55k but less than $65k

$55k or less

No limit

$65k or more

Partial deduction

Full deduction

Full deduction

No deduction

Single or

head of

household

9

The Parity Principle


Taxable income $50,000 $50,000

Contribution ($4,000) ($4,000)

Tax rate 25% 25%

After-tax contribution ($4,000) ($3,000)

10


After-tax contribution ($4,000) ($3,000)

Growth rate 8% 8%

Time invested(years)

30 30

Nest egg $453,133 $339,850


11


Nest egg $453,133 $339,850

Tax rate 25% 25%

Tax due ($113,283) ---

After-tax nest egg $339,850 $339,850


12

Tax rates at historic lows

1970

1969

1968

1965-67

1964

1954-63

1952-53

1951

1950

Year

71.75%

77%

75.25%

70%

77%

91%

92%

91%

91%

Highest tax-rate (single)

1986

1985

1984

1983

1982

1981

1979-80

1972-78

1971

Year

50%

50%

50%

50%

50%

69.125%

70%

70%

70%

Highest tax-rate (single)

Source:http://www.ntu.org/main/page.php?PageID=19

http://www.ntu.org/main/page.php?PageID=19

13

Current tax rates are low

“The current income tax rates are the lowest they’ve been

since World War II …Under current policy, federal

spending will rise to 32% of GDP by 2050, compared

with a current level of 19%. There is no way to fund that

spending without significant increases in tax rates.”

- David Wyss, Chief Economist at Standard & Poor‟s

Source: Pioneer Investments, “Worth the Wait: New Roth 401(k) Reshapes the Retirement Plan Landscape”

14

The Roth IRA versus a Traditional IRA

Do you expect that your personal tax

rates will be higher or lower in the future?

How much Is a $100,000 Roth IRA worth?

15

A Roth IRA worth

$100,000 is equal to a

Traditional IRA worth…?

Where else does a Roth IRA win?

Tax bracket Amount

20% $125,000

28% $138,890

33% $149,250

35% $153,850

The Roth IRA Versus a Traditional IRA

16

Unique benefits: no RMDs

Unlike traditional IRAs, no Required Minimum Distributions (RMDs)

17

Unique benefits: Estate planning

No RMDs gives Roth IRAs a distinct advantage in estate planning

Tax on conversion is “pre-paying” taxes…a gift for heirs

(without owing any gift taxes)

– “Pre-paying” taxes by converting also reduces the size of your taxable estate

– Withdrawals may be tax-free for heirs

Minimum withdrawal rules will apply to heirs

18

Unique benefits: No age limits

Unlike Traditional IRAs, no age limits

– 8 or 85: start at any age, as long as income is being earned

19

Unique benefits: Access to withdrawals

Contributions can be withdrawn at any time without penalty tax or

income tax

Have income tax-free and penalty-tax-free withdrawals of earnings

after five years if you are age 59½ or in the following circumstances:

death, disability, or for a first-time home purchase up to $10,000

One of the penalty-tax-free, but not income-tax-free withdrawals

before age 59½ can be for higher education expenses

Roth IRA

20

Unique benefits: Social Security taxation

Kaye Thomas. Guide to Roth IRA: Tax on Social Security. Fairmark Press Tax Guide for Investors.

http://www.fairmark.com/rothira/socsec.htm

Qualified Roth IRA distributions do not affect SS taxation

Tax-exempt income that is included:

– Tax-exempt interest

– Series EE bond income

– Exclude income earned

abroad

Traditional IRA distributions can increase the amount of Social Security benefits that are taxed

http://www.fairmark.com/rothira/socsec.htm

21

Unique benefits: Access to withdrawals

What‟s included in the calculation?

How much of your Social Security income is taxable?

– All wages

How much of your Social Security is taxable?

– Any taxable or tax-free interest

– Distributions from pensions and traditional plans like IRAs and 401(k)s

– Half of your Social Security income

– Other taxable income

– If married filing jointly and AGI is:

Under $32,000: 0% taxable

$32,000 - $43,999: 50% taxable

Greater than $44,000: 85% taxable

22

Roth IRA advantages

Qualifying distributions are tax-free

Account value is effectively bigger – especially if tax rates go up

No Required Minimum Distributions during life

No age limit on contributions with earned income

Diversify tax risk

Greater flexibility

- Access contributions at any time tax-free

Social Security taxation

- Tax-free bonds are included

- Qualifying Roth IRA distributions are excluded

23

Roth IRA disadvantages

All contributions are non-deductible

The perceived tax benefit may never be realized, i.e., one might

not live to retirement or much beyond, in which case, the tax

structure of a Roth only serves to reduce an estate that may not

have been subject to tax.

If contributions are made while in a higher tax bracket than when

withdrawals are made, a Traditional IRA may result in lower taxes.

If converting to a Roth IRA, you may lose growth potential of

the money paid in taxes

24

Roth IRA income limits for 2009 contributions

Full contribution

Phased out No contribution

$104,999 or less$105,000 -

$120,000$120,000 or more

$165,999 or less$166,000 -

$176,000$176,000 or more

Joint

filers

Filing status

Single

filers

25

Roth IRA annual contribution limits

Year Standard contribution

Total contribution

including catch up

provision

2007 $4,000 $5,000

2008 $5,000 $6,000

2009 $5,000 $6,000

26

Current Roth IRA conversion limits

Filing status No conversion

Single filers

Joint filers

$100,000 or more

$100,000 or more

27


“The May 17, 2006 tax act, the Tax Increase

Prevention and Reconciliation Act (TIPRA),

presents wealthy Americans with an outstanding

lifetime-and-beyond tax break…

In 2010, wealthy Americans will be granted a

wonderful, new opportunity. They will, for the first

time, qualify for a Roth IRA conversion,

regardless of their income.”

28

Convert in 2010

No income limits for conversions of a Traditional IRA to a Roth IRA in 2010

– Limits on income levels for contributions and annual contribution amounts

remain in place

Beneficiary IRAs or inherited IRAs from a person other than your

spouse cannot be converted

If you‟re otherwise eligible, you can convert part of a Traditional IRA to

a Roth IRA. But you can’t convert only the nontaxable part.

29

Tax implication

Upon conversion, Traditional IRA assets are taxed as ordinary income

But for 2010 conversions, these taxes can be paid evenly over two years

(2011 and 2012)

Please note: Pre-tax contributions vs. nondeductible Traditional IRA contributions

Converting an annuity?

- The Fair Market Value (or Actuarial Present Value) is used to determine the tax on

conversion

Source: http://www.nysscpa.org/cpajournal/2007/507/essentials/p48.htm

30

Conversion tax in perspective

The tax on conversion is not an extra tax that you must pay to get the benefits

of a Roth IRA

Instead it is the payment of tax on the pre-tax growth that has already

accrued in the IRA

31

Traditional IRA vs. Roth IRA – Income

$250,000

@ 7.2%

$500,000

$25,000

-$7,500

Tax paid over 20 Years

$150,000

Traditional IRA

$17,500

$250,000

@ 7.2%

$500,000

$25,000

- 0%

Tax paid over 20 years

$0

Roth IRA

$25,000

Balance after 10 years

Growth

Annual withdrawals

30% income tax

Spendable

Assumptions

Traditional IRA contains only deductible contributions.

Qualified Roth IRA distributions taken after five-year holding period.

32

Social Security benefits added

to the taxable income

over 20 years

$374,000


Added to SS

provisional income

Annual taxable SS

Assumptions

Married and filing jointly with $22,000 Social Security benefit.

$20,000 of additional taxable income.

Traditional IRA contains only deductible contributions.

Roth IRA distributions taken after five-year holding period.


$25,000

$18,700

$25,000

Social Security benefits added

to the taxable income

over 20 years

$0

$25,000

$0

$0

Annual withdrawals

Social Security taxation

33

Heirs – lump sum distribution

Traditional IRA vs. Roth IRA–Income

$250,000

@ 7.2%

$500,000

$500,000

- $150,000Income tax (30%)

Tax paid

$150,000

Traditional IRA

$350,000

$250,000

@ 7.2%

$500,000

$500,000

- 0%

Roth IRA

$500,000

Growth

To heirs

30% income tax

Spendable

Tax paid

$0

Balance

after 10 years

34

$500,000

@ 7.2%

$2.04 million

- $0%

Assumptions

Heir inherits $500,000 at age 50 and lives to age 84, with an assumed

growth rate of 7.2% while taking out IRS required distributions, total

beneficiary distributions equal $2.04 million.


$250,000

@ 7.2%

$500,000

$500,000

@ 7.2%

$2.04 million

- $612,748

Tax paid

$612,748

Traditional IRA

$250,000

@ 7.2%

$500,000

Roth IRA

Growth

To heirs

Growth

Balance after

34 years

Tax paid

$0

Balance after

10 years

30% income tax

Heirs stretching distribution

35

Traditional IRA Tax Roth IRA Tax

Traditional IRA vs. Roth IRA

$0

$0

$0

$0

$150,000

$150,000

$374,000

$612,748

Additional

SS taxable

(over 20 years)

Heir’s tax

on lump sum

distribution

Owner’s tax

on income

(over 20 years)

Tax on stretched

distributions

Assuming qualified Roth distributions

36

Roth IRA – FAQs

Tax rates in the future are unpredictable.

How can I know if converting will benefit me?

Just as you use diversification to deal with the

uncertainty of your investments, it can be a good idea

to have at least some money in Roth IRAs to diversify

your exposure to income taxes.

37

Roth IRA – FAQs

What if the value of my IRA significantly

increases or decreases when I convert?

If the value goes up, the tax on conversion would have

been calculated on a lower value. This is just one of

the advantages of converting!

If the value goes down, you can “recharacterize” the

Roth IRA back to a Traditional IRA. This must be done

by the due date, including extensions, for filing your

income tax return.

38

Roth IRA – FAQs

Does Congress have the ability to remove tax

advantages of the Roth IRA in the future?

Tax rules can be changed by Congress at any time.

However, “…outright reneging on the promise of tax-

free Roth withdrawals seems unlikely, at least without

some transition or grandfathering the rules. What‟s

more likely is that Congress will simply raise income

tax rates, putting the burden on wage earners and

retirees pulling money from regular IRAs and 401(k)s.”

-Source: Money Magazine “Retire Without Taxes” October 2008

39

Roth IRA – FAQs

Is converting in 2010 right for you?

Contact your financial professional for more

information on the Roth IRA.

40

Disclosure

This presentation was prepared by TransAmerica.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indicies are unmanaged and cannot be invested into directly.

Please consult your tax advisor for tax-related questions.

Tracking # 586018

A Registered Investment Advisor Member FINRA/SIPC

Questions & Answers

Thank you for attending!

Not FDIC/NCUA Insured Not Bank/Credit Union Guaranteed May Lose Value

Not Insured by any Federal Government Agency Not a Bank Deposit

the roth ira - america's next new tax break

Economy & Finance