1. Ralph G. Adamo, President & CEO Integrity Wealth Management
3991 MacArthur Blvd.
Newport Beach, CA 92660
(949)
Securities and advisory services offered through FSC Securities Corporation, Member FINRA/SIPC, and a registered investment advisor.
Integrity Wealth Management is not affiliated with FSC Securities and is not registered as a Broker Dealer
10/09

2. Roth IRAs: Take a New Look
Welcome.
Today, we will be discussing the rules for establishing and taking distributions from Roth IRAs. A lot has changed since the Roth IRA was introduced in the late 1990s, so we have a lot of information to cover.
Roth IRAs: Take a New Look
No bank guarantee
Not a deposit
Not FDIC / NCUA insured
May lose value
Not insured by any federal government agency

3. Agenda Funding Distributions Discussion 10/09
The rules for Roth IRAs are complex. Let’s start at the beginning, and that is getting money into (or funding) a Roth IRA. We will then discuss the rules for taking money out (the distribution rules) of the Roth IRA. Finally, we will discuss possible uses for Roth IRAs.
10/09

4. Roth IRAs Established 1/1/98
Similar to traditional IRAs except for these important differences:
No deductible contributions
Tax-free qualified distributions
Owner has no required distributions
The Roth IRA was established January 1, It is an individual retirement arrangement that, except as explained below, is subject to the rules that apply to a traditional IRA. It can be either an account or an annuity.
To be a Roth IRA, the account or annuity must be designated as a Roth IRA when it is set up. Unlike a traditional IRA, contributions to a Roth IRA cannot be deducted. Instead, qualified distributions are tax-free. Contributions can be made to a Roth IRA after age 70½ and no distributions are required during the Roth IRA owner’s lifetime.
10/09

5. Funding Four Ways Contributions Conversions
Rollovers from employer plans
Rollovers from Roth 401(k)/403(b)
You may fund a Roth IRA in one of four ways:
Making a regular contribution.
Converting a traditional IRA, SEP-IRA, or SIMPLE IRA (after a two-year wait from its first deposit).
Rolling over eligible rollover distributions from an employer-sponsored retirement plan.
Rolling over contributions from either a Roth 401(k) or Roth 403(b).
Let’s take a closer look at each funding method.
10/09

6. Contributions for 2009
$5,000 (or $6,000 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
For 2009, you may contribute as much as $5,000 to a Roth IRA as a regular contribution. This amount is increased to $6,000 if you are 50 or older by the end of the year.
There are two requirements to make these contributions:
Earned income—that is, income you receive from personal services. Earned income must be at least equal to the amount contributed.
There is one exception to the earned income requirement; if you have earned income, you may make a regular contribution to a Roth IRA in the name of your spouse who does not have earned income.
Modified adjusted gross income (MAGI) cannot exceed certain limits. MAGI for Roth IRA purposes excludes some otherwise taxable income and includes certain deductions and exclusions. Notably, MAGI does not include:
Required minimum distributions (RMDs) from IRAs.
Roth conversions.
Roth IRA rollovers from employer retirement plans.
10/09

7. MAGI Phase-out Ranges Married filing jointly Single $166,000–$176,000
$105,000–$120,000
For 2009, Roth IRA contribution limits are reduced in the following situations.
If you are married and file a joint return, the $5,000 and $6,000 Roth IRA contribution limits begin to phase out once MAGI reaches $166,000. You cannot make a Roth IRA contribution once your MAGI reaches $176,000.
If you are single, the MAGI phase-out limit begins at $105,000. You cannot contribute to a Roth IRA once your MAGI reaches $120,000.
10/09

8. What Is MAGI? Plus certain deductions, including deductions for:
Adjusted gross income (AGI)
Minus
RMDs from IRAs
Roth conversion amounts
Roth rollovers from employer plans
Plus certain deductions, including deductions for:
Traditional IRA
Qualified bond interest
Modified adjusted gross income (MAGI) is adjusted gross income minus RMDs from IRAs, Roth conversion amounts, and Roth rollovers of qualified assets from employer plans plus certain deductions, including deductions for traditional IRAs and qualified bond interest.
10/09

9. Conversions
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
10% penalty does not apply
A second way to fund your Roth IRA is through a conversion. A conversion is treated as a rollover of assets from your traditional IRA, SEP-IRA, or SIMPLE IRA. When converting a SIMPLE IRA to a Roth IRA, you must wait until a two-year waiting period has elapsed, which begins on the date that the first SIMPLE IRA contribution was deposited. You pay tax on all previously untaxed dollars that are converted, but the 10% early distribution penalty does not apply.
10/09

10. Conversion Process IRA Roth IRA 1) Redesignation 2) Direct rollover
1099R reporting
No 60-day rule
1099R reporting
Let’s take a closer look at the conversion process.
A conversion is generally treated as a rollover, regardless of the conversion method. Conversion methods include:
Redesignating a traditional IRA, SEP-IRA, or SIMPLE IRA as a Roth IRA by the same trustee.
A trustee-to-trustee transfer (or direct rollover).
A rollover to a Roth IRA within 60 days from the distribution (an indirect rollover). The amount rolled over to the Roth IRA is called a conversion contribution.
You must pay taxes on the conversion contribution in the year of the conversion, but the 10% penalty tax on early distributions will not apply if the conversion contribution is properly and timely rolled over. For many, the long-term tax savings on earnings may outweigh this conversion tax. We will discuss when it may make sense for you to convert and pay the tax later in the presentation. At this time, let’s just note that any after-tax portion of your conversion contribution is not subject to tax. These after-tax amounts may include nondeductible traditional IRA contributions and after-tax money rolled over from an employer retirement plan.
3) Indirect rollover
1099R reporting
60-day rule applies
No 12-month restriction
10/09

11. Conversions for 2009 Convert to Roth IRA Two requirements
MAGI is $100,000 or less
Single or file jointly with spouse
Married filing separately lose ability to convert
You can convert a traditional IRA to a Roth IRA if your MAGI is $100,000 or less regardless of filing status (married filing jointly or single). MAGI has the same definition for both regular contributions and conversion purposes. Beginning in 2010, the MAGI limitation on Roth IRA conversions disappears, but it does NOT disappear for regular contributions.
10/09

12. Conversions After 2009 Convert to Roth IRA No MAGI limits
Anyone can convert regardless of income level
The Tax Increase Prevention and Reconciliation Act (TIPRA) grants high income earners a new opportunity regarding Roth IRA conversions. For tax years after 2009, TIPRA permits anyone, regardless of income level, to make Roth IRA conversions. The previously discussed MAGI threshold of $100,000 is eliminated. But, TIPRA does more.
IRA
Roth IRA
10/09

13. Conversions in 2010
You can pay tax on conversion in 2010 OR split the bill, defer tax and pay:
One-half in 2011
One-half in 2012
For Roth IRA conversions in 2010, you are given the option to pay all the taxes on the conversion in 2010, or average the taxes owed on the conversion over two years in 2011 and 2012.
10/09

14. What Will Your Tax Rate Be?
“New” income tax rates scheduled to sunset: “old” rates scheduled to return to your return
Current highest rate: 35%
Sunset highest rate: 39.6% (2011 and later)
However, it is important for you to be aware that 2010 is the last year for the current “lower” income tax rates. Current law provides for an increase in tax rates in 2011; therefore, choosing to average tax payments over the two-year period in 2011 and 2012 might create a higher tax bill.
10/09

15. Conversion Caution 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 a 10% early withdrawal penalty
Let’s assume that you and your tax advisor have discussed the idea of converting your IRA to a Roth IRA and decided that it’s appropriate for you. An IRA holder is typically better off economically if conversion taxes are paid from assets other than the IRA. If an IRA holder younger than age 59½ withholds for taxes when converting to a Roth IRA, the amount withheld ultimately is not converted. As a result, the 10% early withdrawal penalty will apply unless another penalty exception applies.
10/09

16. Converting IRA After Age 70½
RMD amounts cannot be converted or rolled to a Roth IRA
If you are converting after age 70½, it’s important to note that you must first take your required minimum distribution (RMD) before you can convert. RMD amounts cannot be converted. There are no RMDs for 2009.
IRA
Roth IRA
RMD
Distribute RMD amount from IRA
Convert balance to Roth IRA
10/09

17. You Can Now Convert from an Employer Plan
Beginning 1/1/08
Two Sets of Rules:
Conversion rules
Rollover rules of the plan from which rollover occurred
Beginning in 2008, you can roll over into a Roth IRA all or any part of an eligible rollover distribution from an employer’s qualified pension, profit-sharing, and stock bonus plan, including a 401(k) plan, and both a 403(b) plan and governmental 457(b) plan.
Eligible rollover distributions exclude certain types of distributions, such as required minimum distributions, hardship distributions, and distributions that are part of a series of substantially equal periodic payments.
As noted earlier, rollovers from either a SEP or SIMPLE IRA to a Roth IRA were allowed prior to 2008.
Any amount rolled over is subject to the same rules that we just discussed for converting a traditional IRA to a Roth IRA. In addition, the rollover contribution must meet any rollover requirements that apply to the specific retirement plan from which the rollover occurred. A rollover contribution may be paid directly to a Roth IRA to avoid the 20% withholding that might otherwise apply.
10/09

18. Who Let the Roth Out? You can now also convert an inherited account
Applies only to eligible rollover distributions from employer plans
May be rolled to an inherited Roth IRA
Which distributions must be taken from Roth IRA?
Does it make sense for you?
Two changes introduced by the Pension Protection Act of 2006 have opened the door to Roth IRA conversions of inherited employer retirement plan accounts. The first change, discussed in the preceding slide, allows individuals to make a direct conversion from employer retirement plans to a Roth IRA. The second allows non-spousal beneficiaries of employer retirement plans to roll over these accounts into inherited IRAs. All plans will have to allow these non-spousal rollovers beginning in 2010.
These two changes were brought together in Notice , in which the Internal Revenue Service announced that a decedent's retirement account can be directly rolled over into a Roth IRA by a non-spousal beneficiary. The Roth IRA is treated as an inherited Roth IRA rather than the beneficiary's own Roth IRA. Thus, amounts must begin to be distributed to the beneficiary the year after the plan participant died, and the account generally must be liquidated over a beneficiary's remaining life expectancy. By comparison, a person is never required to receive a distribution from his or her own Roth IRA during his or her lifetime.
So, when might this make sense?
10/09

19. Are You Looking to Accelerate a Deduction?
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
We will explore Roth conversions in greater detail at the end of the presentation. For now, let’s note that an opportunity may exist when the decedent’s estate was so large that it was subject to the federal estate tax. A beneficiary of retirement assets is entitled to claim an itemized deduction (known as “the Section 691(c) deduction”) for the 45% federal estate tax that was paid on the retirement assets. Although it's usually advantageous to defer income, it can also be advantageous to accelerate tax deductions. By directly rolling over a retirement account into a Roth IRA, you can immediately claim the entire Section 691(c) deduction in the year of the conversion, effectively cutting the income tax rate almost in half. There are other situations in which a conversion could be beneficial, such as prepaying the income tax to reduce an estate’s size for a future estate tax liability.
The federal estate tax exemption amount is $2,000,000 in 2008 and increases to $3,500,000 in The highest federal estate tax rate is 45% in 2008 and The federal estate tax will be repealed on 1/1/10 until 12/31/10. Beginning 2011, the federal estate tax will be reinstated with a federal estate tax exemption amount of $1,000,000 and a maximum estate tax rate of 55%. Congress continues to discuss and consider legislation that, if passed, could change the estate tax exemption and estate tax rates for 2010 and beyond.
The federal estate tax exemption amount is $2,000,000 in 2008 and increases to $3,500,000 in The highest federal estate tax rate is 45% in 2008 and The federal estate tax will be repealed on 1/1/10 until 12/31/10. Beginning 2011, the federal estate tax will be reinstated with a federal estate tax exemption amount of $1,000,000 and a maximum estate tax rate of 55%. Congress continues to discuss and consider legislation that, if passed, could change the estate tax exemption and estate tax rates for 2010 and beyond.
10/09

20. Conversion Do-overs Recharacterization First do-over Reconversion
By tax return due date, including extensions
Reconversion
Doing over the do-over
In year following year of conversion
30 days after recharacterization
A contribution made to one type of IRA may be treated as having been made to a different type IRA. This is known as a recharacterization. Both regular contributions (to either a traditional IRA or Roth IRA) and conversion contributions (to a Roth IRA) may be recharacterized. The deadline to recharacterize is the due date of the tax return for the year of the original contribution, including extensions; for most of us, this would be October 15. The year of the original regular contribution means the year to which the contribution relates, not the year the contribution was actually made.
When a contribution is switched to a different IRA according to these rules, the new IRA is treated as if it received the contribution in the first place. This rule may be especially helpful for undoing a Roth IRA conversion when the value of the account declines following the conversion, thereby avoiding having to pay income tax on an asset value that no longer exists.
Reconversions are converting amounts that have been recharacterized. Reconversions cannot occur in the same tax year as the original conversion nor in the 30-day period following a recharacterization.
10/09

21. Last day to recharacterize
Do-over Timeline
Conversion Period
Reconversion Period
After 30 days
This slide depicts the timeline for recharacterizing and reconverting Roth IRA conversions.
Year 1
Year 2
1/ to /31
1/ to /31
10/15
Last day to recharacterize
10/09

22. Reconversion Examples
Time restrictions for eligible recharacterizations and the earliest reconversion date
Scenario
Conversion
Recharacterization
Reconversion 1
4/1/09
8/1/09
1/1/10 2
12/25/09
1/24/10 3
4/15/10
5/15/10
This slide depicts the timeline for recharacterizing and reconverting Roth IRA conversions.
[Read slide]
10/09

23. Roth 401(k)/403(b) Established 1/1/06 No MAGI limits for contributions
Required distributions
Tricky rollover rules
Finally, a rollover from a Roth 401(k) or Roth 403(b) may be made to a Roth IRA. These employer-sponsored retirement plan Roth accounts, known as designated Roth accounts (DRACs), were established January 1, 2006, and have become increasingly popular. The chief advantage of these accounts is the same as that of the Roth IRA: the ability to have investment earnings completely escape income taxation. There are differences as well, two of which deserve mention here. Unlike Roth IRAs, DRACs have no MAGI limits for contributions. Also, these accounts do not escape the required minimum distribution rules for their owners as do Roth IRAs. Therefore, many individuals will want to roll over these accounts to a Roth IRA to avoid the distribution requirements. The rollover rules are tricky and will be discussed after the next section on Roth IRA distributions.
10/09

24. Roth IRA Distributions
Qualified
Nonqualified
Required (for beneficiaries)
Roth IRA distributions can be classified into two categories:
Qualified distributions
Nonqualified distributions
There are also required distributions for Roth IRA beneficiaries.
10/09

25. Qualified (Tax-free) Distributions
Two requirements
Five years since you established a Roth IRA
Distribution is made for one of the following reasons:
Age 59½ or older
Disabled
Deceased
First-time home buyer
A qualified distribution is any distribution that meets BOTH of the following requirements:
It is made after the five-year period beginning with the first taxable year for which a contribution was made to a Roth IRA.
The distribution is made for one of the following reasons:
On or after age 59½
Because of disability
To a beneficiary after the Roth IRA owner’s death
To purchase a first home (up to the $10,000 lifetime limit)
With qualified distributions, withdrawals of earnings are both income-tax-free and penalty-tax-free.
10/09

26. Nonqualified Distributions
If you take a distribution but fail to meet requirements for a qualified distribution, then the distribution is made in the following order:
Failure to meet either the five-year rule or one of the other necessary triggers (age 59½, disability, death, or first-time home buyer) means that the distribution from the Roth IRA is not a qualified distribution. The portion of the distribution allocable to earnings may be subject to income tax, and a portion of the distribution may also be subject to the 10% early distribution penalty tax.
There are ordering rules for nonqualified distributions. These distributions are ordered as follows:
Regular contributions
Conversion and rollover contributions
Earnings
If a nonqualified distribution includes a conversion or rollover contribution and occurs within five years of the conversion or rollover, then the 10% early distribution penalty generally applies to that portion of the distribution. This penalty only applies in the year of the conversion and the following four taxable years. For example, if you made a conversion in 2008, the penalty won't apply to any distribution on or after January 1, Also, the penalty doesn't apply if you are older than age 59½, or if you can fit within any of the exceptions to the early distribution penalty. In addition, this penalty tax generally applies to the earnings portion of the nonqualified distribution. The traditional IRA exceptions to the early distribution tax are available to avoid this tax in either scenario. These exceptions include age 59½, death, disability, and 72(t) payments, among others.
Regular contributions
Conversion and rollover contributions
10% penalty if within five years
Earnings
Taxes and 10% if no exception
10/09

27. Tricky Rollover Rules New Roth IRA, then new five-year period
Roth 401(k)/403(b)
Roth IRA
As mentioned earlier, distributions from a Roth 401(k) or Roth 403(b) account can generally be rolled over to a Roth IRA. There’s an important hitch in these rules, however: the years of participation in the designated Roth account (DRAC) do not count toward the five-year requirement to take tax-free distributions from the Roth IRA. Therefore, if you are rolling to a new Roth IRA, a new five-year period begins in order to take a qualified distribution from the Roth IRA. The good news is that when rolling to an existing Roth IRA, the rollover takes on the existing five-year period of the Roth IRA. Opening a Roth IRA in anticipation of a DRAC rollover offers this advantage.
New Roth IRA, then new five-year period
Existing Roth IRA, then rollover tracks Roth IRA five-year period
10/09

28. Qualified Distribution Nonqualified Distribution
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
DRACs also have their own set of rules for qualified distributions. A qualified distribution is any distribution that meets BOTH of the following requirements:
It is made after the five-year period beginning with the first taxable year for which a contribution was made to the DRAC.
The distribution is made for one of the following reasons:
On or after age 59½
Because of disability
To a beneficiary after death of the DRAC owner
If a qualified distribution is rolled from a DRAC to a Roth IRA, then the entire amount rolled over is included as basis in the Roth IRA. Importantly, however, the holding period from the DRAC still does not transfer to the Roth IRA.
If a nonqualified distribution is rolled over, then the rollover amount is divided into basis and earnings in the Roth IRA.
10/09

29. DRAC Rollover Example
Amount includes $65,000 after-tax contributions and $35,000 earnings
Qualified distribution
$100,000 included as Roth IRA basis
Nonqualified distribution
Basis and earnings track to Roth IRA
Here’s an example. Over a period of six years, you contribute $65,000 to a DRAC. You then leave your employer and roll the entire account, now worth $100,000, to a Roth IRA. If you are at least age 59½ when the DRAC distribution occurs, the amount you are rolling over is a qualified distribution and the entire $100,000 is included in the basis of the Roth IRA. That means you can withdraw up to $100,000 from the Roth IRA income tax-free at any time. If you are younger than age 59½ when the DRAC distribution occurs, the amount being rolled is a nonqualified distribution. In that case, you would get $65,000 of basis in the Roth IRA and would be able to withdraw up to $65,000 tax-free at any time.
If, before this rollover, you did not have a Roth IRA, you would have to wait five years before you could take a tax- free withdrawal of any earnings in the account. With the qualified distribution, this means any earnings on the $100,000 rolled over. With the nonqualified distribution, this includes the $35,000 rolled over.
10/09

30. 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
To avoid having to begin a new five-year holding period, you should consider establishing a Roth IRA now. This may be done by regular contributions or, if income is too high to make a regular contribution, by making a contribution to an IRA that is nondeductible and then converting that IRA to a Roth IRA. Beginning in 2010, anyone can convert regardless of level of income. It is important to note that converted IRAs containing after-tax contributions trigger the aggregation rule so that all IRAs are treated as one IRA.
10/09

31. 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
For Roth IRA owners, there is no required beginning date (RBD). While the owner is alive, he or she is not required to take distributions during his or her lifetime. What this means at the owner’s death is that he or she is treated as having died before his or her RBD (again, because there is none).
Death before RBD introduces the five-year rule for distributions. Generally, the entire interest in the Roth IRA must be distributed by the end of the fifth calendar year after the year of the owner's death unless the account is payable to a designated beneficiary (an individual or certain trusts) over the life or life expectancy of the designated beneficiary. If the five-year rule applies, no distribution is required for any year before that fifth year.
A designated beneficiary is able to set up an inherited Roth IRA and take payments over his or her life expectancy using life expectancy factors provided by the IRS. These single life expectancy factors can be found in IRS Publication 590, Appendix C, Table I (Single Life Expectancy). The inherited Roth IRA account must include the name of the decedent. The designated beneficiary is able to name a beneficiary under the inherited Roth IRA. However, if the designated beneficiary dies prematurely, the named beneficiary can only continue payments over the remaining life expectancy of the original (now deceased) designated beneficiary. The new beneficiary cannot re-determine the life expectancy over his or her own life expectancy.
10/09

32. Death Distributions and the Five-year Rule
Required distributions waived for 2009
Five-year rule is currently a six-year rule
For deaths occurring between 2004 and 2009
Because RMDs have been eliminated for 2009, the five-year rule is currently a six-year rule. Beneficiaries of accounts of owners who died during the period between 2004 and 2009 will have six years over which to take distributions.
10/09

33. Nonqualified Death Distributions
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
A distribution to a beneficiary may not be a qualified distribution, in which case it is generally includable in the beneficiary's gross income in the same manner it would have been included in the owner’s income, had it been distributed to the IRA owner when he or she was alive. A distribution would not be qualified if the owner of a Roth IRA dies before the end of:
The five-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for the owner’s benefit.
The five-year period starting with the year of a conversion contribution from a traditional IRA or a rollover from a qualified retirement plan to a Roth IRA.
10/09

34. Qualified Death Distributions
Spousal rollover
Earlier of spouse’s or decedent’s five-year holding period
All others
Decedent’s five-year holding period
The five-year holding period for qualified distributions by beneficiaries is determined as follows:
[Read slide.]
10/09

35. Who’s Your Beneficiary?
Designated beneficiary (DB)
Spouse
Non-spousal individual
Qualifying trusts
Non-DB—estates, charities, etc.
The rules for determining RMDs for beneficiaries depend on what “type” of beneficiary is named. Designated beneficiaries are individuals and certain qualifying trusts. The rules for these beneficiaries generally allow them to take distributions over their life expectancies. All other beneficiaries must use the five-year rule.
10/09

36. Spouse Lump sum Five-year rule Inherited Roth IRA Rollover
Annuitization
Spouse’s recalculated life expectancy
Delayed until owner would have reached age 70½
Rollover
The distribution options for spousal beneficiaries are:
Lump sum
Five-year rule
Inherited Roth IRA: The spouse can either annuitize or take systematic withdrawals. With systematic withdrawals, the spouse can take payments over his or her recalculated life expectancy. These distributions may be delayed until the decedent would have reached age 70½.
Rollover: The spouse may treat the Roth IRA as his or her own, in which case no distributions are required.
10/09

37. Non-spousal Individual
Lump sum
Five-year rule
Inherited Roth IRA
Annuitization
Life expectancy of beneficiary
The distribution options for non-spousal individual beneficiaries are:
Lump sum
Five-year rule
Inherited Roth IRA: The beneficiary can either annuitize or take systematic withdrawals. With systematic withdrawals, the beneficiary can take payments over his or her non-recalculated life expectancy. These distributions must begin before the end of the calendar year following the year of the owner’s death. Some providers may not accommodate this line of business.
10/09

38. Qualifying Trusts as DBs
Valid under state law
Irrevocable at death
Identifiable beneficiaries
Trust documentation by 10/31 of year following year of death
A trust may qualify as a DB if the following requirements, as outlined in Treasury Regulation Section 1.401(a)(9)-4, are met.
[Read slide.]
10/09

39. Qualifying Trusts Lump sum Five-year rule
Trust-owned inherited Roth IRA
Life expectancy of oldest trust beneficiary
The distribution rules for qualifying trusts are:
Lump sum
Five-year rule
Trust-owned inherited Roth IRA: The trust can take systematic withdrawals. With systematic withdrawals, the oldest trust beneficiary is used to set the distribution period; it is his or her life expectancy that is used. Again, these distributions must begin before the end of the calendar year following the year of the owner’s death.
10/09

40. Non-designated Beneficiaries
Lump sum
Five-year payout
The options for beneficiaries who are not designated beneficiaries (such as a charity or estate) are more restrictive, and include a five-year payout or lump sum.
10/09

41. Multiple Beneficiaries
DB and non-DB
Five-year rule
All DBs
Life expectancy of oldest
If there are multiple beneficiaries, including DBs and non-DBs, then the five-year rule applies. Alternatively, if there are multiple beneficiaries, all of whom are individuals, then the life expectancy of the oldest beneficiary must be used. There are, however, ways to plan around these rules.
10/09

42. Important Dates for the Year AFTER Death
9/30
DB determination
12/31
Separate accounts
These dates become critical in this planning:
9/30 the year after the owner’s death is the designated beneficiary date.
12/31 the year after the owner’s death is the separate account date.
10/09

43. Case Study
$750,000 Roth IRA
75-year-old owner dies having named two beneficiaries
Let’s look at a case study that illustrates some of these planning opportunities.
[Read slide.]
Grand- daughter,
Age 25
Son,
Age 50
10/09

44. Opportunity for Separate Accounts
Separate accounts established by 12/31 of the year following the year of owner’s death
Son has 34.2 years during which to take distributions
Granddaughter has 58.2 years during which to take distributions
If separate accounts are established for each beneficiary by 12/31 of the year following the year of the owner’s death, then each beneficiary gets to use his or her own life expectancy to determine the distribution period. The granddaughter's distribution period is increased by 24 years.
10/09

45. Thanks, but No Thanks Disclaimers Son executes a qualified disclaimer
His sons, ages 22 and 20, 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
Disclaimers offer another way to maximize tax deferral. If the son executes a qualified disclaimer, then he is treated as having predeceased the Roth IRA owner. If the beneficiary form has his interest passing to his children, then his children take and are treated as DBs for RMD distribution purposes. With separate accounts, each son is allowed to take distributions over his individual life expectancy.
10/09

46. Roth IRA Advantages
Potential for profits without tax
No required lifetime distributions
Not included in definition of income for taxation of social security benefits
Roth IRAs offer the following advantages:
The potential for untaxed investment earnings through qualified distributions.
The ability to avoid required distributions during the owner’s lifetime.
An alternative form of income while collecting social security benefits that is not included (currently) in the definition of provisional income for social security income taxation purposes.
10/09

47. Roth IRA Disadvantages
No deduction for contributions
Pay tax on conversions
Roth IRAs also have some disadvantages. They are funded with after-tax money, and income tax must be paid when converting pretax money.
10/09

48. Do the Math
Analysis is required, because everyone’s situation is different
Assumptions include:
When distributions will be taken
What tax rates will be at the time of distributions
Earnings during the interim
So when does it make sense to go the Roth IRA route? That depends on your personal situation and also on what assumptions are made about the future. How long before the money is withdrawn? What will tax rates be at the time of distribution? What earnings are anticipated in the interim? Analysis is required, but the bottom line is that many individuals may be better off with the Roth IRA. The chief reason is that the Roth IRA is effectively bigger than a traditional IRA because it holds after-tax dollars.
10/09

49. Possible Opportunities
You don’t need your traditional IRA for income and wish to leave it to someone.
You need your IRA to fund your credit shelter 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.
Finally, there are certain situations in which a Roth IRA may make sense.
[Read slide.]
10/09

50. 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
Individuals have more ways to move retirement assets into a Roth IRA today than ever before. Hopefully, our discussion today has given each of you a better understanding of the general rules and concepts of the Roth IRA and converting to a Roth IRA. If you think converting to a Roth IRA is right for you, you should discuss this strategy with your tax and legal advisors.
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10/09

51. Ralph G. Adamo, President & CEO Integrity Wealth Management
3991 MacArthur Blvd.
Newport Beach, CA 92660
(949)
Securities and advisory services offered through FSC Securities Corporation, Member FINRA/SIPC, and a registered investment advisor.
Integrity Wealth Management is not affiliated with FSC Securities and is not registered as a Broker Dealer
10/09