Roth IRA Roth IRA Conversions: Conversions: What You Need to What You Need to Know Know Presented by: Presented by: David S. Richmond, CLU, ChFC David S. Richmond, CLU, ChFC Chairman & Chief Investment Officer Chairman & Chief Investment Officer & Matthew J. Curfman, CFP® Matthew J. Curfman, CFP® Senior Vice President of Investment Services Senior Vice President of Investment Services Richmond Brothers Financial Management Specialists, Richmond Brothers Financial Management Specialists, Inc. Inc.
Transcript
Roth IRA Conversions: Roth IRA Conversions: What You Need to KnowWhat You Need to Know
Presented by:Presented by:David S. Richmond, CLU, ChFCDavid S. Richmond, CLU, ChFC
David Richmond is a licensed Investment Advisor David Richmond is a licensed Investment Advisor Representative in the states of MI, OH, AZ, CO, MNRepresentative in the states of MI, OH, AZ, CO, MN
Licensed to sell securities, annuities, & insuranceLicensed to sell securities, annuities, & insurance Affiliated with Sammons Securities Co.®, LLC, member Affiliated with Sammons Securities Co.®, LLC, member
FINRA/SIPC & Midland NationalFINRA/SIPC & Midland National Richmond Brothers Financial Management Specialists, Inc. Richmond Brothers Financial Management Specialists, Inc.
offers securities through Sammons Securities Co.®, LLC, offers securities through Sammons Securities Co.®, LLC, member FINRA/SIPCmember FINRA/SIPC
Fee-based investment advisory services offered through Fee-based investment advisory services offered through Sigma Planning Corporation, a registered investment Sigma Planning Corporation, a registered investment advisoradvisor
DisclosuresDisclosures
Richmond Brothers offers securities through Sammons Richmond Brothers offers securities through Sammons Securities Co.®, LLC, member FINRA/SIPC. The Securities Co.®, LLC, member FINRA/SIPC. The broker/dealer for Midland National’s variable products is broker/dealer for Midland National’s variable products is Sammons Securities Co. Sammons Securities Co. is a Sammons Securities Co. Sammons Securities Co. is a registered broker/dealer under the Securities Exchange Act registered broker/dealer under the Securities Exchange Act of 1934. Sammons Securities Co. is an indirect wholly of 1934. Sammons Securities Co. is an indirect wholly owned subsidiary of Sammons Enterprises, Inc., of Dallas, owned subsidiary of Sammons Enterprises, Inc., of Dallas, Texas, the ultimate parent company of Midland National. Texas, the ultimate parent company of Midland National.
Dave Richmond and Matt Curfman are members of Ed Dave Richmond and Matt Curfman are members of Ed Slott’s Master Elite IRA Advisor Group™Slott’s Master Elite IRA Advisor Group™
DisclosuresDisclosures This material is provided for general and educational This material is provided for general and educational
purposes only and is not intended as tax, legal or purposes only and is not intended as tax, legal or investment advice (or for use to avoid penalties that may investment advice (or for use to avoid penalties that may be imposed under U.S. Federal tax laws). Please consult be imposed under U.S. Federal tax laws). Please consult your tax advisor for advice regarding your personal tax your tax advisor for advice regarding your personal tax situation.situation.
This presentation has been adapted from Ed Slott and This presentation has been adapted from Ed Slott and Company, LLC’s Company, LLC’s 15 Roth Conversion Traps15 Roth Conversion Traps provided to provided to members of Ed Slott’s Elite IRA Advisor Group™members of Ed Slott’s Elite IRA Advisor Group™
There will be an opportunity to schedule an appointment for There will be an opportunity to schedule an appointment for an individual consultation at the end of this Webinar which an individual consultation at the end of this Webinar which may result in a recommendation of specific financial may result in a recommendation of specific financial products that may help you achieve your financial goalsproducts that may help you achieve your financial goals
There is no obligation to schedule an appointment or There is no obligation to schedule an appointment or purchase a productpurchase a product
AgendaAgenda
How a Roth IRA is different How a Roth IRA is different
Points to remember about Roth Points to remember about Roth ConversionsConversions
Q & AQ & A
How is a Roth IRA Different from How is a Roth IRA Different from Traditional IRA?Traditional IRA?
Cannot deduct contributions to a Cannot deduct contributions to a RothRoth
Qualified distributions are tax freeQualified distributions are tax free Contributions can be made to Roth Contributions can be made to Roth
IRA after age 70½IRA after age 70½ Can leave amounts in Roth IRA as Can leave amounts in Roth IRA as
long as you live long as you live
Points to RememberPoints to Remember
Many things to keep in mind before, Many things to keep in mind before, during and after conversionsduring and after conversions
Conversion to a Roth IRAConversion to a Roth IRA
Requires paying taxes on any pre-tax Requires paying taxes on any pre-tax contributions, plus any gainscontributions, plus any gains– Money used to pay the taxes cannot come from Money used to pay the taxes cannot come from
traditional IRA without a 10% penalty (if you are under traditional IRA without a 10% penalty (if you are under age 59½ age 59½
Converted amounts can be distributed without Converted amounts can be distributed without penalty after five years (beginning January 1 of penalty after five years (beginning January 1 of the year of conversion and ending on December the year of conversion and ending on December 31 of the fifth year)31 of the fifth year)– Each conversion has a separate five-year holding periodEach conversion has a separate five-year holding period– Distribution of earnings before completing a five-year Distribution of earnings before completing a five-year
holding period and attaining age 59½ may be subject to holding period and attaining age 59½ may be subject to tax and 10% penaltytax and 10% penalty
Check Beneficiary FormsCheck Beneficiary Forms
Roth Conversion requires Roth Conversion requires newnew beneficiary beneficiary formform– Make sure to name Primary & Contingent Make sure to name Primary & Contingent
beneficiariesbeneficiaries– If multiple beneficiaries, make sure to If multiple beneficiaries, make sure to
designate who gets what percentagedesignate who gets what percentage
If no beneficiary is named, the account is If no beneficiary is named, the account is given to the estategiven to the estate– This means This means NO STRETCH IRA NO STRETCH IRA (stretch IRAs are (stretch IRAs are
designed for investors who will not need the designed for investors who will not need the money in the account for their own retirement money in the account for their own retirement needs)needs)
Check Beneficiary FormsCheck Beneficiary Forms
If you die before Required Beginning If you die before Required Beginning Date, five year rule applies for Date, five year rule applies for beneficiarybeneficiary
If you die after Required Beginning If you die after Required Beginning Date, beneficiary uses your Date, beneficiary uses your remaining single liferemaining single life
Worse for Roth IRA beneficiary-rule Worse for Roth IRA beneficiary-rule that applies is that applies is alwaysalways 5 year rule 5 year rule
NUANUA
What is Net Unrealized Appreciation What is Net Unrealized Appreciation (NUA)?(NUA)?– Tax break for someone leaving a company that Tax break for someone leaving a company that
has highly appreciated company stock in 401k has highly appreciated company stock in 401k planplan
NUA NUA mustmust be part of a qualified lump-sum be part of a qualified lump-sum distributiondistribution
Make sure that you pull out company stock Make sure that you pull out company stock in kindin kind as stock and then transfer to a as stock and then transfer to a taxable brokerage accounttaxable brokerage account
NUA ExampleNUA Example
$1 million stock with $100,000 cost$1 million stock with $100,000 cost
Stock-Cost=NUAStock-Cost=NUA
Tax is only paid on Tax is only paid on costcost ($100,000) ($100,000) No tax is paid on the difference No tax is paid on the difference
($900,000) until stock is sold($900,000) until stock is sold
NUANUA
Triggering events that qualify for NUA:Triggering events that qualify for NUA:– Separation from serviceSeparation from service– Age 59½ Age 59½ – DeathDeath– DisabilityDisability
You cannot convert NUA stock to a Roth You cannot convert NUA stock to a Roth IRA and pay IRA and pay nono tax tax– The NUA break is then lost (according to Notice The NUA break is then lost (according to Notice
2009-75) 2009-75)
Pro-Rata RulePro-Rata Rule You may not convert non-deductibles to a Roth You may not convert non-deductibles to a Roth
IRA and pay no taxIRA and pay no tax
– Each dollar needs to be a portion of taxable and tax-freeEach dollar needs to be a portion of taxable and tax-free– Be careful with partial conversionsBe careful with partial conversions
Example: Cindy has $100,000 in an IRA, $20,000 is the Example: Cindy has $100,000 in an IRA, $20,000 is the basis (the total of her nondeductible contributions made basis (the total of her nondeductible contributions made over the years)over the years)
– She rolls over $200,000 from her former employer’s plan to the She rolls over $200,000 from her former employer’s plan to the IRA, of which $10,000 is from after-tax contributionsIRA, of which $10,000 is from after-tax contributions
– After the rollover, she’ll have $300,000 in her IRA. The basis After the rollover, she’ll have $300,000 in her IRA. The basis becomes $30,000 (the $20,000 nondeductible plus the becomes $30,000 (the $20,000 nondeductible plus the $10,000 of after-tax funds rolled into the IRA = $30,000 basis)$10,000 of after-tax funds rolled into the IRA = $30,000 basis)
Pro-Rata RulePro-Rata Rule Now Cindy wants to withdraw $10,000 of after-tax money Now Cindy wants to withdraw $10,000 of after-tax money
from the IRAfrom the IRA– Only $1,000 of the withdrawal will be tax-free. She’ll pay tax Only $1,000 of the withdrawal will be tax-free. She’ll pay tax
on the other $9,000 on the other $9,000 – Therefore, the nontaxable amount in the IRA is $30,000 and Therefore, the nontaxable amount in the IRA is $30,000 and
that is 10% of the total $300,000 IRA balance after the rolloverthat is 10% of the total $300,000 IRA balance after the rollover– This means that each withdrawal will be 10% tax-free and 90% This means that each withdrawal will be 10% tax-free and 90%
taxable in the current yeartaxable in the current year
Another option is to convert Cindy’s entire $300,000 IRA to Another option is to convert Cindy’s entire $300,000 IRA to a Roth IRA (assuming she otherwise qualifies for the a Roth IRA (assuming she otherwise qualifies for the conversion) conversion) – Then Then all withdrawals will be tax-free all withdrawals will be tax-free from the converted Roth from the converted Roth
IRA after appropriate waiting periods are met. She’ll pay tax on IRA after appropriate waiting periods are met. She’ll pay tax on $270,000; the $30,000 of basis will transfer tax-free to the $270,000; the $30,000 of basis will transfer tax-free to the Roth IRARoth IRA
– A partial conversion would require the use of the Pro Rata RuleA partial conversion would require the use of the Pro Rata Rule
Non-Spouse BeneficiariesNon-Spouse Beneficiaries
CannotCannot convert inherited IRAs to inherited convert inherited IRAs to inherited Roth IRAsRoth IRAs
If inherited from company plan, may If inherited from company plan, may convert inherited company plan to convert inherited company plan to inherited Roth IRA as trustee-to-trustee inherited Roth IRA as trustee-to-trustee transfer (new in 2010)transfer (new in 2010)
Name of deceased IRA owner must remain Name of deceased IRA owner must remain in account title on properly titled inherited in account title on properly titled inherited IRAIRA
Required Minimum Distributions (RMDs) Required Minimum Distributions (RMDs) cannotcannot be converted to Roth IRA be converted to Roth IRA
72(t) payments cannot be converted to 72(t) payments cannot be converted to Roth IRARoth IRA
Inherited IRAs cannot be convertedInherited IRAs cannot be converted
Only eligible rollover distributions can be Only eligible rollover distributions can be converted (i.e. in-service distributions)converted (i.e. in-service distributions)
Converting After 70½ Converting After 70½
No RMDs for Roth IRA ownersNo RMDs for Roth IRA owners
In 2010, if you are over 70½, you are In 2010, if you are over 70½, you are subject to RMDs in traditional IRA or subject to RMDs in traditional IRA or 401(k)401(k)– Do not convert entire balance (first Do not convert entire balance (first
dollars out are deemed RMD)dollars out are deemed RMD)– Take RMD first and then convert to RothTake RMD first and then convert to Roth
60-Day Rollover Rules60-Day Rollover Rules
Many times a Roth conversion does Many times a Roth conversion does not happen in 60 daysnot happen in 60 days– Best way to avoid this is a trustee-to-Best way to avoid this is a trustee-to-
trustee transfertrustee transfer
SIMPLE IRAsSIMPLE IRAs
Distributions in the first two years Distributions in the first two years are not eligible for rolloverare not eligible for rollover
If you are under age 59½, there is a If you are under age 59½, there is a 25% penalty25% penalty
10% Penalty10% Penalty
If you take funds out of an IRA before age If you take funds out of an IRA before age 59½, there is a 10% penalty59½, there is a 10% penalty
– Since conversion to a Roth IRA is NOT Since conversion to a Roth IRA is NOT considered a distribution, there is no 10% considered a distribution, there is no 10% penaltypenalty
– However, if you are under 59½ when However, if you are under 59½ when converting to a Roth IRA, any withdrawal of converting to a Roth IRA, any withdrawal of converted amounts from the Roth within 5 converted amounts from the Roth within 5 years triggers a 10% penalty years triggers a 10% penalty
Special Payout DealSpecial Payout Deal
Remember, if you convert in 2010, Remember, if you convert in 2010, you do NOT need to pay federal you do NOT need to pay federal taxes on the conversion for 2010taxes on the conversion for 2010
– Have the choice to Have the choice to split conversion split conversion incomeincome between 2011 and 2012 between 2011 and 2012
– Tax may be different in each year Tax may be different in each year depending on total income and tax ratesdepending on total income and tax rates
Special Payout Deal ExampleSpecial Payout Deal Example
For example, let’s say you have $100,000 For example, let’s say you have $100,000 in an IRA and want to convert it to a Roth in an IRA and want to convert it to a Roth IRAIRA
If you choose not to pay taxes on the conversion in 2010:If you choose not to pay taxes on the conversion in 2010:
--Taxes are paid on $50,000 included in income for 2011Taxes are paid on $50,000 included in income for 2011
--Taxes are paid on $50,000 included in income for 2012Taxes are paid on $50,000 included in income for 2012
Separate New Roth IRAsSeparate New Roth IRAs To take maximum advantage of a Roth re-To take maximum advantage of a Roth re-
characterization, make sure you convert to a characterization, make sure you convert to a brand newbrand new Roth IRA Roth IRA
– This includes using a separate Roth IRA for every This includes using a separate Roth IRA for every conversion (i.e. each investment vehicle goes in a conversion (i.e. each investment vehicle goes in a separate Roth)separate Roth)
– If value tanks, you do NOT need to pay tax on the value If value tanks, you do NOT need to pay tax on the value that does not existthat does not exist
– Remember: you have until October 15, 2011 to re-Remember: you have until October 15, 2011 to re-characterize a 2010 conversioncharacterize a 2010 conversion
Check Financial AidCheck Financial Aid
When applying for financial aid, retirement When applying for financial aid, retirement accounts are not looked at, but income isaccounts are not looked at, but income is
If you have children or grandchildren If you have children or grandchildren applying to colleges, find out what year applying to colleges, find out what year income will be measured for financial aidincome will be measured for financial aid
You may be eligible for a $8,000 or $6,500 You may be eligible for a $8,000 or $6,500 tax credittax credit– Make sure to coordinate Roth conversions so Make sure to coordinate Roth conversions so
you may keep homebuyer tax credityou may keep homebuyer tax credit If home is purchased in 2010 up-to-due-If home is purchased in 2010 up-to-due-
date, you can take the credit on 2009 tax date, you can take the credit on 2009 tax returnreturn
Maximize tax credit and Roth conversion Maximize tax credit and Roth conversion opportunityopportunity
Medicare Part B/Medicare Part B/Social Security TaxSocial Security Tax
Roth conversion income will raise Medicare Part B Roth conversion income will raise Medicare Part B premiumspremiums
Roth conversion income could trigger tax on Roth conversion income could trigger tax on Social SecuritySocial Security
If you do not do a Roth conversion, at age 70 ½ If you do not do a Roth conversion, at age 70 ½ RMDs would RMDs would STILLSTILL occur and cause the same occur and cause the same problems problems EVERYEVERY year year
Exemptions, credits, deductions may be lost with Exemptions, credits, deductions may be lost with high-income year, high-income year, BUT NOT FOREVERBUT NOT FOREVER
OverviewOverview
There are many different variables to There are many different variables to consider before doing a Roth conversionconsider before doing a Roth conversion
Although there is a lot of publicity about Although there is a lot of publicity about Roth conversions, the decision to convert Roth conversions, the decision to convert should be made on an individual levelshould be made on an individual level
Make sure to check with your financial Make sure to check with your financial advisors about your situation before advisors about your situation before making a conversionmaking a conversion
QuestionsQuestions
We welcome your questions at this timeWe welcome your questions at this time
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