Continuing Education for CPAs

1. Continuing Education for CPAs Roth IRA Conversions Presented By: Title: L1209077039[exp1210][All States][DC]

2. Metropolitan Life Insurance Company, New York, NY 10166. New England Financial is the service mark for New England Life Insurance Company and related companies, 501 Boylston Street, Boston, MA 02116. MetLife companies. MetLife Insurance Company is registered with the National Association of State Boards of Accountancy (NASBA), as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State Boards of accountancy have final authority on the acceptance of individual courses for CPE credit.

3. Objectives • To discuss the benefits and costs of converting a Traditional IRA to a Roth IRA in 2010. • To examine the critical factors to consider in deciding whether or not to convert a Traditional IRA to a Roth IRA. • To develop an analytical framework to help you assist your clients in making an informed decision

4. The Opportunity – Converting IRAs to Roth IRAs • Possibility of higher marginal income tax rates in the future. • Depressed values of existing IRA balances may reduce the taxable gain that otherwise would have been due. • A temporary opportunity: • Tax incentives for 2010 • Roth conversions may not survive future changes to the tax code.

5. Background • Taxpayer Relief Act of 1997 creates tax-favored accounts (Roth IRAs) from which funds can be withdrawn without tax, after a reasonable holding period and certain other requirements. • Individuals whose modified adjusted gross income (AGI) exceeded statutory limits are not able to contribute to a Roth IRA.

6. AGI Limits on Roth Contributions: 2009 and 2010 AGI Contribution* Less than $166,000 Up to $5000 $166,000 - $175,999 Less than $5000** $176,000 or more - $0 – Less than $105,000 Up to $5000 $105,000 - $120,000 Less than $5000** $120,000 or more - $0 - Filing Status Married filing jointly Single, or Married Filing Separately (separate household) * Contribution limit increased to $6000 for taxpayers over age 50 ** Contribution limit phased out as income increases

7. Background • Individuals whose modified AGI exceeded $100,000 have not been able to convert a Traditional IRA to a Roth IRA. • The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) repeals the $100,000 modified AGI limitation on Roth conversions, beginning in 2010. • TIPRA effectively eliminates the income limits on contributions as well, as taxpayers (up to age 70 ½) will be able to first contribute to a nondeductible Traditional IRA and then immediately convert to a Roth IRA.

8. 2010 Opportunity • In 2010 and following, all taxpayers can convert their Traditional IRAs (both deductible and nondeductible) to Roth IRAs. • The amount converted is currently taxable to the extent of previously deducted IRA contributions and earnings (nondeductible contributions made to the IRA constitute basis and are not taxed). • Taxable income from conversions in 2010 can be spread over two years – 2011 and 2012. • However, for conversions involving annuity contracts, the taxable amount be based on more than just previously deducted contributions and tax deferred earnings.

9. 2010 Opportunity – Example 1 • Taxpayer has two IRAs - IRA 1 has a value of $100,000, composed of nondeductible contributions ($50,000) and earnings. • IRA 2 has a value of $150,000, composed of deductible contributions ($100,000) and earnings. • The taxpayer will only convert IRA 1 to a Roth IRA.

10. 2010 Opportunity – Example 1 • All of the taxpayer’s IRAs will be aggregated for purposes of determining the ratio of gain/basis, regardless of which IRA is converted. • In the aggregate, IRA 1 and IRA 2 have $200,000 of deductible contributions and earnings out of $250,000 in value. • In this case then, 80% ($200,000/$250,000) of the amount converted or $80,000 (80% of $100,000) will be taxable income and 20% will be nontaxable return of basis.

11. 2010 Opportunity – Tax Payments over Two Years • If the conversion occurs in 2010 the individual includes one-half of the taxable amount in 2011 gross income and the other half in 2012 gross income. • If the individual elects out of the two-year spread, then he or she reports the entire income in 2010. • Taxpayers who expect income tax rates to increase in 2011 and 2012 might choose to include all of the income in 2010.

12. 2010 Opportunity – Example 2 • Example: Jack has $100,000 in his Traditional IRA. For several years, he made after tax contributions to his IRA totaling $20,000. • If Jack converts his IRA to a Roth in 2010, Jack could • report $40,000 in 2011 and $40,000 in 2012, or • report the entire $80,000 of taxable income in 2010. • In either case, Jack incurs no 10% federal income tax early withdrawal penalty if the entire $100,000 is contributed to the Roth IRA.

13. 2010 Opportunity – Tax Payments over Two Years • Clients taking advantage of the two-year spread should take action this year to make sure that the have the cash to pay the tax with non-IRA funds. • Distributions from the Traditional IRA or from the new Roth IRA may be subject to both income and a 10% excise tax.

14. 2010 Opportunity – Tax Payments over Two Years • The ability to spread income over two years is only available for conversions which take place in 2010. • If the conversion occurs after 2010, the individual reports the entire income in the year of conversion. • For example, if the taxpayer converts to a Roth IRA in 2011, the tax must generally be paid by April 15, 2012 and the taxpayer may be required to make estimated payments during 2011.

15. 2010 Opportunity – Re-characterizations • Taxpayers may re-characterize – i.e., undo – conversions • The re-characterization must generally be made by the due date of the taxpayer’s return, plus any extension. • Generally, the re-characterization can be as late as October 15th of the year following conversion. • Only one conversion and re-characterization is permitted during a year. • Taxpayers may wish to keep the conversion proceeds separate from other Roth IRAs in order to more easily re-characterize the account back to a Traditional IRA.

16. Conversion Sources • Traditional IRA • SEP IRA • SIMPLE IRA (but there are certain limitations for SIMPLE IRAs) • An eligible rollover distribution from the following non-Roth eligible retirement plans: • 401(a) qualified retirement plan (e.g., 401(k) plan), • 403(a) annuity plan, • 403(b) tax sheltered annuity, or • eligible governmental 457 plan.

17. Changing from a Traditional to Roth IRA • Retitling method • First, an individual can generally make a conversion without actually taking a distribution. For instance, an individual may make a conversion by simply notifying the IRA trustee to change the Traditional IRA to a Roth IRA. • Trustee-to-trustee direct method • Transfer from the existing account to a new account or to a new account with a different custodian • Distribution and Rollover method • Distribution to the taxpayer and rollover to a new Roth IRA within 60 days

18. Convert SEP IRAs or SIMPLE IRAs • Convert SEP or SIMPLE IRAs • SEP or SIMPLE IRAs (after two years of participation) can also be converted to Roth IRAs. • The taxpayer will need to set up a new SEP or SIMPLE IRA to receive any new SEP or SIMPLE IRA contributions after the taxpayer converts.

19. Convert 401(k) or 403(b) Account Balance • An eligible rollover distribution from an employer sponsored qualified retirement plan can be converted to a Roth IRA. • Tax Planning Opportunity: • Client can first rollover pre-tax amounts to his/her current employer’s plan if current employer permits such rollover. • Afterwards, the taxpayer can transfer after-tax amounts directly to a Roth IRA. • By using this approach, there should be no current income tax to the client.

20. To Convert or Not? • Weighing the advantages and disadvantages of converting a Traditional IRA to a Roth IRA in 2010. • Suggested two-prong approach: • First, use a financial calculator to determine whether the loss of the use of the money spent on taxes today is less than the present value of the future tax savings from the Roth distributions. • Secondly, employ a qualitative approach by considering the many factors which cannot be easily incorporated into numbers.

21. To Convert or Not to Convert? Three Most Important Factors: (i) the portion of the account which consists of after-tax contributions, (ii) the client’s income tax bracket at conversion and when distributions are ultimately taken, and (iii) whether the tax is paid from the IRA itself or from outside sources.

22. The Three Primary Decision Factors • Nondeductible Contributions • What portion of the IRA balance reflects nondeductible contributions? • Relative Tax Brackets • Current vs. future tax brackets? • Convert a portion to limit bracket creep due to various charges and fees, partial conversions of annuities may not be permitted. • Manipulate income?

23. The Three Primary Decision Factors 3)Pay Tax From An Outside Source • Paying from outside source allows more to be saved for retirement • Paying tax with IRA funds may generate 10% penalty tax

24. To Convert or Not? 11 Qualitative Factors • Fees Incurred (2) Age and Rate of Return • The higher the expected rate of return and the younger the client, the greater the difference will be in favor of the Roth. • Will impact the extent to which the client will gain from the conversion. (3) Radical Reform of Tax Structure • To the extent that major tax reform is enacted, the early payment of an income tax may prove disadvantageous.

25. To Convert or Not? 11 Qualitative Factors • Change in the Income Tax Rate • To the extent that the marginal income tax rates for high income taxpayers increase, the payment of an income tax at today’s lower rate will be attractive. • State Income Taxes • If substantial state income taxes are due as a result of conversion, this will make conversion less attractive. • If the individual state does not provide for tax-free distributions from Roth IRAs, this will also make the case for conversion less appealing. (6) Retirement Needs • Elimination of lifetime RMD (but not after-death RMD) allows for more tax-free growth - Consider “Stretch”. • Roth IRA would be more attractive to those clients who do not need retirement income and would like to pass an income tax-free inheritance to children/grandchildren (provided the qualified distribution requirements are met).

26. To Convert or Not? 11 Qualitative Factors (7) Tax on Social Security Benefits/Higher Medicare Premiums • A Roth IRA may make it easier to stay below the Social Security threshold; or, • Some senior citizens could push their taxable income above the level that triggers a tax on their social security benefits or creates higher Medicare premiums (8) Impact on Financial Aid Eligibility (9) Impact on Creditor Protection • Check the protection provided to IRAs in state of residence

27. To Convert or Not? 11 Qualitative Factors (10) Estate Taxes. • By paying the income tax up-front, the size of the estate is reduced. • Pre-payment of the income tax is essentially a tax free gift to heirs • Roth IRA is a better asset to fund the credit shelter trust than a Traditional IRA because qualified distributions are income tax free and do not waste part of the unified credit. • Tax Diversification Prudent to have various tax buckets which are treated differently (e.g., tax free, tax-deferred and tax advantaged) to control tax bracket during retirement

28. Actions to Take Today Advisors should ask their clients who have more than $100,000 of modified adjusted gross income the following: • What is the current balance of each of your IRAs, SEPs, SARSEPs and SIMPLE IRAs? • How much of each IRA account consists of after-tax contributions? • Do you have an existing 401(k), 403(b) or eligible governmental 457 plan from a previous employer? • If so, what is the current balance and how much of that amount consists of after-tax contributions? • Does your current employer plan accept rollovers from a previous employer’s plan? • Do you wish to make a non-deductible IRA contribution for 2009 and 2010 so as to increase the funds available for conversion?

29. Conclusion • Tax-free qualified distributions and no required distributions during the Roth IRA owner’s life make the Roth IRA a valuable investment vehicle • In 2010 all taxpayers regardless of income can take advantage of this new opportunity. • Conversion tends to be advantageous when: • (i) the tax rate at retirement is expected to be higher than the tax rate paid on the conversion, • (ii) the IRA’s tax basis is high (e.g., after tax contributions were made to the IRA), • (iii) the tax due on the conversion is paid from outside sources, • (iv) the taxpayer is young and he or she has a long investment horizon, and • (v) the taxpayer expects to pay estate taxes and would like to pass the IRA on to his heirs.

30. Circular 230 Notice and Disclosure: Pursuant to IRS Circular 230, MetLife is providing you with the following notification: The information contained in this document is not intended to and cannot be used by anyone to avoid IRS penalties. This document supports the promotion and marketing of insurance products. Clients should seek advice based on their particular circumstances from an independent tax advisor. MetLife, its agents, and representatives may not give legal or tax advice. Any discussion of taxes herein or related to this document is for general information purposes only and does not purport to be complete or cover every situation. Tax law is subject to interpretation and legislation change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the facts and circumstances. You should consult with and rely on your own independent legal and tax advisers regarding your particular set of facts and circumstances.

31. Thank you! Thank You! Please fill out our seminar evaluation form

32. Disclosure Peter Rosengard is an investment advisor representative and a registered representative of MetLife Securities, Inc. (MSI), which is a registered investment advisor and a member of FINRA/SIPC. Insurance offered through the Enterprise General Agency, Inc. (EGA), Somerset, NJ 08873, and the Metropolitan Life Insurance Company (MLIC), New York, NY 10166.  Products and services offered through R4 Employee Benefit SolutionsTM and R4 EnterprisesTM are not guaranteed, endorsed or recommended by MLIC, MSI or the EGA.  R4 Risk & Wealth SolutionsTM is a marketing name for Peter Rosengard’s firm.

33. Circular 230 Notice Pursuant to IRS Circular 230, MetLife is providing you with the following notification: The information contained in this document is not intended to and cannot be used by anyone to avoid IRS penalties. This document supports the promotion and marketing of insurance products. You should seek advice based on your particular circumstances from an independent tax advisor. MetLife, its agents, and representatives may not give legal or tax advice. Any discussion of taxes herein or related to this document is for general information purposes only and does not purport to be complete or cover every situation. Tax law is subject to interpretation and legislative change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the facts and circumstances. You should consult with and rely on your own independent legal and tax advisers regarding your particular set of facts and circumstances.

34. L1209077039[exp1210][All States][DC]