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What the Experts Are Saying…

What the Experts Are Saying…. “The Roth IRA is the single best gift Congress has ever presented to the American taxpayer.”. What the Experts Are Saying…. “By allowing Roth IRAs, they also created the single most powerful estate building and wealth transfer vehicle available today.”.

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What the Experts Are Saying…

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  1. What the 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. What the Experts Are Saying… “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.” www.moneychimp.com

  4. What the Experts Are Saying… “The essence of a Roth IRA is that you pay tax on the seed, but reap the harvest tax-free.”

  5. What the Experts Are Saying… “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 and mutual funds to bonds and real estate.” Why you need a Roth IRA – NOW! by Erin Burt, Kiplinger’s Personal Finance 3-17-06

  6. What the Experts Are Saying…

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

  8. Tax Rates at Historic Lows Source:http://www.ntu.org/main/page.php?PageID=19 Source: www.taxfoundation.org

  9. 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 WyssChief Economist at Standard & Poor’s Source: Pioneer Investments, “Worth the Wait: New Roth 401(k) Reshapes the Retirement Plan Landscape”

  10. 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?

  11. The Roth IRA Versus Traditional IRA A Roth IRA worth $100,000 is equal to a Traditional IRA worth…? Where else does a Roth IRA win?

  12. A Roth Conversion Strategy Could Help You Achieve Your Financial Objectives Traditional IRA vs. Roth WITHDRAWALS $225,000 IRA @ 7.2% $450,000 10yrs $30,000 - $ 6,000 $24,000 $225,000 Roth @ 7.2% $450,000 10yrs $30,000 - $0 $30,000 Annual Withdrawals Income Tax (20%) Spendable Roth IRA Tax Paid Over 10 Years $ 60,000 Tax Paid Over 10 Years $0

  13. Unique Benefits: No RMDs • Unlike Traditional IRAs, no Required Minimum Distributions

  14. Unique Benefits: Estate Planning • No RMDs gives Roth IRAs 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 will be tax-free for heirs • Minimum withdrawal rules will apply to heirs

  15. 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

  16. Unique Benefits: Access to Withdrawals Roth IRA • 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

  17. Unique Benefits: Social Security Taxation • 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 Kaye Thomas. Guide to Roth IRA: Tax on Social Security. Fairmark Press Tax Guide for Investors. http://www.fairmark.com/rothira/socsec.htm

  18. Are you currently taxed at a rate of 46%? Assume $24,000 from SSI and $22,000 from a pension. Here is what could happen today:

  19. Unique Benefits: Access to Withdrawals How Much of Your Social Security Income is Taxable? What’s included in the calculation? • All wages • Any taxable or tax-free interest • Distributions from pensions and traditional plans like IRAs and 401(k)s • Half of your Social Security income • And other taxable income How much of your Social Security is taxable? • If married filing jointly and AGI is: • Under $32,000 0% taxable • $32,000 - $43,999 50% taxable • Greater than $44,000 85% taxable

  20. 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 • Greater flexibility • Access contributions at any time tax-free • Access earnings for first-time home purchases after five-year holding period • Social Security Taxation • Tax-free bonds are included • Qualifying Roth IRA distributions are excluded • Diversify tax risk

  21. 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

  22. Roth IRA Income Limits for 2009 Contributions

  23. Roth IRA Annual Contribution Limits

  24. Current Roth IRA Conversion Limits

  25. What the Experts Are Saying… “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.”

  26. Convert in 2010 • No income limits for conversions of a Traditional IRA to a Roth IRA in 2010 • Limits on income levels for contributionsand 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.

  27. Tax Implications • Upon conversion, Traditional IRA assets are taxed as ordinary income. • But for 2010 conversions, these taxes can be paid over two years (2011 and 2012). • Please note: Pre-tax contributions vs. nondeductible Traditional IRA contributions. • Converting an Annuity? The Fair Market Value is used to determine the tax on conversion. Source: http://www.nysscpa.org/cpajournal/2007/507/essentials/p48.htm

  28. 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.

  29. Conversion Tax in Perspective The conversion tax is not an extra tax that you must pay to get the benefits of a Roth IRA. Instead it is the payment of the tax that has already accrued in the IRA. A tax that one day will be paid by you or your heirs! At a rate that might be lower or higher depending on future tax rates.

  30. Current IRA = $385,000 Growth Rate 7% Owner’s Current Age 65 at Death 85 Spouse’s Current Age 64 at Death 90 Heir’s Average Current Age 27 at Death 85 Tax Rate During Lifetime of Owner and Spouse = 33% Heirs = 40%

  31. At Age 65 $385,000 Inherits $705,600 Inherits $654,000 RMDs to 90 $320,100 RMDs to 85 $2,024,100 Total RMDs $2,862,600 RMDs to 85 $518,400 Taxes Paid $171,000 Taxes Paid $105,600 Taxes Paid $809,600 Total Income Taxes $1,086,300

  32. At Age 65 $385,000 Inherits $705,600 Inherits $654,000 RMDs to 90 $320,100 RMDs to 85 $2,024,100 Total RMDs $2,862,600 RMDs to 85 $518,400 Taxes Paid $171,000 Taxes Paid $105,600 Taxes Paid $809,600 Total Income Taxes $1,086,300

  33. At Age 65 $385,000 Inherits $705,600 Inherits $654,000 RMDs to 90 $320,100 RMDs to 85 $2,024,100 Total RMDs $2,862,600 RMDs to 85 $518,400 Taxes Paid $171,000 Taxes Paid $105,600 Taxes Paid $809,600 Total Income Taxes $1,086,300

  34. At Age 65 $385,000 Inherits $705,600 Inherits $654,000 RMDs to 90 $320,100 RMDs to 85 $2,024,100 Total RMDs $2,862,600 RMDs to 85 $518,400 Taxes Paid $171,000 Taxes Paid $105,600 Taxes Paid $809,600 Total Income Taxes $1,086,200

  35. At Age 65 $385,000 Inherits $705,600 Inherits $654,000 RMDs to 90 $320,100 RMDs to 85 $2,024,100 Total RMDs $2,862,600 RMDs to 85 $518,400 Taxes Paid $171,000 Taxes Paid $105,600 Taxes Paid $809,600 Total Income Taxes $1,086,200 Age 65 Converts $50,000 Roth Remaining in traditional IRA $335,000 Converts Only $50,000 to a Roth IRA

  36. At Age 65 $385,000 Inherits $705,600 Inherits $654,000 RMDs to 90 $320,100 RMDs to 85 $2,024,100 Total RMDs $2,862,600 RMDs to 85 $518,400 Taxes Paid $171,000 Taxes Paid $105,600 Taxes Paid $809,600 Total Income Taxes $1,086,200 RMD Tax-Free Increase $589,800 Age 65 Converts $50,000 Roth Inherits $820,900 Inherits $879,700 RMDs to 90 $278,500 RMDs to 85 $2,722,800 Total RMDs $3,452,300 RMDs to 85 $451,000 Taxes Paid $148,900 Taxes Paid $91,900 Taxes Paid $704,500 Total Income Taxes $945,300 Taxes Saved $22,100 Taxes Saved $13,700 Taxes Saved $105,100 Total Taxes Saved $140,900

  37. At Age 65 $385,000 Inherits $705,600 Inherits $654,000 RMDs to 90 $320,100 RMDs to 85 $2,024,100 Total RMDs $2,862,600 RMDs to 85 $518,400 Taxes Paid $171,000 Taxes Paid $105,600 Taxes Paid $809,600 Total Income Taxes $1,086,200 RMD Tax-Free Increase $589,800 Age 65 Converts $50,000 Roth Inherits $820,900 Inherits $879,700 RMDs to 90 $278,500 RMDs to 85 $2,722,800 Total RMDs $3,452,300 RMDs to 85 $451,000 Taxes Paid $148,900 Taxes Paid $91,900 Taxes Paid $704,500 Total Income Taxes $945,300 Taxes Saved $22,100 Taxes Saved $13,700 Taxes Saved $105,100 Total Taxes Saved $140,900

  38. At Age 65 $385,000 Inherits $705,600 Inherits $654,000 RMDs to 90 $320,100 RMDs to 85 $2,024,100 Total RMDs $2,862,600 RMDs to 85 $518,400 Taxes Paid $171,000 Taxes Paid $105,600 Taxes Paid $809,600 Total Income Taxes $1,086,200 RMD Tax-Free Increase $589,800 Age 65 Converts $50,000 Roth Inherits $820,900 Inherits $879,700 RMDs to 90 $278,500 RMDs to 85 $2,722,800 Total RMDs $3,452,300 RMDs to 85 $451,000 Taxes Paid $148,900 Taxes Paid $91,900 Taxes Paid $704,500 Total Income Taxes $945,300 Taxes Saved $22,100 Taxes Saved $13,700 Taxes Saved $105,100 Total Taxes Saved $140,900

  39. At Age 65 $385,000 Inherits $705,600 Inherits $654,000 RMDs to 90 $320,100 RMDs to 85 $2,024,100 Total RMDs $2,862,600 RMDs to 85 $518,400 Taxes Paid $171,000 Taxes Paid $105,600 Taxes Paid $809,600 Total Income Taxes $1,086,200 RMD Tax-Free Increase $589,800 Age 65 Converts $50,000 Roth Inherits $820,900 Inherits $879,700 RMDs to 90 $278,500 RMDs to 85 $2,722,800 Total RMDs $3,452,300 RMDs to 85 $451,000 Taxes Paid $148,900 Taxes Paid $91,900 Taxes Paid $704,500 Total Income Taxes $945,300 Taxes Saved $22,100 Taxes Saved $13,700 Taxes Saved $105,100 Total Taxes Saved $140,900

  40. At Age 65 $385,000 Inherits $705,600 Inherits $654,000 RMDs to 90 $320,100 RMDs to 85 $2,024,100 Total RMDs $2,862,600 RMDs to 85 $518,400 Taxes Paid $171,000 Taxes Paid $105,600 Taxes Paid $809,600 Total Income Taxes $1,086,200 RMD Tax-Free Increase $589,800 Age 65 Converts $50,000 Roth Inherits $820,900 Inherits $879,700 RMDs to 90 $278,500 RMDs to 85 $2,722,800 Total RMDs $3,452,300 RMDs to 85 $451,000 Taxes Paid $148,900 Taxes Paid $91,900 Taxes Paid $704,500 Total Income Taxes $945,300 Taxes Saved $22,100 Taxes Saved $13,700 Taxes Saved $105,100 Total Taxes Saved $140,900

  41. A Real Estate Analogy…Conversion Tax in Perspective Investment Property (today) Value = $200,000 Basis = - $100,000 Taxable = $100,000 Tax Rate 15% Total Tax = $15,000

  42. A Real Estate Analogy…Conversion Tax in Perspective Investment Property (today) Value = $200,000 Basis = - $100,000 Taxable = $100,000 Tax Rate 15% Total Tax = $15,000 Investment Property (15 years) Value = $1,100,000 Basis = - $100,000 Taxable = $1,000,000 Tax Rate 30% Total Tax = $300,000

  43. A Real Estate Analogy…Conversion Tax in Perspective Investment Property (today) Value = $200,000 Basis = - $100,000 Taxable = $100,000 Tax Rate 15% Total Tax = $15,000 Suppose you could pay the tax today, keep the property and avoid all future income taxes on any future appreciation. Would you?

  44. A Real Estate Analogy…Conversion Tax in Perspective Investment Property (today) Value = $200,000 Basis = - $100,000 Taxable = $100,000 Tax Rate 15% Total Tax = $15,000 Investment Property (15 years) Value = $1,100,000 Tax Rate 30% Total Tax = $300,000 Suppose you could pay the tax today, keep the property and avoid all future income taxes on any future appreciation. Would you?

  45. A Real Estate Analogy…Conversion Tax in Perspective Investment Property (today) Value = $200,000 Basis = - $100,000 Taxable = $100,000 Tax Rate 15% Total Tax = $15,000 Heirs Enjoy Future Tax-Free Appreciation Suppose you could pay the tax today, keep the property and avoid all future income taxes on any future appreciation. Would you?

  46. 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.

  47. 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.

  48. 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

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