2010 Roth Conversion

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Information about the Roth Conversion Law Changes for 2010

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  • [ADVISOR -Introduce yourself, and your relationship with Waddell & Reed as a financial advisor.]In 2006, President Bush signed the Tax Increase Prevention and Reconciliation Act (TIPRA) into law. TIPRA removes the income limitation that is attached to Roth conversions, and also allows conversions to be available for the first time by taxpayers who are married filing separately. With the attraction of tax-free distributions, Roth IRAs have become popular retirement savings vehicles for working individuals since their introduction in 1998. But if you're a relatively high wage earner, chances are your income has left you out of the Roth revolution. Well the rules are about to change. And that is why we are here today![Change slide]
  • Before we jump into our discussion, please read the important disclosures on the screen.[Change slide]
  • [Change slide]
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  • Let’s look at a hypothetical client we will call John.[Read slide][Change slide]
  • Here is what John’s tax and Roth IRA options might look like if he converts and he decided not to convert.[Read paragraphs on slide]Looks like it might be advantageous for John to convert![Change slide]
  • 2010 Roth Conversion

    1. 1. Name: John Smith, Financial Advisor<br />Waddell & Reed, Inc. 09/2009<br />
    2. 2. Important Disclosures<br />This information is for educational purposes only, and is not intended as investment or tax advice.<br />Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. For a prospectus containing this and other information for the mutual funds offered by Waddell & Reed, call your financial advisor or visit us online at www.waddell.com. Please read the prospectus carefully before investing.<br />
    3. 3. Roth IRA<br />
    4. 4. Why Should You Consider Converting to a Roth IRA Now?<br />New tax laws in 2010 make everyone with an IRA eligible<br />Taxable IRA balances may be currently reduced<br />Currently historically low income tax rates<br />Roth IRAs allow for tax-free withdrawals during retirement<br />
    5. 5. How Can a Roth IRA Help?<br />Protection against potential future tax rate changes<br />Tax diversification <br />Withdrawal flexibility – No Required Minimum Distributions <br />Legacy planning – potentially pass tax-free to beneficiary(ies)<br />
    6. 6. Key Features of a Roth IRA<br />* Certain exceptions apply to the age 59 ½ early withdrawal penalty.<br />** If you convert after the age of 59 ½, the converted amount is available tax-free regardless of the holding period.<br />
    7. 7. Conversion Conversation<br />
    8. 8. Conversion Rules Prior to 2010<br />Must have a modified adjusted gross income (MAGI) of less than $100,000<br />Must file as Single, Head or Household, or Married Filing Jointly<br />Persons who file as Married Filing Separately cannot convert <br />Note: Converted amounts are not included in your MAGI when determining eligibility<br />
    9. 9. Conversion Rules 2010 and Forward<br />Everyone is eligible to convert, regardless of income or filing status<br />If conversion occurs in 2010- may choose to report taxable income:<br />Half in 2011 and half in 2012<br />OR<br />All in 2010<br />If conversion occurs 2011 and forward- must report the taxable income in the year of the conversion<br />Note: Income limits remain for regular Roth IRA contributions<br />
    10. 10. Are You a Conversion Candidate?<br />Younger Professional (age 22-45)<br />Pre-Retiree & Young Retiree (age 46-70)<br />Have 5 years or more before you will need to start drawing regular income from your retirement account(s)<br />Believe that personal tax rates will be equivalent or higher during retirement years<br />Desire to reduce or eliminate future Required Minimum Distributions<br />Want to pass assets tax-free to beneficiaries<br />
    11. 11. Important Factors For You to Consider<br />Current and future income tax rates<br />All retirement accounts and income sources (pre-tax and after-tax)<br />Current age and life expectancy<br />Anticipated spending needs during retirement<br />Ability to pay the taxes due on a conversion from a source other than your IRA<br />Age, life expectancy, and possible tax rates of your beneficiary(ies)<br />
    12. 12. Roth Distribution Rules<br />Are not includible in gross income. <br />Is one made after the satisfaction of a five-year holding period and upon the attainment of age 59½, death, disability or for a qualified first-time homebuyer ¹. <br />The five-year holding period for converted amounts begins with the first day of the first year for which the Roth IRA holder completes the conversion. <br />Each conversion has its own five-year holding period.<br />Do not factor into IRS calculation to determine if all or a portion of your Social Security benefits are taxable<br />1 Qualified first-time homebuyer distributions are limited to a lifetime maximum of $10,000.<br />Qualified Distributions<br />
    13. 13. Rules for Your Beneficiary<br />The beginning of the five-year period is not re-determined when the Roth IRA holder dies. <br />The five-year period for a beneficiary of a Roth IRA is determined by the date of the original Roth IRA holder's five-year period. <br />A spouse beneficiary who transfers the decedent's Roth IRA into his or her own Roth IRA determines the five-year period based upon the first date of contribution (or conversion if processed first) to all Roth IRAs in his or her own name.<br />Qualified Distributions<br />
    14. 14. Are you a possible candidate?<br />
    15. 15. Example: John<br />Has $60,000 IRA Rollover to convert to Roth IRA in 2010<br />28% Tax bracket currently, expects tax bracket to rise in the future<br />Has cash reserves to pay tax bill in 2010 or opt to split taxes between 2011 and 2010<br />Illustration assumes a return of 8% on his investments<br />Illustration assumes tax rate will remain at 28%<br />
    16. 16. Example: John<br />
    17. 17. When Converting Might Not Be for You<br /><ul><li>You do not have the ability to pay the tax bill for the Roth conversion from a source outside of your IRA
    18. 18. You are currently retired and drawing a significant income stream from your IRA accounts
    19. 19. You believe your tax bracket is likely to drop during your retirement years
    20. 20. The conversion will push you into a higher tax bracket than you would want
    21. 21. You have named a charity as the beneficiary of the IRA. Qualified charities are exempt from income tax, therefore no income tax will be due at your death</li></li></ul><li>You Have a “Do Over”<br />A Roth conversion can also be reversed under the Roth recharacterization rules. If completed in a timely manner, its as though the conversion never occurred.<br />You transfer back any assets that were converted from a traditional IRA to a Roth.<br />If you file your taxes by April 15, the IRS gives you an automatic date of October 15 of that year to recharacterize. You will need to amend your Form 1040 by the October 15 deadline to create the recharacterization.<br />Any amounts reversed back must be adjusted for gains or losses that occurred during the intervening period.<br />No taxable income for the conversion is reported.<br />NOTE: If you filed an extension for your IRS Form 1040, your recharacterization deadline is the date of your IRS-approved tax filing deadline. The IRS deadline may be August 15, September 15 or potentially October 15.<br />
    22. 22. Strategies to Consider<br />Convert early in the year<br />Allows for a longer period of tax-free growth<br />Extended “do-over” period; you generally have until 10/15 of the following year to recharacterize to a traditional IRA<br />Make partial conversions over a number of years to spread tax hit<br />Convert old qualified plan money from a previous employer’s retirement plan to a Roth <br />Perhaps fund your IRA for 2009 as a non deductible contribution <br />
    23. 23. Action Items<br />Gather account statements from all of your retirement accounts<br />Review your IRS Tax Filing Forms- specifically Form 8606 for non deductible IRA contribution amounts<br />Meet with your financial advisor to help you determine if this is a good strategy for you<br />Meet with your tax professional to get a better estimate of your tax liability<br />Consider how and when you will pay any taxes on the conversion<br />
    24. 24. Waddell & Reed Financial Products and Services<br />
    25. 25. Waddell & Reed Financial Products and Services<br />Investment solutions designed to meet your objectives<br />Personal financial advisor to educate you regarding investment choices<br />Personalized comprehensive financial planning<br />Insurance coverage to protect you and your family<br />
    26. 26. Life Cycle Stages<br />
    27. 27. Accumulation<br />
    28. 28. Distribution<br />
    29. 29. Preservation<br />
    30. 30. Transfer<br />
    31. 31. Why Should You Consider A Financial Plan<br />Make informed decisions<br />Be flexible in your investment choices<br />Coordinate your Financial Planning Team<br />Avoid potential future traps<br />Have enhanced family communications<br />Measure your progress<br />Work toward your life goals<br />
    32. 32. Types of Investments<br /> Money Market and Fixed Income Funds<br /> Domestic and International Equity Funds<br /> Growth and Income funds<br /> Asset Allocation Funds<br />An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund. Generally, as interest rates rise, bond prices fall. International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. <br />
    33. 33. Thank You<br />

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