Tax-Efficient Investing: Retirement Distribution Strategies (Part 3 of Tax-Efficient Investing Webinar Series))

Tax Aware Investing -It’s the after Tax Return that Counts! Advisors4Advisors Part III Presented by: Robert S. Keebler, CPA, MST, AEP (Distinguished) Stephen J. Bigge CPA, CSEP Peter J. Melcher JD, LL.M, MBA Keebler & Associates, LLP 420 S. Washington St. Green Bay, WI 54301 Phone: (920) 593-1701 Robert.Keebler@keeblerandassociates.comCircular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice containedin this communication, including attachments, was not written to be used and cannot be used for the purpose of (i) avoiding tax-related penaltiesunder the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein. If youwould like a written opinion upon which you can rely for the purpose of avoiding penalties, please contact us.

Retirement Distribution Strategies to Help Retirement Assets Last a Lifetime Not intended for inspection by, or distribution or quotation to the general public. For internal or advisor use only. Ameriprise© 2011 Keebler & Associates, LLPAl Rights Reserved. Financial Services, Inc. 2

Overview • Why retirement distribution planning is important • Income taxation basics of retirement investments • Roth IRAs • Tax-sensitive withdrawal strategies • Other planning considerations Net unrealized appreciation (NUA) Compensatory stock options Deferred Compensation© 2011 Keebler & Associates, LLPAl Rights Reserved. 3

Why Retirement Distribution Planning is Important Qualified Retirement Account vs. Non-Qualified Account Distributions Perhaps one of the most important decisions a retiree must make is to determine from which retirement assets to withdraw funds to meet everyday living expenses.© 2011 Keebler & Associates, LLPAl Rights Reserved. 5

Why Retirement Distribution Planning is Important Qualified Retirement Account vs. Non-Qualified Account Distributions Key decision factors • Size of accounts • Investment mix / performance • Marginal income tax bracket • Time horizon© 2011 Keebler & Associates, LLPAl Rights Reserved. 6

Why Retirement DistributionPlanning is ImportantQualified Retirement Account vs.Non-Qualified Account Distributions OPT ION 1 - Withdraw 100% From IRA Husbands Age 64 65 66 67 68 Wifes Age 59 60 61 62 63 ASSETS 2007 2008 2009 2010 2011 IRA Beginning Balance $ 1,300,000 $ 1,216,000 $ 1,127,620 $ 1,034,553 $ 936,472 Income 7.00% 91,000 85,120 78,933 72,419 65,553 Distributions (175,000) (173,500) (172,000) (170,500) (169,000) Ending Balance $ 1,216,000 $ 1,127,620 $ 1,034,553 $ 936,472 $ 833,025 Brok erage Account Beginning Balance $ 1,400,000 $ 1,474,010 $ 1,551,707 $ 1,633,325 $ 1,719,113 Yield (Interest & Dividends) 2.00% 28,000 29,480 31,034 32,667 34,382 Growth 5.00% 70,000 73,701 77,585 81,666 85,956 Subtotal $ 1,498,000 $ 1,577,191 $ 1,660,327 $ 1,747,658 $ 1,839,451 Yield Disributed (28,000) (29,480) (31,034) (32,667) (34,382) Stock Sales - - - - - Net Cash Flow Reinvested 4,010 3,997 4,033 4,122 4,266 Ending Balance $ 1,474,010 $ 1,551,707 $ 1,633,325 $ 1,719,113 $ 1,809,335 Total Assets $ 2,690,010 $ 2,679,327 $ 2,667,879 $ 2,655,585 $ 2,642,360 CASH FLOW 2007 2008 2009 2010 2011 IRA Distribution $ 175,000 $ 173,500 $ 172,000 $ 170,500 $ 169,000 Interest & Dividends 28,000 29,480 31,034 32,667 34,382 Stock Sales Proceeds - - - - - Subtotal $ 203,000 $ 202,980 $ 203,034 $ 203,167 $ 203,382 Less: Income Tax (66,990) (66,983) (67,001) (67,045) (67,116) Less: Living Expenses (132,000) (132,000) (132,000) (132,000) (132,000) Net Cash Flow $ 4,010 $ 3,997 $ 4,033 $ 4,122 $ 4,266© 2011 Keebler & Associates, LLPAl Rights Reserved. 7

Why Retirement Distribution Planning is Important Qualified Retirement Account vs. Non-Qualified Account Distributions OPT ION 2 - Withdraw 100% From Brokerage Account Husbands Age 64 65 66 67 68 Wifes Age 59 60 61 62 63 ASSETS 2007 2008 2009 2010 2011 IRA Beginning Balance $ 1,300,000 $ 1,391,000 $ 1,488,370 $ 1,592,556 $ 1,704,035 Income 7.00% 91,000 97,370 104,186 111,479 119,282 Distributions - - - - - Ending Balance $ 1,391,000 $ 1,488,370 $ 1,592,556 $ 1,704,035 $ 1,823,317 Brok erage Account Beginning Balance $ 1,400,000 $ 1,344,910 $ 1,285,459 $ 1,221,390 $ 1,152,431 Yield (Interest & Dividends) 2.00% 28,000 26,898 25,709 24,428 23,049 Growth 5.00% 70,000 67,245 64,273 61,070 57,622 Subtotal $ 1,498,000 $ 1,439,053 $ 1,375,441 $ 1,306,887 $ 1,233,101 Yield Disributed (28,000) (26,898) (25,709) (24,428) (23,049) Stock Sales (130,000) (131,500) (133,000) (134,500) (136,000) Net Cash Flow Reinvested 4,910 4,803 4,659 4,472 4,238 Ending Balance $ 1,344,910 $ 1,285,459 $ 1,221,390 $ 1,152,431 $ 1,078,291 Total Assets $ 2,735,910 $ 2,773,829 $ 2,813,946 $ 2,856,466 $ 2,901,608 CASH FLOW 2007 2008 2009 2010 2011 IRA Distribution $ - $ - $ - $ - $ - Interest & Dividends 28,000 26,898 25,709 24,428 23,049 Stock Sales Proceeds 130,000 131,500 133,000 134,500 136,000 Subtotal $ 158,000 $ 158,398 $ 158,709 $ 158,928 $ 159,049 Less: Income Tax (21,090) (21,595) (22,051) (22,456) (22,810) Less: Living Expenses (132,000) (132,000) (132,000) (132,000) (132,000) Net Cash Flow $ 4,910 $ 4,803 $ 4,659 $ 4,472 $ 4,238© 2011 Keebler & Associates, LLPAl Rights Reserved. 8

Why Retirement Distribution Planning is Important Qualified Retirement Account vs. Non-Qualified Account Distributions Total Assets $4,500,000 $4,000,000 $3,500,000 $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $- 5 10 20 30 Year 100% IRA Distribution 100% Brokerage Account Distribution© 2011 Keebler & Associates, LLPAl Rights Reserved. 9

Income Taxation Basics of Retirement Investments Main Issues • Understanding the main types of retirement investment accounts • Understanding the main types of retired taxpayers • Understanding current and future income tax rates • Understanding impact of new 3.8% Medicare “surtax” • Understanding the basic taxation principles of traditional IRAs (and other traditional qualified retirement accounts)© 2011 Keebler & Associates, LLPAl Rights Reserved. 11

Income Taxation Basics of Retirement Investments Three Main Types of Retirement Investment Accounts • Taxable investment accounts – income generated within the account (i.e. interest, dividends, capital gains, etc.) are taxed each year to the account owner • Tax-deferred investment accounts (e.g. traditional IRAs, traditional qualified retirement plans, non-qualified annuities) – income generated within the account is not taxed until distributions are taken from the account • Tax-free investment accounts (e.g. Roth IRAs, life insurance) – income generated within the account is never taxed when distributions are made (provided certain qualifications are met)© 2011 Keebler & Associates, LLPAl Rights Reserved. 12

Income Taxation Basics of Retirement Investments Common Assets in a Client’s Portfolio • IRA Accounts • Roth IRA Accounts • ERISA Plans • Tax-Deferred Annuities • Life Insurance • Stocks, Bonds, Warrants • Employer NSOs and ISOs • Employer Deferred Compensation • Real Estate • Oil & Gas • U.S. Savings Bonds© 2011 Keebler & Associates, LLPAl Rights Reserved. 13

Income Taxation Basics of Retirement Investments Main Types of Retired Taxpayers • Low income taxpayers – taxpayers who generally are in the lowest income tax brackets (i.e. 10%, 15%) and are generally eligible for various income tax credits. Further, these taxpayers are usually in situations where their Social Security is not taxed • Low/middle income taxpayers – taxpayers who are generally in the middle income tax brackets (i.e. 15%, 25% 28%) and are generally eligible for certain favorable tax attributes (e.g. 0% tax rate on capital gains/qualified dividends) • Middle/high income taxpayers – taxpayers who are generally in the upper end of the middle income tax brackets (i.e. 28%, 33%) who oftentimes are subject to the Alternative Minimum Tax (AMT) and other phase-outs • High income taxpayers – taxpayers who are in the highest marginal income tax bracket (35%) and are subject to several phase-outs and or “surtaxes” (such as AMT)© 2011 Keebler & Associates, LLPAl Rights Reserved. 14

Income Taxation Basics of Retirement Investments • 2011 Ordinary Income Rates Married Qualified Married Filing Head of Single Widow(er) Filing Jointly Separately Household 10% Tax Rate $8,500 $17,000 $17,000 $8,500 $12,150 15% Tax Rate $34,500 $69,000 $69,000 $34,500 $46,250 25% Tax Rate $83,600 $139,350 $139,350 $69,675 $119,400 28% Tax Rate $174,400 $212,300 $212,300 $106,150 $193,350 33% Tax Rate $379,150 $379,150 $379,150 $189,575 $379,150 35% Tax Rate > $379,150 > $379,150 > $379,150 > $189,575 > $379,150 • Capital Gain – 0% rate if you are in the 10% or 15% bracket – 15% rate if you are in the 25%, 28%, 33% or 35% bracket© 2011 Keebler & Associates, LLPAl Rights Reserved. 15

Income Taxation Basics of Retirement Investments Long-Term Ordinary Income Capital Gains 2013 & 2013& 2011 & 2012 Beyond1 2011 & 2012 Beyond* 10% 15% 0% 10% / 8% 15% 15% 15% 20% / 18% 25% 28% *NOTE: In general, the 8% and 18% capital 28% 31% gains rates only apply to long-term capital gains on property that has been held more than five 33% 36% years at the time of sale. 35% 39.6% For the 18% rate, the property must be purchased after December 31, 2000.© 2011 Keebler & Associates, LLPAl Rights Reserved. 16

Income Taxation Basics of Retirement Investments New 3.8% Medicare “Surtax” Beginning with the 2013 tax year, a new 3.8% Medicare “surtax” on net investment income will apply to all taxpayers whose income exceeds a certain “threshold amount”. This new “surtax” will, in essence, raise the marginal income tax rate for affected taxpayers. • Thus, a taxpayer in the 39.6% tax bracket (i.e. the highest marginal income tax rate in 2013) would have a federal marginal rate of 43.4%!© 2011 Keebler & Associates, LLPAl Rights Reserved. 17

Income Taxation Basics of Retirement Investments New 3.8% Medicare “Surtax” Tax Rate in Tax Rate in Tax Rate in 2013+ 2011 & 2012 2013 (w/surtax) 10% 15% 15% 15% 15% 15% 25% 28% 28% 28% 31% 34.8% 33% 36% 39.8% 35% 39.6% 43.4% NOTE: The chart above assumes that the 3.8% Medicare surtax would not begin to apply until a person’s taxable income reaches the 31% tax bracket (based on certain net investment income and itemized deduction assumptions). However, there are times, though unlikely, when the 3.8% could apply to a person in a lower tax bracket (i.e. 15%, 28%) or may not apply to a person in higher tax brackets (31%, 36%, 39.6%).© 2011 Keebler & Associates, LLPAl Rights Reserved. 18

Income Taxation Basics of Retirement Investments New 3.8% Medicare “Surtax” APPLICATION TO INDIVIDUALS – the new Medicare surtax is equal to 3.8% times the lesser of the following: 1. “Net investment income”, OR 2. The excess (if any) of – a. “Modified adjusted gross income” (“MAGI”) for such taxable year, over the b. “Threshold amount”© 2011 Keebler & Associates, LLPAl Rights Reserved. 19

Income Taxation Basics of Retirement Investments New 3.8% Medicare “Surtax” Three critical terms associated with the 3.8% Medicare surtax: • “Net investment income” • “Threshold amount” • “Modified adjusted gross income” (“MAGI”)© 2011 Keebler & Associates, LLPAl Rights Reserved. 20

Income Taxation Basics of Retirement Investments New 3.8% Medicare “Surtax” • “Net investment income” is defined as interest, dividends, annuities, rents, royalties, income derived from a passive activity, and net capital gain derived from the disposition of property (other than property held in an active trade or business), reduced by deductions properly allocable to such income. • Specifically, this does not include the following: 1. Income derived from an active trade or business; 2. Distributions from IRAs or their qualified plans; 3. Any income taken into account for self-employment tax purposes; 4. Gain on the sale of an active interest in a partnership or S corporation; or 5. Items which are otherwise excluded or exempt from income under income tax law, such as interest from tax-exempt bonds, capital gain excluded on the sale of a principal residence under IRC 121, and veteran’s benefits.© 2011 Keebler & Associates, LLPAl Rights Reserved. 21

Income Taxation Basics of Retirement Investments New 3.8% Medicare “Surtax” “Threshold amount” is the key factor in determining the “lesser of” formula for purposes of calculating the surtax. Threshold amounts • Single taxpayers - $200,000 • Married, filing jointly taxpayers - $250,000 • Estates/trusts - $11,200 (i.e. top income tax bracket in 2010) - $11,350 (i.e. top income tax bracket in 2011)© 2011 Keebler & Associates, LLPAl Rights Reserved. 22

Foundation Concepts Income Taxation Basics of Retirement Investments Taxation of IRAs • To the extent that an IRA has only deductible contributions (plus income and growth), 100% of each IRA distribution will be subject to income tax in the year of distribution • To the extent that an IRA has non-deductible contributions, a portion of each IRA distribution will not be subject to tax© 2011 Keebler & Associates, LLPAl Rights Reserved. 23

Foundation Concepts Income Taxation Basics of Retirement Investments Taxation of IRAs • When an IRA has non-deductible contributions, a portion of each IRA distribution will be a return of non- taxable “basis” to the IRA owner • In determining the non-taxable portion of an IRA distribution, all IRAs and IRA distributions during the year (including outstanding rollovers) must be combined for apportioning “basis” - See IRS Form 8606© 2011 Keebler & Associates, LLPAl Rights Reserved. 24

Foundation Concepts Income Taxation Basics of Retirement Investments Taxation of IRAs – “Basis Apportionment” Example Current year non-deductible IRA contributions $ 1,000 Prior year non-deductible IRA contributions 6,000 Total non-deductible IRA contributions $ 7,000 FMV of all IRAs $ 320,000 Outstanding rollovers 20,000 Distributions 10,000 Roth IRA conversions - Total value of IRAs, distributions and Roth IRA conversions $ 350,000 "Basis" apportionment formula 0.0200 Gross IRA distribution $ 10,000 Non-taxable portion (200) Taxable IRA distribution $ 9,800© 2011 Keebler & Associates, LLPAl Rights Reserved. 25

Income Taxation Basics of Retirement Investments Taxation of IRAs – Required Minimum Distributions (RMDs) • Required Beginning Date: generally, April 1st of year following year client turns age 70½ • Uniform Lifetime Table • Required Minimum Distribution (RMD) = Minimum that must be distributed in a given year • RMDs are calculated based upon the aggregate prior year ending account balance divided by the applicable life expectancy factor • RMDs need not be distributed from each Traditional IRA, but rather the total RMD may be taken from any one of the Traditional IRAs, provided that the total RMD is taken© 2011 Keebler & Associates, LLPAl Rights Reserved. 26

Foundation Concepts Income Taxation Basics of Retirement Investments Taxation of IRAs – Required Minimum Distributions (RMDs) • Example - Birthdate is October 18, 1941 – Turn age 70 on October 18, 2011 – Turn age 70½ on April 18, 2012 – RBD -- April 1, 2013 • Example - Birthdate is April 18, 1941 – Turn age 70 on April 18, 2011 – Turn age 70½ on October 18, 2011 – RBD -- April 1, 2012© 2011 Keebler & Associates, LLPAl Rights Reserved. 27

Foundation Concepts Income Taxation Basics of Retirement Investments Taxation of IRAs – Required Minimum Distributions (RMDs) RMDs are calculated based upon prior year ending account balance divided by life expectancy factor Prior Year 12/31 Balance RMD = Life Expectancy Factor© 2011 Keebler & Associates, LLPAl Rights Reserved. 28

Income Taxation Basics of Retirement Investments Taxation of IRAs – Required Minimum Distributions (RMDs) • Life expectancy tables – Uniform Lifetime Table – Single Life Table – Joint and Last Survivor Table  Available where the spouse is the sole beneficiary and is greater than 10 years younger than the account owner© 2011 Keebler & Associates, LLPAl Rights Reserved. 29

Income Taxation Basics of Retirement Investments Taxation of IRAs – Required Minimum Distributions (RMDs) Uniform Lifetime Table Age Divisor Age Divisor Age Divisor 70 27.4 86 14.1 102 5.5 71 26.5 87 13.4 103 5.2 72 25.6 88 12.7 104 4.9 73 24.7 89 12.0 105 4.5 74 23.8 90 11.4 106 4.2 75 22.9 91 10.8 107 3.9 76 22.0 92 10.2 108 3.7 77 21.2 93 9.6 109 3.4 78 20.3 94 9.1 110 3.1 79 19.5 95 8.6 111 2.9 80 18.7 96 8.1 112 2.6 81 17.9 97 7.6 113 2.4 82 17.1 98 7.1 114 2.1 83 16.3 99 6.7 115 and older 1.9 84 15.5 100 6.3 85 14.8 101 5.9© 2011 Keebler & Associates, LLPAl Rights Reserved. 30

Foundation Concepts ERISA Plans • Qualified Plans are not taxed until distribution • If retired, distributions must begin no later than one’s Required Beginning Date (RBD) • Basis is treated on a pro-rata method • Qualified Plans can be rolled to an IRA • Qualified Plans can be rolled to a Roth IRA • Spouses are treated separately© 2011 Keebler & Associates, LLPAl Rights Reserved. 31

Early Distributions from IRAs & Qualified PlansIRC 72(t) 10-percent penalty for early withdrawals from IRAs and qualified plans • Technically, the 10-percent is not a penalty; rather, it is an additional tax. Therefore, there is no excuse for reasonable cause. The code section itself provides all the exceptions to the tax.© 2011 Keebler & Associates, LLPAl Rights Reserved. 32

Early Distributions from IRAs & Qualified PlansIRC 72(t) - Exceptions • Death • Disability • Medical expenses that exceed 7.5 percent of income • Age 55 or older in year of separation from service (not applicable to IRAs) – Age 50 for “public safety officers” © 2011 Keebler & Associates, LLP Al Rights Reserved. 33

Early Distributions from IRAs & Qualified PlansIRC 72(t) - Exceptions • Qualified higher education expenses (IRAs only) • First time home purchase, limited to $10,000 lifetime (IRAs only) • Payment of health insurance by unemployed individuals • Series of Substantially Equal Periodic Payments (SEPPs)© 2011 Keebler & Associates, LLPAl Rights Reserved. 34

Early Distributions from IRAs & Qualified PlansSubstantially Equal Period Payments (SEPPs)• Required Minimum Distribution (RMD) method• Fixed amortization method• Fixed annuitization method© 2011 Keebler & Associates, LLPAl Rights Reserved. 35

Early Distributions from IRAs & Qualified PlansSubstantially Equal Period Payments (SEPPs) • Payments must continue under the LATER of age 59½ or five years • If payments are “materially modified” prior to that point, the 10-percent additional tax will be imposed on all pre- 59½ withdrawals – In addition to the 10-percent additional tax, an additional amount is added to reflect the interest on the penalty from the original year of withdrawal© 2011 Keebler & Associates, LLPAl Rights Reserved. 36

Early Distributions from IRAs & Qualified PlansSubstantially Equal Period Payments (SEPPs)“Material Modification” - Example •In 2000, John began withdrawing SEPPs from his IRA (IRA #1) of $50,000 per year. In 2008, John withdrew an additional $10,000 from IRA #1 to cover some unforeseen living expenses. As a result, John will be subject to the 10% additional tax for not only his 2008 distribution of $60,000, but also all of his prior year withdrawals (including late payment interest).© 2011 Keebler & Associates, LLPAl Rights Reserved. 37

Income Taxation of Life Insurance •Growth is not taxed until distribution •No Required Minimum Distributions (RMDs) •Basis is withdrawn first (i.e. FIFO method of accounting) •Policy Loans can be taken tax-free •Watch out for the Modified Endowment contract provisions •Tax-Free at Death© 2011 Keebler & Associates, LLPAl Rights Reserved. 38

Income Taxation of Non-qualified Annuities •Non-Qualified annuities are not taxed until distributed •No distributions at 70 ½ •Basis is recovered last when random distributions are taken •Basis is covered on a “percentage method” when an annuity is annuitized© 2011 Keebler & Associates, LLPAl Rights Reserved. 39

Income Taxation of Roth IRAs • Lowers overall taxable income long-term • Tax-free compounding • No RMDs at age 70½ • Tax-free withdrawals for beneficiaries* • More effective funding of the “bypass trust” • New 3.8% Medicare “surtax” planning© 2011 Keebler & Associates, LLPAl Rights Reserved. 40

Roth IRAs Convertible accounts • Traditional IRAs • 401(k) plans • Profit sharing plans • 403(b) annuity plans • 457 plans • “Inherited” 401(k) plans (see Notice 2008-30) Non-convertible accounts • “Inherited” IRAs • Education IRAs© 2011 Keebler & Associates, LLPAl Rights Reserved. 41

Roth IRAs Reasons for Converting to a Roth IRA 1) Taxpayers have special favorable tax attributes including charitable deduction carry-forwards, investment tax credits, net operating losses (NOLs), high basis non-deductible traditional IRAs, etc. 2) Suspension of the minimum distribution rules at age 70½ provides a considerable advantage to the Roth IRA holder. 3) Taxpayers benefit from paying income tax before estate tax (when a Roth IRA election is made) compared to the income tax deduction obtained when a traditional IRA is subject to estate tax.© 2011 Keebler & Associates, LLPAl Rights Reserved. 42

Roth IRAs Reasons for Converting to a Roth IRA 4) Taxpayers who can pay the income tax on the IRA from non-IRA funds benefit greatly from the Roth IRA because of the ability to enjoy greater tax-free yields. 5) Taxpayers who need to use IRA assets to fund their Unified Credit bypass trust are well advised to consider making a Roth IRA election for that portion of their overall IRA funds. 6) Taxpayers making the Roth IRA election during their lifetime reduce their overall estate, thereby lowering the effect of higher estate tax rates.© 2011 Keebler & Associates, LLPAl Rights Reserved. 43

Roth IRAs Reasons for Converting to a Roth IRA 7) Federal tax brackets are more favorable for married couples filing joint returns than for single individuals, Roth IRA distributions won’t cause an increase in tax rates for the surviving spouse when one spouse is deceased because the distributions are tax-free. 8) Post-death distributions to beneficiaries are tax-free. 9) Tax rates are expected to increase in the near future. 10) The new 3.8% Medicare surtax.© 2011 Keebler & Associates, LLPAl Rights Reserved. 44

Roth IRAs Mathematics of Roth IRA Conversions In simplest terms, a traditional IRA will produce the same after-tax result as a Roth IRA provided that: • The annual growth rates are the same • The tax rate in the conversion year is the same as the tax rate during the withdrawal years (i.e. A x B x C = D; A x C x B = D)© 2011 Keebler & Associates, LLPAl Rights Reserved. 45

Roth IRAs Mathematics of Roth IRA Conversions Traditional IRA Roth IRA Current Account Balance $ 1,000,000 $ 1,000,000 Less: Income Taxes @ 40% - (400,000) Net Balance $ 1,000,000 $ 600,000 Growth Until Death 200.00% 200.00% Account Balance @ Death $ 3,000,000 $ 1,800,000 Less: Income Taxes @ 40% (1,200,000) - Net Account Balance to Family $ 1,800,000 $ 1,800,000© 2011 Keebler & Associates, LLPAl Rights Reserved. 46

Roth IRAs Mathematics of Roth IRA Conversions • Critical decision factors • Tax rate differential (year of conversion vs. withdrawal years) • Use of “outside funds” to pay the income tax liability • Need for IRA funds to meet annual living expenses • Time horizon© 2011 Keebler & Associates, LLPAl Rights Reserved. 47

Roth IRAs Mathematics of Roth IRA Conversions The key to successful Roth IRA conversions is to keep as much of the conversion income as possible in the current marginal tax bracket • However, there are times when it may make sense to convert more and go into higher tax brackets • Need to take into consideration the new 3.8% Medicare “surtax” • Need to take into consideration the impact of AMT© 2011 Keebler & Associates, LLPAl Rights Reserved. 48

Roth IRAs 2011 Income Tax Brackets Married Qualified Married Filing Head of Single Widow(er) Filing Jointly Separately Household10% Tax Rate $8,500 $17,000 $17,000 $8,500 $12,15015% Tax Rate $34,500 $69,000 $69,000 $34,500 $46,25025% Tax Rate $83,600 $139,350 $139,350 $69,675 $119,40028% Tax Rate $174,400 $212,300 $212,300 $106,150 $193,35033% Tax Rate $379,150 $379,150 $379,150 $189,575 $379,15035% Tax Rate > $379,150 > $379,150 > $379,150 > $189,575 > $379,150© 2011 Keebler & Associates, LLPAl Rights Reserved. 49

Roth IRAs Mathematics of Roth IRA Conversions “Optimum“ Roth IRA conversion amount 35% tax Target Roth IRA conversion amount bracket 33% tax Current bracket taxable income 28% tax bracket 25% tax bracket 15% tax CAUTION: Make sure to bracket analyze the impact of AMT 10% tax on the conversion amount bracket© 2011 Keebler & Associates, LLPAl Rights Reserved. 50

Roth IRAs Tactical Considerations for Roth IRA Conversions • Unused charitable contribution carryovers • Current year ordinary losses • Net Operating Loss (NOL) carryovers from prior years • Alternative Minimum Tax (AMT) • Credit carryovers© 2011 Keebler & Associates, LLPAl Rights Reserved. 51

Roth IRAsRecharacterizations • Taxpayers may “recharacterize” (i.e. undo) the Roth IRA conversion in current year or by the filing date of the current year’s tax return – Recharacterization can take place as late as 10/15 in the year following the year of conversion • Taxpayers may choose to “reconvert” their recharacterization – Reconversion may only take place at the later of the following two dates:  The tax year following the original conversion OR  30 days after the recharacterization© 2011 Keebler & Associates, LLPAl Rights Reserved. 52

Roth IRAs Recharacterizations • Taxpayers cannot recharacterize a portion of a Roth conversion by “cherry picking” only those stocks that decline in value (IRS Notice 2000-39) • All gains and losses to the entire Roth IRA, regardless of the actual stock or fund recharacterized, must be pro-rated© 2011 Keebler & Associates, LLPAl Rights Reserved. 53

Roth IRAs Recharacterization Timeline Conversion Period Recharacterization Period 2011 2012 1/1/2011 – First 12/31/2011 – Last 4/15/2012 – 10/15/2012 – 12/31/2012 day conversion day conversion Normal filing Latest filing date can take place can take place date for 2011 tax for 2011 tax return return / last day to recharacterize 2011 Roth IRA conversion© 2011 Keebler & Associates, LLPAl Rights Reserved. 54

CIRCULAR 230 DISCLOSURE Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to any other party. For discussion purposes only. This work is intended to provide general information about the tax and other laws applicable to retirement benefits. The author, his firm or anyone forwarding or reproducing this work shall have neither liability nor responsibility to any person or entity with respect to any loss or damage caused, or alleged to be caused, directly or indirectly by the information contained in this work. This work does not represent tax, accounting, or legal advice. The individual taxpayer is advised to and should rely on their own advisors.©2011 Keebler & Associates, LLPAll Rights Reserved. 56

Tax-Efficient Investing: Retirement Distribution Strategies (Part 3 of Tax-Efficient Investing Webinar Series))

by Robert Keebler

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Tax-Efficient Investing: Retirement Distribution Strategies (Part 3 of Tax-Efficient Investing Webinar Series)) Presentation Transcript