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  • 1. © 2013 VSA, LP Valid only if used prior to January 1, 2014. The information, general principles and conclusions presented in thisreport are subject to local, state and federal laws and regulations, court cases and any revisions of same. While every care hasbeen taken in the preparation of this report, neither VSA, L.P. nor The National Underwriter is engaged in providinglegal, accounting, financial or other professional services. This report should not be used as a substitute for the professional adviceof an attorney, accountant, or other qualified professional.Preparing for YourRetirementAn IRA Review1a2-06
  • 2. Your Earning Power2Preparing for Your Retirement: An IRA Review$ 50,000 $ 100,000 $ 250,000 $ 500,000$ 2,000,000 $ 4,000,000 $ 10,000,000 $ 20,000,000$ 1,500,000 $ 3,000,000 $ 7,500,000 $ 15,000,000$ 1,000,000 $ 2,000,000 $ 5,000,000 $ 10,000,000$ 500,000 $ 1,000,000 $ 2,500,000 $ 5,000,000$ 250,000 $ 500,000 $ 1,250,000 $ 2,500,000Your Future Earning PowerIf Your Family Income Averages:Years toAge 65:403020105How much of your earning powerdo you pay in taxes?What will happento your standard ofliving when yourincome ceases atretirement?Few people realize that a 30-year-old couple willearn 3.5 million dollars by age 65 if their totalfamily income averages $100,000 for their entirecareers, without any raises.Your IncomeSpouse’s IncomeOther IncomeInvestment IncomeYour ability to earn an income is your most valuable asset.
  • 3. Sources of Retirement Income3Preparing for Your Retirement: An IRA ReviewWhen you retire and your earning power ceases, you will have to depend on threeprimary sources for your retirement income:Social SecurityEmployer-Provided PlansPersonalRetirementSavingsAccording to the Social Security Administration, the average retired workerin 2013 receives an estimated $1,261 monthly benefit, about 40% ofaverage pre-retirement income. As pre-retirement income increases,however, the percentage replaced by Social Security declines.You may be eligible to participate in a retirement plan established by youremployer and receive pension income at your retirement.For many people, there is a gap between the retirement income they canexpect from Social Security and employer-provided plans and theirretirement income objectives. Personal retirement savings represent theonly way to bridge that gap!will you defer your retirement age,If sufficient retirementincome is not available,or will you choose to reduce your standard of living?
  • 4. Important Facts About Social Security Retirement Benefits4Preparing for Your Retirement: An IRA Review!Early retirement results in a permanent reduction in the Social Security retirement benefit.For example, the Social Security retirement benefit of a worker born between 1943 and1954 who retires early at age 62 will be reduced by 25%.According to the Social Security Administration:The maximum Social Security retirement benefit for a worker retiring at full retirementage in 2013 is $2,533 monthly.The average Social Security benefit for all retired workers in 2013 is an estimated $1,261.continued on next slideThe Social Security Normal Retirement Age, currently age 66 for thosepeople born between 1943 and 1954, is gradually increasing to age 67for persons born after 1954.
  • 5. Important Facts About Social Security Retirement Benefits5Preparing for Your Retirement: An IRA ReviewThe Social Security spousal retirement benefit is limited to a maximum of 50% of theretired worker’s benefit.The spousal retirement benefit is reduced if the worker retires before his or her fullretirement age.How much do you want to rely on a source of retirement income over which you have nocontrol? Consider this quote from a Time magazine article titled "Social Insecurity":Question: When was this article published?“For government to pay pensions to the advancing tide of baby boomers will almostcertainly require stunning benefit reductions or huge tax increases. Most likely both.After years of fiscal and political fecklessness, an explosive conclusion.”Answer: March 12, 1995, although the same statement could easily apply today, in theabsence of any reform to the Social Security system.
  • 6. If You Wait…You Lose!6Preparing for Your Retirement: An IRA ReviewIf $100 a month is saved, what will the savings be worth at age 65, assuming a hypothetical 5%annual rate of return*?* This is a hypothetical illustration only and is not indicative of any particular investment or investment performance. It does notreflect the fees and expenses associated with any particular investment, which would reduce the performance shown in thishypothetical illustration if they were included. In addition, rates of return will vary over time, particularly for long-terminvestments.Delaying retirement savings can keep you from realizing your retirement dreams!“The eighth wonderof the world iscompound interest.”- Albert EinsteinAge When You Begin to Save $ 100 a Month
  • 7. A Potential Solution Using an IRA7Preparing for Your Retirement: An IRA ReviewThose who qualify for a tax-deductible IRA can use money thatwould otherwise be paid in taxesto establish a retirement fund thataccumulates tax deferred. Taxes,however, must be paid asdistributions are received from atax-deductible IRA.A second alternative for those whoqualify is the Roth IRA. Whilecontributions to a Roth IRA are nottax deductible, the retirementfund accumulates tax deferred anddistributions are received free ofincome tax.Either a tax-deductible IRA or aRoth IRA can produce resultssuperior to a savings plan whosegrowth is taxed.20 Year Results - 8% Hypothetical Annual Rate of Return/$5,500 Annual Contribution/ 25% Income Tax Bracket ** This is a hypothetical illustration only and is not indicative of any particularinvestment or performance. It does not reflect the fees and expensesassociated with any particular investment, which would reduce theperformance shown in this hypothetical illustration if they were included. Inaddition, rates of return will vary over time, particularly for longer-terminvestments. Depending on the performance of your IRA investment, it is alsopossible to lose money.$271,826$53,615$271,826$214,460050,000100,000150,000200,000250,000300,000Traditional Tax-Deductible IRANon-DeductibleRoth IRANon-DeductibleSavingscontinued on next slide
  • 8. A Potential Solution Using an IRA8Preparing for Your Retirement: An IRA ReviewAssumes the $1,375 annual tax savings are invested in an account whose growth is taxed eachyear. If the $271,826 value of the tax-deductible IRA is surrendered at the end of the 20th year,the principal amount remaining after payment of income tax is $203,870 at a 25% rate (assumesno penalty tax is assessed). When added to the future value of the tax savings ($53,615), onwhich income tax has already been paid, the after-tax value of the IRA plus the future value ofthe tax savings results in total cash available of $257,485.If surrendered at the end of the 20th year, the full principal amount of $271,826 is available freeof income tax (assumes no penalty tax is assessed).Assumes the income tax is paid out of investment earnings each year, meaning that the fullprincipal amount of $214,460 is available free of income tax at the end of the 20th year.Traditional Tax-Deductible IRANon-Deductible Roth IRANon-Deductible Savings
  • 9. Traditional IRA vs. Roth IRA… A 2013 Comparison9Preparing for Your Retirement: An IRA ReviewEligible individuals can contribute to a tax-deductible traditional IRA, to a non-deductible Roth IRAor to a combination of the two. However, no more than a combined total of $5,500/$6,500 if age50 or older in 2013 (or 100% of earned income if less) may be contributed to these accounts eachyear.Individuals who are not eligible for deductible contributions to a traditional IRA or to makecontributions to a Roth IRA may still make non-deductible contributions to a traditional IRA andreceive the benefits of tax-deferred growth.The comparison that follows is designed to help you make an informed decision.Which type of IRA is best for you depends on your situation,needs and objectives.continued on next slide
  • 10. Traditional IRA vs. Roth IRA… A 2013 Comparison10Preparing for Your Retirement: An IRA ReviewTraditional IRA (taxdeductible)Roth IRATraditional IRA (non-deductible)Yes No NoYes (lesser of $5,500;$6,500 if age 50 or older; or100% of earned income)Yes (lesser of $5,500;$6,500 if age 50 or older; or100% of earned income)Yes (lesser of $5,500;$6,500 if age 50 or older; or100% of earned income)Yes Yes YesNo (fully taxable)Yes (if qualifieddistributions)No (partially taxable)Yes (contributions cannotbe made after age 70-1/2)NoYes (contributions cannotbe made after age 70-1/2)NoYes (contribution phasedout if adjusted gross incomeexceeds specified limits)NoYes (distributions mustbegin by age 70-1/2)NoYes (distributions mustbegin by age 70-1/2)Yes, up to $1 million for allIRAsYes, up to $1 million for allIRAsYes, up to $1 million for allIRAsDeductibleContributionsLimit on ContributionsTax-Deferred GrowthTax-Free DistributionsAge LimitsIncome LimitsMinimum DistributionRequirementBankruptcy Protection
  • 11. Which Is Better… the Traditional IRA or the Roth IRA?11Preparing for Your Retirement: An IRA ReviewDepending on your situation and objectives, the tax-freedistribution feature of the Roth IRA may produce superioroverall results when compared to a traditional IRA, whichmay provide for tax-deductible contributions, but taxabledistributions.continued on next slidevs.Traditional IRARoth IRAIn choosing between a traditional IRA and a Roth IRA, you may find it helpful to evaluate boththe accumulation period and the distribution period results of the respective plans.Values in 20 Years / $5,500 Annual Contribution Each Year for 20 Years/ 8%Hypothetical Annual Rate of Return/ 25% Income Tax Bracket 1Total IRA ValueDeductible IRATax Savings 2Total CashAvailableTraditional IRA (deductible contributions) $271,826 $53,615 $325,441Traditional IRA (non-deductible contributions) $271,826 ----- $271,826Roth IRA (non-deductible contributions) $271,826 ----- $271,826AccumulationPeriod:
  • 12. Which Is Better… the Traditional IRA or the Roth IRA?12Preparing for Your Retirement: An IRA Review1 This is a hypothetical illustration only and is not indicative of any particular investment or performance. It does not reflect thefees and expenses associated with any particular investment, which would reduce the performance shown in this hypotheticalillustration if they were included. In addition, rates of return will vary over time, particularly for longer-term investments.Depending on the performance of your IRA investment, it is also possible to lose money.2 Assumes that the $1,375 annual tax savings on the $5,500 traditional deductible IRA contribution (25% tax bracket) are investedin a taxable account.3 Assumes that principal and interest are distributed in equal annual installments over 20 years.Total CashAvailableAnnual After-TaxDistributionTotalDistributionsTraditional IRA (deductible contributions) $325,441 $23,019 $460,380Traditional IRA (non-deductible contributions;partially taxable distributions)$271,826 $20,601 $412,020Roth IRA (non-deductible contributions) $271,826 $25,635 $512,700DistributionPeriod:Total Cash Available Distributed in Equal Amounts Over 20 Years3 / 8% HypotheticalAnnual Rate of Return/ 25% Income Tax Bracket
  • 13. Understanding Traditional IRAs13Preparing for Your Retirement: An IRA ReviewEligibility:Single Person A single person who is under age 70-1/2 and has earned income may establishand contribute up to the lesser of $5,500 or 100% of earned income to an IRA.MarriedCoupleUp to $5,500 can be contributed to an IRA for each spouse, even if one spousehas no earned income, provided that the combined compensation of bothspouses is at least equal to the combined IRA contribution (maximum of$11,000).Older Workers Workers who are age 50 or older may contribute an additional $1,000 to anIRA in 2013, for a total of $6,500, provided that earned income is at leastequal to the IRA contribution.Deductibility:IRA contributions are fully deducted from income, unless you and your spouse are activeparticipants in an employer-sponsored retirement plan, including a tax-deferred annuity (TDA).continued on next slide
  • 14. Understanding Traditional IRAs14Preparing for Your Retirement: An IRA ReviewIn that event, the IRA deduction is gradually phased out as follows:continued on next slideAdjusted GrossIncomeMaximum IRA Deductions (2013 Tax Year)Joint Taxpayers Single TaxpayersOne IRA Two IRAsAge 50 orOlderOne IRAAge 50 orOlder$59,000 & under $5,500 $11,000 $6,500 $5,500 $6,500$64,000 $5,500 $11,000 $6,500 $2,750 $3,250$69,000 $5,500 $11,000 $6,500 $ 0 $ 0$95,000 $5,500 $11,000 $6,500 $ 0 $ 0$105,000 $2,750 $5,500 $3,250 $ 0 $ 0$115,000 & above $ 0 $ 0 $ 0 $ 0 $ 0
  • 15. Understanding Traditional IRAs15Preparing for Your Retirement: An IRA ReviewThe spouse of an active participant in an employer-sponsored retirement plan who is not coveredby his or her own plan can make fully-deductible IRA contributions, if the couple’s adjusted grossincome is below $178,000 in 2013 and partially-deductible IRA contributions if between $178,000and $188,000 in 2013.Contribution Deadline:An IRA can be established and contributions made between January 1 of the current tax year andthe date the income tax return for the current year is filed (no later than April 15th of thefollowing year).
  • 16. Traditional IRA Taxation16Preparing for Your Retirement: An IRA ReviewDuring Life :Deductible up to $5,500 (up to $11,000 for a married couple; additional $1,000 contributionavailable to workers age 50 and older in 2013) unless the individual is an active participant in anemployer-sponsored qualified retirement plan, in which case the tax deduction is graduallyphased out. In 2013, this phase-out begins at adjusted gross incomes in excess of $95,000 formarried couples filing jointly ($59,000 for single taxpayers) and ends at $115,000 for marriedcouples ($69,000 for single taxpayers), at which point there is no IRA deduction.The spouse of an active participant in an employer-sponsored retirement plan who is not coveredby his or her own plan can make fully-deductible IRA contributions, if the couple’s adjusted grossincome is below $178,000 and partially-deductible IRA contributions if between $178,000 and$188,000 in 2013.continued on next slideThe earnings on IRA contributions (whether deductible or non-deductible)accumulate tax-free until distributed.Contributions (2013)Growth
  • 17. Traditional IRA Taxation17Preparing for Your Retirement: An IRA ReviewIRA distributions are taxed under the rules of IRC Sec. 72. This means that the taxpayer is entitledto recover any non-deductible IRA contributions tax-free when distributions begin. Other thanthis tax-free return of the “investment in the contract,” all IRA distributions are includable in grossincome in the year received.In addition:Premature distributions made prior to age 59-1/2 are subject to a 10% excise or “penalty” taxin addition to the regular income tax on the amount of the distribution. (Exceptions to thepenalty tax include payments made on account of death, disability, to cover certain medicalexpenses, to pay qualified higher education expenses, for the purchase of a first home($10,000 lifetime limit), or in a series of substantially equal periodic payments over thetaxpayer’s life expectancy.)Minimum distributions from an IRA must begin by April 1 of the year after the year in whichthe taxpayer attains age 70-1/2, or a 50% excise tax is levied on the difference between whatwas paid out and what should have been paid out under IRA minimum distribution rules.continued on next slideDistributions
  • 18. Traditional IRA Taxation18Preparing for Your Retirement: An IRA ReviewAt Death:The value of the IRA is included in the gross estate of the deceased owner.Traditional IRA distributions received by a beneficiary after the traditionalIRA owner’s death are taxed in the same manner as if received by the owner.Estate TaxationIncome Taxation
  • 19. Understanding Roth IRAs19Preparing for Your Retirement: An IRA ReviewEligibility:Single taxpayers with adjusted gross income of up to $112,000 or married couples filing jointlywith adjusted gross income of up to $178,000 are eligible to contribute the full $5,500 annually toa Roth IRA in 2013. Workers who are age 50 or older may contribute an additional $1,000 to aRoth IRA in 2013, for a total of $6,500.The contribution amount in 2013 is gradually reduced to zero for adjusted gross income levelsbetween $112,000 and $127,000 for single taxpayers, and between $178,000 and $188,000 forcouples.Unlike regular IRAs, contributions to a Roth IRA can be made even after age 70-1/2.Deductibility:Contributions to a Roth IRA are non-deductible. Instead, the tax advantages of a Roth IRA are“backloaded.” Earnings on Roth IRA contributions accumulate without tax and distributions maybe received tax free.continued on next slide
  • 20. Understanding Roth IRAs20Preparing for Your Retirement: An IRA ReviewQualified Distributions:Qualified distributions from a Roth IRAare not included in gross income and arenot subject to the additional 10%penalty tax for premature distributions.To be a tax-free qualified distribution:Converting from a Traditional IRA to a Roth IRA :Income taxes must be paid on the amount that isconverted from a traditional IRA to a Roth IRA, butthere is no premature distribution penalty tax.continued on next slideThe distribution must occur morethan five years after the individualfirst contributed to the Roth IRA; andThe individual must be at least 59-1/2 years old, disabled, deceased orthe funds must be used to purchase afirst home ($10,000 lifetime limit).
  • 21. Roth IRA Taxation21Preparing for Your Retirement: An IRA ReviewDuring Life :Not deductible.continued on next slideThe earnings on Roth IRA contributions accumulate tax-free until distributed.Qualified distributions from a Roth IRA are received free of income tax and are not subject to the10% premature withdrawal penalty tax.Roth IRA distributions that do not meet the qualified distribution requirements will be included inincome to the extent that the distribution represents earnings on Roth IRA contributions and maybe subject to a 10% premature withdrawal penalty tax.There is no requirement that distributions from a Roth IRA begin by age 70-1/2.DistributionsGrowthContributions
  • 22. Roth IRA Taxation22Preparing for Your Retirement: An IRA Reviewcontinued on next slideAdjusted Gross IncomeDistribution Made Within 5Years of First Roth IRAContributionDistribution Made More Than 5Years After First Roth IRAContributionEarningsTaxableSubject to 10%PenaltyEarningsTaxableSubject to 10%PenaltyOn or after age 59-1/2 Yes No No NoBefore age 59-1/2 (exceptions follow): Yes Yes Yes YesDeath Yes No No NoDisability Yes No No NoFirst-time homebuyer ($10,000 limit) Yes No No NoSubstantially equal periodic payments Yes No Yes NoMedical expenses above 7.5% ofadjusted gross incomeYes No Yes NoHealth insurance premiums paid by theunemployedYes No Yes NoHigher education expenses Yes No Yes No
  • 23. Roth IRA Taxation23Preparing for Your Retirement: An IRA ReviewAt Death:The value of a Roth IRA is included in the gross estate of the deceased owner.Roth IRA distributions received by a beneficiary after the Roth IRA owner’sdeath are taxed in the same manner as if received by the owner.Estate TaxationIncome Taxation
  • 24. IRA-to-IRA Rollovers24Preparing for Your Retirement: An IRA ReviewCan Funds Be TransferredBetween Traditional IRAs andBetween Roth IRAs?Yes, funds can be moved from a traditional IRA to anothertraditional IRA or from a Roth IRA to another Roth IRAwithout any taxes or penalty, assuming certainrequirements are met:The trustee of the existing IRA either transfers the funds directly to the trustee of thereceiving IRA; orThe funds in the existing IRA are distributed to you and you roll them over to the receivingIRA within 60 days of receiving the distribution.Only one rollover from a traditional IRA to another traditional IRA, or from a Roth IRA toanother Roth IRA can be made in any one-year period.Can Funds Be Transferred from a Roth IRAto a Traditional IRA?No, funds cannot be moved from a Roth IRA toa traditional IRA.continued on next slide
  • 25. IRA-to-IRA Rollovers25Preparing for Your Retirement: An IRA ReviewAdvantages:+Qualified distributions from a Roth IRA are received free of income tax.If non-qualified distributions are taken, the portion of the distribution represented by traditional IRAcontributions is not taxable.There is no minimum age by which you must begin receiving distributions from a Roth IRA.The premature distribution penalty tax does not apply to amounts converted or rolled over from atraditional IRA to a Roth IRA.Qualified distributions from a Roth IRA are not included in determining the taxable portion of anySocial Security benefits being received.continued on next slideCan Funds Be TransferredFrom a Traditional IRA to aRoth IRA?Yes. After careful review, you may decide that a Roth IRA isa better retirement savings option for you than atraditional IRA. In this event, if you already have funds in atraditional IRA, you may want to consider moving thosefunds into a Roth IRA.
  • 26. IRA-to-IRA Rollovers26Preparing for Your Retirement: An IRA ReviewThe amount that is converted or rolled over to the Roth IRA is subject to federal income tax in theyear of the conversion or rollover, to the extent that the funds consist of earnings and tax-deductible contributions to the traditional IRA.In the year of the conversion or rollover, this taxable income can serve to increase the taxableportion of any Social Security benefits being received.The premature distribution penalty tax applies to any converted or rolled over amounts distributedfrom the Roth IRA during the five-year period following the conversion or rollover.Disadvantages: –You should seek professional tax advice before converting or rolling over funds from atraditional IRA to a Roth IRA in order to avoid unforeseen and/or negative tax and, possibly,creditor protection consequences.