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Roth Ira Conversions

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This presentation is about Roth IRA Conversions from the perspective of Estate Planning.

This presentation is about Roth IRA Conversions from the perspective of Estate Planning.


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  • 1. Roth IRA Conversions By Ward J. Wilsey, JD, LLM 3655 Nobel Dr. Suite 345 San Diego, CA 92122 (858) 764-2672 wardwilsey@wilseylaw.com
  • 2. Ward J. Wilsey, JD, LLM  BA in Economics from UCSD  JD from University of San Diego  LLM in Taxation from Washington University in St. Louis  Estate Planning Attorney with the Wilsey Law Firm  Frequent lecturer with several providers of continuing legal education for attorneys, including the National Business Institute
  • 3. Roth IRA Overview  Roth IRAs are treated exactly like regular IRAs  Except for where the Internal Revenue Code specifies  Three main advantages  Distributions are Tax Free  No Required Minimum Distributions (“RMDs”)  No Maximum Age for Making Contributions  Disadvantage  Cannot Deduct Contributions
  • 4. Minimum Distributions Rules for Roths  No Lifetime Required Distributions  408A(C)(5)  Post-Death RMD rules do apply  Reg. § 1.408A-6, A-14(b)  Roth distributions and conversions do not fulfill MRD requirements for a traditional IRA  Reg. § 1.408A-6, A-15
  • 5. Roth Distributions  Qualified Distributions are Tax Free if they meet two requirements:  Five Years after first contribution  § 408A(d)(2)(B)  And one (or more) requirements of § 408A(d)(2)(A) are met:  After Age 59.5  After Participants death  Attributable to Participant being disabled
  • 6. Ways to Fund Roth IRA  Regular Contributions  Less of Contribution or the applicable dollar limit  § 408A(C)(2)  Less Traditional IRA Contributions  Applicable Dollar Limit Year Dollar Limit Add on Over 50 2002-2004 $3,000 $500 2005 $4,000 $500 2006-2007 $4,000 $1,000 2008-2010 $5,000 $1,000
  • 7. Income Limits for Contributions  2009  Single Income Limit of $105,000 MAGI  Phase-out to $120,000  Married Income Limit of $166,000 MAGI  Phase-out to $176,000  Basically no contributions for Married filing separately
  • 8. Rollover Roth IRA  Transfer Funds from Traditional IRA  Amount includible in gross income  § 408A(d)(3)(A)-(C)  Three Ways (§408(d)(3)(A)(i))  Cash from Traditional contributed to Roth within 60 Days  Plan to Plan Rollover  Re-designated by Custodian
  • 9. Who May Convert?  2009  Income Limit of $100,000  No age requirement  Watch out for paying taxes with IRA if under age 59.5, 10% early withdrawal penalty  MAGI (Modified Adjusted Gross Income) (See generally §219)  Start with Adjusted Gross Income  Certain income normally excluded in added in and certain deductions are not allowed  i.e. IRA Contributions
  • 10. Who May Convert  2010  Anyone may convert, no income limits  May pay the taxes over two years  ½ 2011  ½ 2012
  • 11. Mathematics of a Conversion  Example  Joe has $500,000 IRA growing at 8%  $500,000 of non-qualified liquid assets growing at 6%  Difference in growth rates used to reflect lack of income taxes affecting IRA growth  Age 50  Convert or no Convert???
  • 12. Comparison in 2030 Conversion No Conversion  Joe converts $500,000 IRA to Roth  Joe doesn’t convert IRA and pays the taxes with Non-  After in 2010 IRA assets  Taxes of $225,000 state and  Roth IRA worth $500,000 federal growing at 8%  Liquid Assets now worth  After in 2010 $500,000 6%  Roth IRA worth $500,000 growing at 8%  In 2030  Liquid Assets now worth  Roth IRA worth $2,330,478 $275,000 6%  Non-Qualified worth  In 2030 $1,603,567  Roth IRA worth $2,330,478  Total is $3,934,046  Non-Qualified worth $881,962  Increase reflects built in Capital Gains Tax Liability  Total is $3,212,440
  • 13. Conversion  These are almost equal accounting for taxes  The big deal is if taxes raise in the future, since distributions will be taxed at a higher tax  Although the conversion is a bust from the IRA owners perspective if tax rates lower in the future
  • 14. Comparison in 2050 Conversion Non-Conversion  IRA $10,862,260  IRA $3,777,396  Non-Qualified $2,828,572  Non-Qualified of  Total of $13,690,833 $5,142,858  Reinvested RMDs (now non-qualified of $4,020,364)  Total of $12,940,620  Decrease reflects that taxes were paid on RMDs
  • 15. Beneficiary 50 Year Old Conversion Non-Conversion  IRA worth $10,862,260  IRA worth $3,777,396  By age 85, the Beneficiary  By age 85, the Beneficiary will have $60,097,460 in will have $11,494,527 in distributions distributions  $2,828,572 in non-  $5,695,259 in non- qualified assets qualified assets  Assume all growth and  Assume all growth and income is distributed income is distributed  $11,180,310 by age 85  $18,110,433 by age 85  $71,277,770 total  $29,604,960 total
  • 16. Bottom Line  If Conversion Occurs, Inherited Roth IRA is far preferable  If wealthy clients have IRA or 401K that they don’t need, and have sufficient liquid funds for conversion, they should probably do it
  • 17. Roth Conversion Option 3  Conversion occurs after clients death  Internal Revenue Notice 2008‐30 allows for a Roth Conversion to occur after a clients death  Make sure the numbers work  You are using Non-Qualified Assets to pay taxes  Life Insurance???
  • 18. Keep In Mind  For Estate Planning Purposes:  Best Scenario is Roth Conversion during lifetime  Second Best is No Conversion  Roth Conversion after Death???