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Roth IRA Conversions: What You Need to Know Presented by: David S. Richmond, CLU, ChFC Chairman & Chief Investment Officer & Matthew J. Curfman, CFP® Senior.

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Presentation on theme: "Roth IRA Conversions: What You Need to Know Presented by: David S. Richmond, CLU, ChFC Chairman & Chief Investment Officer & Matthew J. Curfman, CFP® Senior."— Presentation transcript:

1 Roth IRA Conversions: What You Need to Know Presented by: David S. Richmond, CLU, ChFC Chairman & Chief Investment Officer & Matthew J. Curfman, CFP® Senior Vice President of Investment Services Richmond Brothers Financial Management Specialists, Inc.

2 Disclosures  David Richmond is a licensed Investment Advisor Representative in the states of MI, OH, AZ, CO, MN  Licensed to sell securities, annuities, & insurance  Affiliated with Sammons Securities Co.®, LLC, member FINRA/SIPC & Midland National  Richmond Brothers Financial Management Specialists, Inc. offers securities through Sammons Securities Co.®, LLC, member FINRA/SIPC  Fee-based investment advisory services offered through Sigma Planning Corporation, a registered investment advisor

3 Disclosures  Richmond Brothers offers securities through Sammons Securities Co.®, LLC, member FINRA/SIPC. The broker/dealer for Midland National’s variable products is Sammons Securities Co. Sammons Securities Co. is a registered broker/dealer under the Securities Exchange Act of 1934. Sammons Securities Co. is an indirect wholly owned subsidiary of Sammons Enterprises, Inc., of Dallas, Texas, the ultimate parent company of Midland National.  Dave Richmond and Matt Curfman are members of Ed Slott’s Master Elite IRA Advisor Group™

4 Disclosures  This material is provided for general and educational purposes only and is not intended as tax, legal or investment advice (or for use to avoid penalties that may be imposed under U.S. Federal tax laws). Please consult your tax advisor for advice regarding your personal tax situation.  This presentation has been adapted from Ed Slott and Company, LLC’s 15 Roth Conversion Traps provided to members of Ed Slott’s Elite IRA Advisor Group™  There will be an opportunity to schedule an appointment for an individual consultation at the end of this Webinar which may result in a recommendation of specific financial products that may help you achieve your financial goals  There is no obligation to schedule an appointment or purchase a product

5 Agenda  How a Roth IRA is different  Points to remember about Roth Conversions  Q & A

6 How is a Roth IRA Different from Traditional IRA?  Cannot deduct contributions to a Roth  Qualified distributions are tax free  Contributions can be made to Roth IRA after age 70½  Can leave amounts in Roth IRA as long as you live

7 Points to Remember  Many things to keep in mind before, during and after conversions

8 Conversion to a Roth IRA  Requires paying taxes on any pre-tax contributions, plus any gains –Money used to pay the taxes cannot come from traditional IRA without a 10% penalty (if you are under age 59½  Converted amounts can be distributed without penalty after five years (beginning January 1 of the year of conversion and ending on December 31 of the fifth year) –Each conversion has a separate five-year holding period –Distribution of earnings before completing a five-year holding period and attaining age 59½ may be subject to tax and 10% penalty

9 Check Beneficiary Forms  Roth Conversion requires new beneficiary form –Make sure to name Primary & Contingent beneficiaries –If multiple beneficiaries, make sure to designate who gets what percentage  If no beneficiary is named, the account is given to the estate –This means NO STRETCH IRA (stretch IRAs are designed for investors who will not need the money in the account for their own retirement needs)

10 Check Beneficiary Forms  If you die before Required Beginning Date, five year rule applies for beneficiary  If you die after Required Beginning Date, beneficiary uses your remaining single life  Worse for Roth IRA beneficiary-rule that applies is always 5 year rule

11 NUA  What is Net Unrealized Appreciation (NUA)? –Tax break for someone leaving a company that has highly appreciated company stock in 401k plan  NUA must be part of a qualified lump-sum distribution  Make sure that you pull out company stock in kind as stock and then transfer to a taxable brokerage account

12 NUA Example  $1 million stock with $100,000 cost Stock-Cost=NUA  Tax is only paid on cost ($100,000)  No tax is paid on the difference ($900,000) until stock is sold

13 NUA  Triggering events that qualify for NUA: –Separation from service –Age 59½ –Death –Disability  You cannot convert NUA stock to a Roth IRA and pay no tax –The NUA break is then lost (according to Notice 2009-75)

14 Pro-Rata Rule  You may not convert non-deductibles to a Roth IRA and pay no tax –Each dollar needs to be a portion of taxable and tax-free –Be careful with partial conversions  Example: Cindy has $100,000 in an IRA, $20,000 is the basis (the total of her nondeductible contributions made over the years) –She rolls over $200,000 from her former employer’s plan to the IRA, of which $10,000 is from after-tax contributions –After the rollover, she’ll have $300,000 in her IRA. The basis becomes $30,000 (the $20,000 nondeductible plus the $10,000 of after-tax funds rolled into the IRA = $30,000 basis)

15 Pro-Rata Rule  Now Cindy wants to withdraw $10,000 of after-tax money from the IRA –Only $1,000 of the withdrawal will be tax-free. She’ll pay tax on the other $9,000 –Therefore, the nontaxable amount in the IRA is $30,000 and that is 10% of the total $300,000 IRA balance after the rollover –This means that each withdrawal will be 10% tax-free and 90% taxable in the current year  Another option is to convert Cindy’s entire $300,000 IRA to a Roth IRA (assuming she otherwise qualifies for the conversion) –Then all withdrawals will be tax-free from the converted Roth IRA after appropriate waiting periods are met. She’ll pay tax on $270,000; the $30,000 of basis will transfer tax-free to the Roth IRA –A partial conversion would require the use of the Pro Rata Rule

16 Non-Spouse Beneficiaries  Cannot convert inherited IRAs to inherited Roth IRAs  If inherited from company plan, may convert inherited company plan to inherited Roth IRA as trustee-to-trustee transfer (new in 2010)  Name of deceased IRA owner must remain in account title on properly titled inherited IRA

17 Eligible Rollover Distributions  Required Minimum Distributions (RMDs) cannot be converted to Roth IRA  72(t) payments cannot be converted to Roth IRA  Inherited IRAs cannot be converted  Only eligible rollover distributions can be converted (i.e. in-service distributions)

18 Converting After 70½  No RMDs for Roth IRA owners  In 2010, if you are over 70½, you are subject to RMDs in traditional IRA or 401(k) –Do not convert entire balance (first dollars out are deemed RMD) –Take RMD first and then convert to Roth

19 60-Day Rollover Rules  Many times a Roth conversion does not happen in 60 days –Best way to avoid this is a trustee-to- trustee transfer

20 SIMPLE IRAs  Distributions in the first two years are not eligible for rollover  If you are under age 59½, there is a 25% penalty

21 10% Penalty  If you take funds out of an IRA before age 59½, there is a 10% penalty –Since conversion to a Roth IRA is NOT considered a distribution, there is no 10% penalty –However, if you are under 59½ when converting to a Roth IRA, any withdrawal of converted amounts from the Roth within 5 years triggers a 10% penalty

22 Special Payout Deal  Remember, if you convert in 2010, you do NOT need to pay federal taxes on the conversion for 2010 –Have the choice to split conversion income between 2011 and 2012 –Tax may be different in each year depending on total income and tax rates

23 Special Payout Deal Example  For example, let’s say you have $100,000 in an IRA and want to convert it to a Roth IRA If you choose not to pay taxes on the conversion in 2010: -Taxes are paid on $50,000 included in income for 2011 -Taxes are paid on $50,000 included in income for 2012

24 Separate New Roth IRAs  To take maximum advantage of a Roth re- characterization, make sure you convert to a brand new Roth IRA –This includes using a separate Roth IRA for every conversion (i.e. each investment vehicle goes in a separate Roth) –If value tanks, you do NOT need to pay tax on the value that does not exist –Remember: you have until October 15, 2011 to re-characterize a 2010 conversion

25 Check Financial Aid  When applying for financial aid, retirement accounts are not looked at, but income is  If you have children or grandchildren applying to colleges, find out what year income will be measured for financial aid

26 First-Time Homebuyer Credit  You may be eligible for a $8,000 or $6,500 tax credit –Make sure to coordinate Roth conversions so you may keep homebuyer tax credit  If home is purchased in 2010 up-to-due- date, you can take the credit on 2009 tax return  Maximize tax credit and Roth conversion opportunity

27 Medicare Part B/ Social Security Tax  Roth conversion income will raise Medicare Part B premiums  Roth conversion income could trigger tax on Social Security  If you do not do a Roth conversion, at age 70 ½ RMDs would STILL occur and cause the same problems EVERY year  Exemptions, credits, deductions may be lost with high-income year, BUT NOT FOREVER

28 Overview  There are many different variables to consider before doing a Roth conversion  Although there is a lot of publicity about Roth conversions, the decision to convert should be made on an individual level  Make sure to check with your financial advisors about your situation before making a conversion

29 Questions We welcome your questions at this time REMINDER: –Raise hand (click on yellow hand icon to raise/lower hand) to be un-muted and ask question through phone or computer microphone –Or, type in a question in the Questions pane and click send to submit it to Richmond Brothers

30 Thank You For more information:

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