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Not FDIC Insured May Lose Value No Bank Guarantee Investors should carefully consider a fund’s investment goals, risks, charges and expenses before investing.

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Presentation on theme: "Not FDIC Insured May Lose Value No Bank Guarantee Investors should carefully consider a fund’s investment goals, risks, charges and expenses before investing."— Presentation transcript:

1 Not FDIC Insured May Lose Value No Bank Guarantee Investors should carefully consider a fund’s investment goals, risks, charges and expenses before investing. To obtain a prospectus, which contains this and other information, talk to your financial advisor, call us at (800) DIAL BEN/(800) , or visit franklintempleton.com. Please carefully read the prospectus before you invest or send money.

2 To Convert…or Not To Convert? Roth IRA Considerations

3 2 What’s a Roth IRA? New Individual Retirement Account introduced in 1998 – Named after Senator William Roth of Delaware, who led the fight to establish it Same annual contribution amounts as traditional IRA Different income restrictions Contributions permitted after age 70½ if still employed No required distributions (RMDs) from a Roth after reaching age 70½ But the BIG difference is… Taxes!

4 3 Roth IRA: Pay Tax Now Instead of Later Contributions Not Tax Deductible EARNINGS TAX FREE Qualified Withdrawals Investments inside a Roth IRA grow tax-free After-tax Money Tax-Free Income Roth IRA

5 4 Traditional IRA SEP IRA SIMPLE IRA Eligible Employer Plan [ including 403(b) and 401(k) ]* What’s a “Roth conversion”? A rollover of assets from: Roth IRA TO *Other examples include profit sharing plans, stock bonus plans, pension plans and government 457 plans.

6 5 Who’s Eligible to Convert? Through 2009 Filing StatusIncome Limit SingleMAGI does not exceed $100,000 Married, filing JointMAGI does not exceed $100,000 Married, filing SeparateIneligible *Tax Increase Prevention & Reconciliation Act of 2005 (TIPRA) Starting January 1, 2010* Income LimitFiling Status Eligible & no income limit No income limit Married, filing Separate Married, filing Joint Single

7 6 Conversion Scenario: The Parkers Janet and Brian Parker are both 46 years old Janet has a $50,000 Traditional IRA Tax bracket: – Today: 25% – In retirement: 15% When they retire at age 66 they will need to withdraw $20,000 from Janet’s IRA each year on an after-tax basis. The Parkers want to know if it makes sense to convert Janet’s Traditional IRA to a Roth IRA. They would pay the income tax using the $12,500 they have in a CD (Certificate of Deposit)

8 7 Conversion Comparison for the Parkers Assumptions: Hypothetical IRA Average Annual Total Return: 8% Hypothetical CD Annual Fixed Rate of Return: 2.5% Current Tax Bracket: 25% Retirement Tax Bracket: 15% No further contributions to IRA Withdrawals are taken at start of each year

9 8 Conversion Comparison for the Parkers This chart is for illustrative purposes only and does not reflect the performance of any Franklin, Templeton or Mutual Series fund. Please consult with tax and legal professionals for specific individual recommendations and advice. Assumptions: Hypothetical IRA Average Annual Total Return: 8% Hypothetical CD Annual Fixed Rate of Return: 2.5% Current Tax Bracket: 25% Retirement Tax Bracket: 15% Withdrawals are taken at start of each year Tipping Point: Roth will have more money after 7 years

10 9 Conversion Comparison for the Parkers This chart is for illustrative purposes only and does not reflect the performance of any Franklin, Templeton or Mutual Series fund. Please consult with tax and legal professionals for specific individual recommendations and advice. Tipping Point: Roth will have more money after 3 years Assumptions: Hypothetical IRA Average Annual Total Return: 8% Hypothetical CD Annual Fixed Rate of Return: 2.5% Current Tax Bracket: 25% Retirement Tax Bracket: 25% Withdrawals are taken at start of each year

11 10 Conversion Scenario: The Chen’s At ages 68 and 67, Lee and Grace Chen are already retired Lee has a $100,000 Traditional IRA Tax bracket: 25% Depending upon how their other investments perform, in some years the Chen’s may need $10,000 from Lee’s IRA after-tax to cover their retirement expenses. If there is anything left in Lee’s IRA, they would like to leave it to their grandson. The Chen’s want to know if converting makes sense for them. They would pay the $25,000 income tax bill using the money in a CD

12 11 Conversion Comparison for the Chen’s Assumptions: Hypothetical IRA Average Annual Total Return: 8% Hypothetical CD Annual Fixed Rate of Return: 2.5% Retirement Tax Bracket: 25% Withdrawals are taken at start of each year

13 12 Conversion Comparison for the Chen’s Assumptions: Hypothetical IRA Average Annual Total Return: 8% Hypothetical CD Annual Fixed Rate of Return: 2.5% Retirement Tax Bracket: 25% Withdrawals are taken at start of each year This chart is for illustrative purposes only and does not reflect the performance of any Franklin, Templeton or Mutual Series fund. Please consult with tax and legal professionals for specific individual recommendations and advice. Tipping Point: Roth will have more money after 11 years

14 13 Tipping Point: Roth will have more money after 11 years Conversion Comparison for the Chen’s Assumptions: Hypothetical IRA Average Annual Total Return: 8% Hypothetical CD Annual Fixed Rate of Return: 2.5% Retirement Tax Bracket: 25% Withdrawals are taken at start of each year This chart is for illustrative purposes only and does not reflect the performance of any Franklin, Templeton or Mutual Series fund. Please consult with tax and legal professionals for specific individual recommendations and advice. Tax-Free Amount Left to Lee’s Grandson (if no withdrawals): $466,096

15 14 Leaving a Roth IRA to a Young Beneficiary Assumptions: 1.AAR on investments: 8%. 2.Jason withdraws just the minimum amount required each year For illustrative purposes only. This illustration does not reflect actual investment results of any Franklin Templeton fund or product, and is not a guarantee of future results. Jason is age 6 in the year after he inherits grandpa’s Roth IRA Tax-Free! Total Cumulative Income Received by Age 82: $2,142,458!

16 15 What About Taxes? If you convert, you must pay income tax on amounts not previously taxed Type of IRA AssetsTaxable at Conversion? IRA Contributions (deducted)Taxable EarningsTaxable Pre-tax rollovers from retirement accounts Taxable IRA Contributions (not deducted) Not taxable

17 16 What About Taxes? (Cont’d) Best to use non-IRA money to pay the tax More assets go into Roth 10% penalty and income tax on all amounts withdrawn (or withheld) prior to age 59½—even if used to pay conversion tax If you later “re-characterize” (un-do) the conversion, money taken from an IRA to pay the conversion tax cannot be returned to the IRA it came from

18 17 What About Taxes? (Cont’d) When do I pay the tax? Taxable portion of conversion is reported as “income” in the year you do the conversion – Could push you into higher tax bracket – Could make you subject to AMT (Alternative Minimum Tax) – Could require you to make quarterly estimated tax payments Special option for 2010 conversions only – Declare as income on 2010 tax return OR – Declare 50% as 2011 income and 50% as 2012 income – Consider: when might your tax bracket be lower? Must file Form 8606 with federal tax return

19 18 When Can I Withdraw Converted Assets? There is no income tax when converted amounts are withdrawn However, there will be a 10% penalty unless: – The amount was converted at least 5 years ago, OR – The IRA owner is one of the following: 1 Age 59½ or older Deceased Disabled 2 Taking “substantially equal periodic payments” Paying medical expenses in excess of 7.5% of AGI Eligible for a qualified disaster recovery assistance distribution The bottom line: After 5 years, converted amounts come out tax- and penalty-free 1.IRC Sec. 72(t) 2.Social Security definition of “disabled” essentially means you are unable to perform ANY kind of meaningful work, i.e. not simply that you are unable to continue to perform the work you were doing prior to your disability. 3.After being unemployed for 12 consecutive weeks Paying health insurance premiums 3 Paying college expenses Withdrawing $10,000 to buy a “1st time” home A qualified reservist on active duty Withdrawing funds to satisfy an IRS levy on a qualified plan or IRA

20 19 Reasons to Convert ReasonBenefit Lock in today’s tax ratesDo you know your retirement tax bracket? Achieve tax diversification Conversion adds flexibility to choose which accounts to pull income from Manage your tax consequences Turn investment losses into a positive Lower IRA value means lower tax bill to convert assets No required distributions at age 70½ Assets continue to appreciate tax-free

21 20 Reasons to Convert (Cont’d) ReasonBenefit Roth withdrawals don’t affect taxation of Social Security income May prevent up to 85% of Social Security income from being taxed You can withdraw conversion amounts without penalty No penalty applies after five years if you are under 59½ The five year requirement does not apply if you are 59½ or older Estate planning considerations Taxes paid on the conversion will reduce your taxable estate Leave Roth IRA to a beneficiary: spouse, children, grandchildren Beneficiary receives tax-free income for life

22 21 Considerations Keep in mind Expected return on Roth IRA investments Conversion amount How long will assets remain in the Roth IRA Use non-IRA assets to cover the tax bill Consider your beneficiaries

23 22 Frequently Asked Questions If I convert in 2010 and want to spread the tax over the next two years, what income tax rate will apply? Whatever rates are in effect for the year in which you declare the converted amount as income. Do I have to convert all of my non-Roth IRAs? No. You can convert as much—or as little—as you wish. Do I have to convert everything I want to in a single year? No. You can spread it out, converting as much as you wish — or none — from year to year.

24 23 Frequently Asked Questions (Cont’d) In some years my income was too high to allow me to deduct my IRA contribution, so I used after-tax money for this. Will I have to pay income tax on this again when I convert? No. But figuring how much of your conversion will be taxable is a bit tricky, so you should consider working with a professional to get it right. Franklin Templeton has created a worksheet that will help us estimate this. However, the final calculation includes certain amounts that won’t be known until the end of the year, so we won’t be able to compute the exact amount until then.

25 24 Frequently Asked Questions (Cont’d) If I have a Roth option in my 401(k) or 403(b) plan at work, can I convert my pre-tax assets to the tax-free Roth option in the plan? No. However, when you retire or leave your job, you can roll assets in the Roth side of your 401(k) into a Roth IRA. Pre-tax assets in your 401(k) can either go into a traditional IRA or a Roth IRA. If you roll them into a Roth IRA, you will owe income tax on the amount.

26 25 Consider Franklin Templeton for Your Roth IRA 2008 – “Franklin Templeton is King of the Decade” 2009 – “Franklin Templeton Keeps the Lead for Past Decade” ( 2/1/10 )* 2009 Fund Family Rankings based on total returns for 10 years ended 12/31/09 (out of 48 fund families) *Past performance does not guarantee future results. Source: Barron’s, “ The New Champs,” Feb. 1, For the 1- and 5-year periods ended 12/31/09, Franklin Templeton ranked 17/61 and 5/54 fund families, respectively. Barron’s is a registered trademark of Dow Jones LP. All Rights Reserved. Sales charges are not included in calculating returns. Each fund’s return measured against Lipper category, resulting in a percentile ranking, then weighted by asset size, relative to the fund family’s other assets in its general classification. To qualify, a group must have at least three funds in Lipper’s general U.S.-stock category, as well as one in the world equity, at least one mixed-equity fund, at least two taxable-bond funds and one tax-exempt offering.

27 26 Consider Franklin Templeton for Your Roth IRA *Past performance does not guarantee future results. Source: Morningstar. For each fund with at least a 3-year history, Morningstar calculates a risk-adjusted return measure that accounts for variation in a fund's monthly performance (including the effects of all sales charges), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receives a Morningstar Rating TM of 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund and rated separately.) Morningstar Rating TM is for Class A shares only; other classes may have different performance characteristics. © 2010 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. 4- and 5-Star Ratings* As of January 31, 2010, 31 of Franklin Templeton’s Class A funds were rated 4 or 5 stars by Morningstar Morningstar ratings measure risk-adjusted returns. The overall Morningstar Rating™ for a fund is derived from a weighted average of the performance figures associated with its 3-, 5-, and 10-year (if applicable) rating metrics

28 27 Work with Your Financial and Tax Advisors To estimate the tax on a Roth conversion To choose the right investments for your Roth IRA To file the proper paperwork

29 28 Work with Your Financial and Tax Advisors To estimate the tax on a Roth conversion To choose the right investments for your Roth IRA To file the proper paperwork

30 Franklin Templeton Distributors, Inc. One Franklin Parkway San Mateo, California (800) DIAL BEN ® (800) franklintempleton.com RIRA SEM 02/10


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