1. 1 The Stretch IRA - Keeping Minimum Required Distributions to a Minimum Presented by: Robert S. Keebler, CPA, MST 1400 Lombardi Ave., Ste 200 P.O. Box 11997 Green Bay, WI 54307-1997 Ph: (920) 490-5626 Fax: (920) 499-1050 E-mail: rkeebler@virchowkrause.com

2. 2 Potential tax exposure to IRA without planning Why Retirement Distribution Planning is Important

3. 3 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 Why Retirement Distribution Planning is Important

4. 4 Qualified Retirement Account vs. Non-Qualified Account Distributions Decision factors Size of accounts Size of accounts Investment mix / performance Investment mix / performance Marginal income tax bracket Marginal income tax bracket Time horizon Time horizon Why Retirement Distribution Planning is Important

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8. 8 Wills control probate assets Wills control probate assets Trusts control trust assets Trusts control trust assets IRAs and qualified retirement plans are controlled by beneficiary designation form or default provisions of contract IRAs and qualified retirement plans are controlled by beneficiary designation form or default provisions of contract Foundation Concepts

9. 9 IRAs are not taxed until distributed IRAs are not taxed until distributed Distributions must begin no later than one’s Required Beginning Date (RBD) Distributions must begin no later than one’s Required Beginning Date (RBD) IRA Elections are required after death IRA Elections are required after death Roth IRA conversions must be analyzed Roth IRA conversions must be analyzed Use of life insurance to prolong distributions Use of life insurance to prolong distributions

10. 10 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 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 To the extent that an IRA has non-deductible contributions, a portion of each IRA distribution will not be subject to tax Taxation of IRA Distributions Foundation Concepts

11. 11 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 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” 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 Taxation of IRA Distributions Foundation Concepts

12. 12 “Basis” Apportionment Formula - Example Taxation of IRA Distributions Foundation Concepts

13. 13 Foundation Concepts Generally, April 1 of the year following the year the owner turns age 70½ is the RBD Generally, April 1 of the year following the year the owner turns age 70½ is the RBD Once at RBD, required minimum distributions (RMD) must begin Once at RBD, required minimum distributions (RMD) must begin

14. 14 Example-Birthdate is October 18, 1937 Example-Birthdate is October 18, 1937 – Turn age 70 on October 18, 2007 – Turn age 70½ on April 18, 2008 – RBD -- April 1, 2009 Example-Birthdate is April 18, 1937 Example-Birthdate is April 18, 1937 – Turn age 70 on April 18, 2007 – Turn age 70½ on October 18, 2007 – RBD -- April 1, 2008 Required Beginning Date - Example Foundation Concepts

15. 15 RMDs are calculated based upon prior year ending account balance divided by life expectancy factor RMDs are calculated based upon prior year ending account balance divided by life expectancy factor Prior Year 12/31 Balance Life Expectancy Factor RMD = Foundation Concepts

16. 16 Life expectancy tables 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 Available where the spouse is the sole beneficiary and is greater than 10 years younger than the account owner Foundation Concepts

17. 17 Uniform Lifetime Table Foundation Concepts

18. 18 Single Life Table Foundation Concepts

19. 19 Post-death critical questions: Did the participant die before his RBD? Did the participant die before his RBD? Is the spouse the sole beneficiary? Is the spouse the sole beneficiary? Are there multiple beneficiaries? Are there multiple beneficiaries? Are all beneficiaries “designated beneficiaries”? Are all beneficiaries “designated beneficiaries”? What does the IRA/qualified plan allow? What does the IRA/qualified plan allow? Foundation Concepts

20. 20 Permissible “designated beneficiaries”: Permissible “designated beneficiaries”: –Individuals Spouse Spouse Child Child Grandchild Grandchild Parent Parent Brother/sister Brother/sister Niece/Nephew Niece/Nephew Neighbor Neighbor − Certain Trusts Foundation Concepts

21. 21 Death before age 70½ Death before age 70½ –Five-year rule –Exceptions to the five-year rule –Delayed distributions – spousal beneficiary –Spousal beneficiary – special trust problem Death after age 70½ Death after age 70½ –Life expectancy distributions if you have a designated beneficiary –Distributions must begin by December 31st of the year after death –Year of death distribution – life expectancy of IRA owner Foundation Concepts

22. 22 Life Expectancy Rule Life Expectancy Rule Five-Year Rule Death Before Required Beginning Date Death On or After Required Beginning Date Designated Beneficiary Non- Designated Beneficiary “Ghost” Life Expectancy Rule Foundation Concepts

23. 23 Critical dates: September 30 of the year following the year of death September 30 of the year following the year of death – Date at which the beneficiaries are identified October 31 of the year following the year of death October 31 of the year following the year of death –Date at which trust documentation (in the case where as trust is named as a designated beneficiary) must be filed December 31 of the year following the year of death December 31 of the year following the year of death –Date at which the first distribution must be made by each IRA beneficiary –Date at which separate shares must be created Foundation Concepts

24. 24 “Inherited” IRA Objective: Prolong IRA payments over longest possible period of time, thus increasing wealth to future generations

25. 25 “Inherited” IRA An IRA is treated as “inherited” if the individual for whose benefit the IRA is maintained acquired the IRA on account of the death of the original owner. An IRA is treated as “inherited” if the individual for whose benefit the IRA is maintained acquired the IRA on account of the death of the original owner. Under the tax law the IRA assets can be distributed based upon the life expectancy of the beneficiary. Under the tax law the IRA assets can be distributed based upon the life expectancy of the beneficiary.

26. 26 Two Strategies Two Strategies –Spousal Rollover –Inherited IRA Advantages Advantages –Rollover delays RMD until spouse’s own RBD –Inherited IRA provisions allow beneficiary’s life expectancy to be used for distributions after death of IRA owner “Inherited” IRA

27. 27 Beneficiary Designation Forms Beneficiary Designation Forms Tax Apportionment Tax Apportionment Irrevocable Life Insurance Trust (ILIT) Irrevocable Life Insurance Trust (ILIT) Key Issues in Making the “Inherited IRA” Work “Inherited” IRA

28. 28 Exception to Inherited IRA rules Exception to Inherited IRA rules Only available to surviving spouse Only available to surviving spouse Allows spouse to roll over assets received as beneficiary to a new IRA in his/her own name Allows spouse to roll over assets received as beneficiary to a new IRA in his/her own name Spouse’s age used to determine when required minimum distributions must begin Spouse’s age used to determine when required minimum distributions must begin Spouse may use the Uniform Lifetime Table to determine distributions Spouse may use the Uniform Lifetime Table to determine distributions Spousal Beneficiary - Rollover “Inherited” IRA

29. 29 Utilizes the exemption to the five year rule Utilizes the exemption to the five year rule Avoids IRA assets being subject to estate tax in spouse ’ s estate Avoids IRA assets being subject to estate tax in spouse ’ s estate Achieves “ Inherited IRA ” to the degree that distributions occur over life expectancy of the designated beneficiary Achieves “ Inherited IRA ” to the degree that distributions occur over life expectancy of the designated beneficiary Child / Grandchild Beneficiary “Inherited” IRA

30. 30 Life expectancy of child and/or grandchild determined in year after year of the IRA owner ’ s death by reference to the Single Life Table and then is reduced by a value of one each subsequent year Life expectancy of child and/or grandchild determined in year after year of the IRA owner ’ s death by reference to the Single Life Table and then is reduced by a value of one each subsequent year Child / Grandchild Beneficiary “Inherited” IRA

31. 31 Beginning in 2007, non-spousal beneficiaries (e.g. children, grandchildren, friends, etc.) are permitted to roll over a qualified retirement plan (e.g. 401(k)), via a trustee-to-trustee transfer, into an “inherited” IRA Beginning in 2007, non-spousal beneficiaries (e.g. children, grandchildren, friends, etc.) are permitted to roll over a qualified retirement plan (e.g. 401(k)), via a trustee-to-trustee transfer, into an “inherited” IRA “Designated beneficiary” trusts are also permitted to roll over qualified retirement plans to “inherited” IRAs “Designated beneficiary” trusts are also permitted to roll over qualified retirement plans to “inherited” IRAs Pension Protection Act of 2006 “Inherited” IRA

32. 32 Incorrect titling Incorrect titling Failure to take RMDs Failure to take RMDs Failure to utilize disclaimers when appropriate Failure to utilize disclaimers when appropriate Failure to analyze contingent beneficiaries when utilizing disclaimers Failure to analyze contingent beneficiaries when utilizing disclaimers Taking a lump-sum distribution Taking a lump-sum distribution Common Mistakes to Avoid “Inherited” IRA

33. 33 Spousal rollover before age 59 ½ Spousal rollover before age 59 ½ –Will cause pre-59 ½ distributions to be subject to the 10% early distribution penalty. –If no rollover occurred, pre-59 ½ distributions can be taken penalty free. Solution Solution –Do not perform spousal rollover until spouse reaches age 59 ½. Common Mistakes to Avoid “Inherited” IRA

34. 34 For non-spousal beneficiaries, it is critical to keep inherited IRA in the name of the deceased IRA owner. Example (Individual): “John Smith, deceased, IRA for the benefit of James Smith” Example (Trust): “John Smith, deceased, IRA for the benefit of James Smith as Trustee of the Smith Family Trust dated 1/1/2007.” “Inherited” IRA Common Mistakes to Avoid

35. 35 Benefits Benefits –Effectively shows the additional wealth generated by naming a qualified designated beneficiary of an IRA –Provides a framework as to how to structure the IRA Trust –Serves as a guide for post-mortem distributions “Inherited” IRA “Inherited” IRA Analysis – Case Study “Inherited” IRA Analysis – Case Study

36. 36 Scenarios Scenarios –Immediate distribution –IRA payable to non-qualified beneficiary (five-year rule) –IRA payable to surviving spouse (spousal rollover) –IRA payable to child “Inherited” IRA “Inherited” IRA Analysis – Case Study “Inherited” IRA Analysis – Case Study

37. 37 Assumptions Assumptions –IRA owner’s age - 68 –Spouse’s age – 67 –Child’s age – 35 –IRA balance - $500,000 –Brokerage account balance - $0 –Pre-tax growth rate – 8% –Ordinary income tax rate – 40% –Capital gains tax rate – 20% “Inherited” IRA Analysis – Case Study “Inherited” IRA Analysis – Case Study “Inherited” IRA

38. 38 “Inherited” IRA “Inherited” IRA Analysis – Case Study “Inherited” IRA Analysis – Case Study

39. 39 “Inherited” IRA “Inherited” IRA Analysis – Case Study “Inherited” IRA Analysis – Case Study

40. 40 “Inherited” IRA “Inherited” IRA Analysis – Case Study “Inherited” IRA Analysis – Case Study

41. 41 “Inherited” IRA “Inherited” IRA Analysis – Case Study “Inherited” IRA Analysis – Case Study

42. 42 “Inherited” IRA “Inherited” IRA Analysis – Case Study “Inherited” IRA Analysis – Case Study

43. 43 IRA distributions over the life expectancy of the oldest beneficiary Trust IRA Beneficiary Designation Form Spouse Children IRAs Payable to Trusts How an IRA is Payable to a Trust How an IRA is Payable to a Trust

44. 44 Spendthrift protection Spendthrift protection Creditor protection Creditor protection Divorce protection Divorce protection Special needs Special needs Investment management Investment management Estate planning Estate planning “Dead-hand” control “Dead-hand” control IRAs Payable to Trusts Benefits of Using a Trust Benefits of Using a Trust

45. 45 Trust tax rates Trust tax rates Legal and trustee fees Legal and trustee fees Income tax returns Income tax returns Greater complexity Greater complexity IRAs Payable to Trusts Disadvantages of Using a Trust Disadvantages of Using a Trust

46. 46 Disclaimer Planning Disclaimer must be “qualified.” I n writing I n writing Within 9 months Within 9 months No acceptance of the interest or any of its benefits, No acceptance of the interest or any of its benefits, Interest passes without any direction on the part of the person making the disclaimer Interest passes without any direction on the part of the person making the disclaimer

47. 47 Alex dies at age 70. Alex’s wife disclaims amount of Alex’s unified credit to bypass trust for benefit of herself and their children – Disclaimer must occur within nine months from date of death – Disclaimer must be served to the IRA custodian – Disclaimer must be fractional to avoid immediate income taxation Disclaimer Planning Example Example

48. 48 Roth IRAs 100% of growth is tax-exempt 100% of growth is tax-exempt No required minimum distributions at age 70½ No required minimum distributions at age 70½ –NOTE: Distributions from Roth IRAs cannot be used to fulfill the RMD from a traditional IRA $100,000 Modified Adjusted Gross Income (MAGI) limitation $100,000 Modified Adjusted Gross Income (MAGI) limitation RMDs on Inherited Roth IRAs RMDs on Inherited Roth IRAs Roth 401(k) plans Roth 401(k) plans

49. 49 Starting in 2010, the $100,000 Adjusted Gross Income (AGI) limitation no longer applies Starting in 2010, the $100,000 Adjusted Gross Income (AGI) limitation no longer applies –The tax incurred on a Roth IRA conversion in 2010 may be spread over the following two tax years (i.e. 2011 and 2012) Married Filing Separately taxpayers can convert to a Roth IRA Married Filing Separately taxpayers can convert to a Roth IRA Roth IRAs

50. 50 Convertible accounts Convertible accounts – Traditional IRAs – 401(k) plans (Starting in 2008) – Profit sharing plans (Starting in 2008) – 403(b) annuity plans (Starting in 2008) – 457 plans (Starting in 2008) Non-Convertible accounts Non-Convertible accounts –“Inherited” IRAs –Education IRAs Roth IRAs

51. 51 Basis Can be Withdrawn Tax-Free (FIFO Method) Basis Can be Withdrawn Tax-Free (FIFO Method) Distributions are not subject to income tax if they do not exceed aggregate contributions and/or conversions to the Roth IRA Distributions are not subject to income tax if they do not exceed aggregate contributions and/or conversions to the Roth IRA Withdrawals made within five years of conversion if owner under age 59½ and no other exception applies Withdrawals made within five years of conversion if owner under age 59½ and no other exception applies Five-year period independent of five-year period for qualified distribution Five-year period independent of five-year period for qualified distribution Taxation of Distributions Roth IRAs

52. 52 (1) Taxpayers have special favorable tax attributes including charitable deduction carry-forwards, investment tax credits, 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. (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. Roth IRAs Seven Reasons to Convert to Roth IRAs

53. 53 (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. (7) Because 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. Roth IRAs Seven Reasons to Convert to Roth IRAs

54. 54 The key to successful Roth IRA conversions is to keep as much of the conversion income as possible in the current marginal tax bracket 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 Roth IRAs Understanding the Mechanics

55. 55 10% tax bracket 15% tax bracket 25% tax bracket 28% tax bracket 33% tax bracket 35% tax bracket Current taxable income Target Roth IRA conversion amount Optimum Roth IRA conversion amount? Roth IRAs Understanding the Mechanics

56. 56 Roth IRAs Understanding the Mechanics Example 1 – Same Growth & Tax Rates

57. 57 Roth IRAs Understanding the Mechanics Example 2 – Same Tax Rates / Different Growth Rates

58. 58 Roth IRAs Understanding the Mechanics Example 3 – Different Growth & Tax Rates (Higher Tax Rate in Future Years)

59. 59 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 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 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 The tax year following the original conversion OR 30 days after the recharacterization 30 days after the recharacterization Roth IRAs Understanding the Mechanics

60. 60 Conversion PeriodRecharacterization Period 1/1/2007 – First day conversion can take place 2007 12/31/2007 – Last day conversion can take place 4/15/2008 – Normal filing date for 2007 tax return 10/15/2008 – Latest filing date for 2007 tax return / last day to recharacterize 2007 Roth IRA conversion 12/31/2008 2008 Roth IRAs Roth IRA Conversion Timetable

61. 61 Additional IRA Resources  Books: − “Life and Death Planning for Retirement Benefits” by Natalie Choate − “The Retirement Savings Time Bomb … and How to Defuse It” by Ed Slott − “Individual Retirement Account Answer Book” by Fleisher, Lippe and Levy  Websites: − www.ataxplan.com (Natalie Choate’s website) − www.wealthcounsel.com − www.IRAhelp.com  Training / CLE: − “Practice Building Bootcamp” (presented by Phil Kavesh) − WealthCounsel’s Two-Day IRA Seminar − “Sophisticated Planning and Drafting for IRA & Qualified Plan Distributions” (private two-day IRA seminar presented by Robert S. Keebler, CPA, MST)

62. 62  Training CDs: − “IRAs Payable to Trusts” (offered through WealthCounsel)  Software: − WealthDocs TM by WealthCounsel − Inherited IRA Analysis by Robert S. Keebler (offered through WealthCounsel)  Newsletters: − “Ed Slott’s IRA Advisor” − “Choate’s Notes” by Natalie Choate − “Employee Benefits and Retirement Planner Newsletter” by Leimberg Information Services Inc. (e-mail only) Additional IRA Resources