1. Individual Retirement Arrangements (IRAs) Traditional IRA and Roth IRA Ying Lin, Jane Fu, Anna ’ s SMD Base training only

2. The History of IRA The Employee Retirement Income Security Act (ERISA) of 1974 created as a traditional (IRA) The Roth IRA resulted from The Taxpayer Relief Act enacted in 1997

3. IRA Options Traditional IRA Roth IRA Deductible Plus Tax Defer (Fully taxable upon distribution) Non-deductible Tax Defer Only (Only Earnings Are Taxable upon distribution) Non-deductible Tax Defer Plus Tax-free on qualified distribution

4. Traditional IRA Who can contribute to a traditional IRA (deductible or non-deductible)? –Anyone younger than 70 ½ –Anyone who has earned income or is the spouse of someone with earned income (even a child can have an IRA account if the child has earned income)

5. IRAs Contribution Limits Tax Year Regular Contribution Limit Additional Catch-up Limit (age 50 or over) 2007$4,000$1,000 2008$5,000$1,000 2009 and after $5,000$1,000 Beginning 2009, contributions are indexed for Cost-Of-Living Adjustments (COLA), increases in $500 increments Catch-up contributions are not indexed for inflation.

6. Traditional IRA: Tax Deduction If neither you nor your spouse is an active participant in an Employer-Maintained (or Sponsored) Retirement Plan (EMRP,such as 401k or 403b,etc.),your contribution are fully deductible, regardless of MAGI (Modified Adjusted Gross Income) If you or your spouse is an active participant in an EMRP, your tax deduction depends on your (and your spouse’s) MAGI and your tax filing status Remember 3 factors: 1. Active participant in EMRP? 2. Tax filing status 3. Income (MAGI)

7. MAGI Limits for Deductible Contributions to a Traditional IRA Joint Filers* (both participants in EMRP) Single Filers (Covered in EMRP) Tax Year: MAGI Phase-out Range: 2009$89,000~$109,000$55,000~$65,000 2010$89,000~$109,000$56,000~$66,000 2011$90,000~$110,000$56,000~$66,000 *If married filing jointly, only one of the couple is active participant in EMRP, or no one is covered in EMRP, phase-out range for the non-participant is $169,000~$179,000 (combined MAGI -2011). * For married filing separately, at least one of the couple is active participant in EMRP, and live together, the phase-out range for both of the couple is $0~$10,000. But if the couple is not living together, phase out range is the same as “Single Filers” for each of the couple.

8. 2011 Traditional IRA MAGI Deduction Limits (If NOT Covered by a Retirement Plan at Work) Filing Status Full Deduction Phase-OutNo Deduction Single, head of household No Limit Married filing jointly (spouse not covered) No Limit Married filing jointly (spouse covered) $169,000 or less $169,000 - $179,000 $179,000 or more Married filing separately (spouse covered) Less than $10,000 $10,000 or more

9. Non-Deductible Traditional IRA make sense only for high-income taxpayers who participate in an EMRP and exceed the Roth IRA income limits. The Tax Increase Prevention and Reconciliation Act (TIPRA) that became law on May 17, 2006 allows all taxpayers, even those making more than $100,000, to convert their traditional IRAs to Roth accounts as long as they do so in 2010. Notes: Good News for High-Income Taxpayers:

10. When can withdrawals be made for Traditional IRA? After 59 ½ for whatever purpose without penalty,but income tax Prior to 59 ½ withdrawals are subject to federal penalties (10%) plus income tax unless money is used for –after death to beneficiary –upon permanent disability –Qualified higher education expenses –First time home purchase (up to $10,000 lifetime limit) –Medical expenses > than 7.5% of AGI –Other special cases (see IRS Publication 590) Federal law requires that you begin withdrawals by April 1 st of the year after you reach 70 ½

11. Roth IRA (2011) Who can contribute to a Roth IRA? Anyone who has earned income or is the spouse of an earned income worker (subject to MAGI limits) Tax filing status: (Income) MAGI Phase-Out Range: Married filing jointly $169,000 ~$179,000 Single/or Head of Household $107,000~$122,000 Married filing separately $0~$10,000

12. What are the benefits of a Roth IRA? Can contribute even if you are over age 70 ½ and no required withdrawing in lifetime Can contribute even if an participant of EMRP tax-deferredContributions and Earnings grow tax-deferred Contributions can always be withdrawn tax-free and penalty-free Tax-free and penalty-free withdrawing on Earnings for Qualified DistributionsTax-free and penalty-free withdrawing on Earnings for Qualified Distributions

13. Roth IRA Qualified Distributions (on Earnings) 1)Your fist regular Roth IRA account (or your first IRA-to-Roth conversion account, whichever earlier) has been set up and maintained for more than 5 years* AND 2)As described by any one of the following: - after age 59 ½ -after death to beneficiary -upon permanent disability - First time home purchase (up to $10,000 lifetime limit) - Other special cases (see IRS publication 590) * Separate 5-year holding time period for each IRA-To-Roth conversion. See IRS Publication 590 for details.

14. Roth IRA withdraw (distribution) Ordering Rules: Distributions (qualified or non-qualified) from you Roth IRAs are Treated as made in the following order: 1)From regular Roth contributions (without tax and penalty); 2)From conversion contributions on FIFO basis (based on conversion time) and in following order: a) taxable portion (from deductible contributions of IRA, tax, but may have penalty if conversion<5 years) b) non-taxable portion (from non-deductible contribution of IRA, tax-free and penalty-free) 3)From earnings on all Roth IRA assets (tax and penalty may apply for non-qualified distributions) (Note: all distributions for each year are considered together, and all of your Roth IRA Accounts are treated as one account.)

15. Tax treatment of all possible Roth IRA distributions

16. Roth Conversion Can convert Traditional IRA to Roth IRA –If MAGI is less than $100,000 (single or married filing jointly), But there is an exception after 2010. –You pay taxes on traditional IRA & then move funds to Roth IRA –Must pay taxes with other funds, otherwise subject to 10% penalty –The money accumulates tax free: –5 year rule applies –59 ½ rule applies

17. Direct transfer form trustee-to-trustee is the most simple & safest way to convert 60 day roll-over rule –Approximately 20% of funds are withheld when you receive distribution (taxes) –You will have to replace withheld money with other funds –10% early withdrawal penalty applies if you use IRA funds to pay income taxes at conversion

18. Converting from Traditional IRA to a Roth IRA may be a smart choice for you if: You think your tax bracket will stay the same or go up after you retire You plan to wait at least five years before withdrawing money You can pay the taxes from other savings It won’t move you into a higher tax bracket in the year you convert You want to avoid a required minimum distribution from your retirement savings after 70 ½ You wish to pass a portion of your estate to beneficiaries free of income taxes

19. IRA and Roth IRA Investing Alternatives Investment options are many and varied. Permissible investments for IRAs include stocks, bonds, mutual funds, real estate, bank account, but cannot be collectibles. Can also invest in Annuities,but not life insurance.

20. Mutual funds company we use Fidelity American Funds Transamerica IDEX MFS ING Etc.

21. Thank you! See you at the top!