1. An Opportunity to Fund Retirement with a Roth IRA
Welcome.
Today, we will be discussing the rules for Roth IRAs and Roth IRA conversions. A lot has changed since the Roth IRA was introduced in the late 1990s, so we have a lot of information to cover.
An Opportunity to Fund Retirement with a Roth IRA
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2. Please note that this presentation has been designed to provide general information. Neither Pacific Life nor its representatives offer legal or tax advice. Clients should consult their attorneys and tax advisers as to the applicability of this information to their specific circumstances and for complete up-to-date information concerning federal and state tax law.
[Name of Financial Professional] and [Company] are not affiliated with Pacific Life or its affiliated companies.
Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state.
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3. Agenda Funding Distributions Planning
The rules for Roth IRAs are complex. Let’s start at the beginning, and that is getting money into (or funding) a Roth IRA. We will then discuss the rules for taking money out (the distribution rules) of the Roth IRA. Finally, we will discuss possible uses for Roth IRAs.
However, before discussing Roth IRA conversions, it's important to remember that your financial decisions should be based on your needs and circumstances. Consider the type of investment options available, fees and expenses, levels of service, taxes, and early withdrawal penalties, to name a few. Now, let's start by learning about Roth IRAs.

4. Roth IRAs Established 1/1/98 Governed by IRA rules, except:
No deductible contributions
Tax-free qualified distributions
Owner has no required distributions
The Roth IRA was established January 1, It is an individual retirement arrangement that, except as explained below, is subject to the rules that apply to a traditional IRA. It can be either an account (e.g., bank and mutual fund) or an annuity.
To be a Roth IRA, the account or annuity must be designated as a Roth IRA when it is set up. Unlike a traditional IRA, contributions to a Roth IRA cannot be deducted. Instead, qualified distributions are tax-free. Contributions can be made to a Roth IRA after age 70½, and no distributions are required during the Roth IRA owner’s lifetime.

5. Funding Contributions Conversions FOUR WAYS
Rollovers from Employer Plans
Rollovers from Roth 401(k)/403(b)
You may fund a Roth IRA in one of four ways by:
Making a regular contribution.
Converting a traditional IRA, SEP-IRA, or SIMPLE IRA (after a two-year wait from its first deposit).
Rolling over eligible rollover distributions from an employer-sponsored retirement plan.
Rolling over contributions from either a Roth 401(k) or Roth 403(b).
Let’s take a closer look at each funding method.

6. Contributions for 2016
$5,500 (or $6,500 if 50 or older by end of year)
Two requirements
Earned income at least equal to amount contributed
Below modified adjusted gross income (MAGI) thresholds
For 2016, you may contribute as much as $5,500 to a Roth IRA as a regular contribution. This amount is increased to $6,500 if you are 50 or older by the end of the year.
There are two requirements to make these contributions:
Earned income—that is, income you receive from personal services. Earned income must be at least equal to the amount contributed.
There is one exception to the earned income requirement; if you have earned income, you may make a regular contribution to a Roth IRA in the name of your spouse who does not have earned income.
Modified adjusted gross income (MAGI) cannot exceed certain limits. MAGI for Roth IRA purposes excludes some otherwise taxable income and includes certain deductions and exclusions. Notably, MAGI does not include:
Required minimum distributions (RMDs) from IRAs.
Roth conversions amounts.
Roth IRA rollovers from employer retirement plans.

7. Married Filing Jointly
MAGI Phase-Out Ranges
Married Filing Jointly
Single
$184,000 – $194,000
$117,000 – $132,000
For 2016, Roth IRA contribution limits are reduced in the following situations.
If you are married and file a joint return, the $5,500 and $6,500 Roth IRA contribution limits begin to phase out once MAGI reaches $184,000. You cannot make a Roth IRA contribution once your MAGI reaches $194,000.
If you are single, the MAGI phase-out limit begins at $117,000. You cannot contribute to a Roth IRA once your MAGI reaches $132,000.

8. What Is MAGI for Roth IRA?
Adjusted Gross Income (From IRS Form Series)
Roth Conversion Amounts
Roth Rollovers from Employer Plans
Certain Deductions & Exclusions
For example:
Traditional IRA
Qualified Bond Interest
Modified adjusted gross income (MAGI) for the purpose of Roth IRAs is the adjusted gross income from IRS Form 1040 series minus Roth conversion amounts and rollovers of qualified assets from employer plans to a Roth IRA plus certain deductions and exclusions, including, for example, deductions for traditional IRAs and qualified bond interest. For a complete list of certain deductions, please refer to IRS Publication 590-A.

9. Conversions
Rollover of assets from a traditional IRA, SEP-IRA or SIMPLE IRA to a Roth IRA
Two-year period must be met if converting a SIMPLE IRA
IRA owner pays taxes on pretax dollars
Additional 10% federal tax does not apply
A second way to fund your Roth IRA is through a conversion. A conversion is treated as a rollover of assets from your traditional IRA, SEP-IRA, or SIMPLE IRA. When converting a SIMPLE IRA to a Roth IRA, you must wait until a two-year waiting period has elapsed, which begins on the date that the first SIMPLE IRA contribution was deposited. You pay tax on all previously untaxed dollars that are converted, but the additional 10% federal tax does not apply.

10. Conversion Process Redesignation Direct rollover Indirect rollover
1099R reporting
Direct rollover
1099R reporting
No 60-day rule
Let’s take a closer look at the conversion process.
A conversion is generally treated as a rollover, regardless of the conversion method. Conversion methods include:
Redesignating a traditional IRA, SEP-IRA, or SIMPLE IRA as a Roth IRA by the same trustee.
A trustee-to-trustee transfer (or direct rollover).
A rollover to a Roth IRA within 60 days from the distribution (an indirect rollover). The amount rolled over to the Roth IRA is called a conversion contribution.
You must pay taxes on the conversion contribution in the year of the conversion, but the additional 10% federal tax on early distributions will not apply if the conversion contribution is properly and timely rolled over. For many, the long-term tax savings on earnings may outweigh this conversion tax. We will discuss when it may make sense for you to convert and pay the tax later in the presentation. At this time, let’s just note that any after-tax portion of your conversion contribution is not subject to tax. These after-tax amounts may include nondeductible traditional IRA contributions and after-tax money rolled over from an employer retirement plan.
Indirect rollover
1099R reporting
60-day rule applies
No 12-month restriction

11. All Conversions in 2010 and Onward
Convert traditional IRA to Roth IRA
IRA
Roth IRA
In 2010, the MAGI limitation on Roth IRA conversions disappeared, but it did NOT disappear for regular contributions.
The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) grants high-income earners a new opportunity regarding Roth IRA conversions. For tax years after 2009, TIPRA permits anyone, regardless of income level, to make Roth IRA conversions. The previously discussed MAGI threshold of $100,000 was eliminated.
No MAGI limits
Anyone can convert regardless of income level

12. Tax Changes for Top Income Earners
American Taxpayer Relief Act of 2012
Makes permanent for 2013 and beyond the lower Bush-era income-tax rates (for most individuals)
Top income-tax rate 39.6%
Year
Single
Married Filing Jointly
2013
$400,000
$450,000
2014
$406,750
$457,600
2015
$413,200
$464,850
2016
$415,050
$466,950
The American Taxpayer Relief Act of 2012 makes permanent for 2013 and beyond the lower Bush-era income- tax rates for all, except for taxpayers with taxable income more than $400,000 per year ($450,000 for married taxpayers filing jointly). Income above these levels will be taxed at a 39.6% rate.
For 2016, this top tax bracket begins at $415,050 per year for single taxpayers and $466,950 per year for married taxpayers filing jointly.

13. Conversion Caution Using assets outside of the IRA to pay tax:
Reduces taxable estate
Maximizes long-term tax deferral
Using IRA assets to pay tax may:
Subject some assets to income taxation
Incur an additional 10% federal tax
Let’s assume that you and your tax advisor have discussed the idea of converting your IRA to a Roth IRA and decided that it’s appropriate for you. An IRA holder is typically better off economically if conversion taxes are paid from assets other than the IRA. If an IRA holder younger than age 59½ withholds for taxes when converting to a Roth IRA, the amount withheld ultimately is not converted. As a result, income tax will be due on the amount withheld and the additional 10% federal tax will apply unless another penalty exception applies.

14. Converting IRAs After Age 70½
Required minimum distribution (RMD) amounts cannot be converted or rolled to a Roth IRA
IRA
2. Roth IRA
1. RMD
Distribute RMD amount from IRA
Convert balance to Roth IRA
If you are converting after age 70½, it’s important to note that you must first take your required minimum distribution (RMD) before you can convert. RMD amounts cannot be converted.

15. Converting from an Employer Plan
Beginning 1/1/08
Two sets of rules:
Conversion rules
Rollover rules of the plan from which rollover occurred
Beginning in 2008, you can roll over into a Roth IRA all or any part of an eligible rollover distribution from an employer’s qualified pension, profit-sharing, and stock bonus plan, including a 401(k) plan, and both a 403(b) plan and governmental 457(b) plan.
Eligible rollover distributions exclude certain types of distributions, such as required minimum distributions, hardship distributions, and distributions that are part of a series of substantially equal periodic payments (SEPPs).
As noted earlier, rollovers from either a SEP-IRA or SIMPLE IRA to a Roth IRA were allowed prior to 2008.
The rollover contribution must meet any rollover requirements that apply to the specific retirement plan from which the rollover occurred. A rollover contribution may be paid directly to a Roth IRA to avoid the 20% withholding that might otherwise apply.

16. Converting from an Employer Plan
IRS Notice
Description: The IRS issued notice that addresses the question “If my 401(k) has both pre-tax money and post-tax money, can I just take the post-tax money and convert to a Roth IRA tax-free?”
Impacted Areas: Qualified Retirement Plans, IRAs, and Roth IRAs
Changes: Clarifies the IRS’s prior position of applying the pro-rata rule
Effective Date: January 1, 2015
For individuals that have 401(k) plans with both pre- and post-tax assets (other than designated Roth accounts), there has always been the age-old question of whether they can roll the assets separately (the pre- tax to a traditional IRA and the post-tax to a Roth IRA as a tax-free conversion), or whether the pro-rata rule (where both pre- and post-tax assets would be distributed) applied. This question became even more prevalent after the Pension Protection Act of 2006 was passed, which, among other things, allowed direct Roth conversions from 401(k) plans.
Since then, a common question asked by recent retirees is “If I have pre-tax money and post-tax money in my employer plan, can I pick and choose by rolling the post-tax money directly into a Roth IRA?”
Well, the IRS has finally addressed this seemingly ever-present question when it issued IRS Notice , allowing individuals who wish to roll over their 401(k) funds and proactively allocate their pre-tax amounts to a traditional IRA, and the post-tax portion to a Roth IRA (via a tax-free conversion).
This option will allow one to benefit from:
Tax-savings on the conversion, and
Tax-free distributions from future “qualified distributions” on their Roth IRA.

17. Converting from an Employer Plan
IRS Notice
Details: Permits participants to direct the pre-tax and post-tax when disbursements are made to multiple destinations (e.g., to an IRA and Roth IRA) and not require application of the pro-rata rule
Keep in mind, not all 401(k) plans allow for post-tax contributions. So for this to be a viable strategy, one must first check with the plan administrator.
But assuming the plan does permit post-tax contributions, upon retirement (or otherwise leaving the company), IRS Notice states that in a situation where there is a direct rollover to two or more plans that are all scheduled to be made at once (in a single disbursement), the individual can select how the pre-tax amount is allocated among these plans. To make this selection, the individual must inform the plan administrator prior to the time of the direct rollovers.

18. Converting from an Employer Plan
Examples:
Pre-IRS Notice
Post-IRS Notice
$100, (k) Plan
$80,000 pre-tax
$20,000 post-tax
Receives pro-rata treatment when converting to Roth IRA
If you convert $20,000 into a Roth IRA, then $16,000 would be subject to tax
Can pick which bucket of assets (pre- tax or post-tax) to convert/distribute
If you convert $20,000 into a Roth IRA, then you can choose that all $20,000 come from the post-tax bucket and process a tax-free conversion
In other words, if an individual has a $100, (k) plan that contains $80,000 of pre-tax assets and $20,000 of post-tax assets, they can take the full $100,000, and now put the $20,000 of post-tax assets into a Roth IRA (tax-free conversion), and the remaining $80,000 of pre-tax assets and do a tax-free rollover into a traditional IRA. Whereas before IRS Notice , the pro-rata rule would’ve applied, and $16,000 of the $20,000 (80% or the same proportion of pre-tax versus post-tax money in the 401(k) plan) would be subject to taxation.

19. Who Let the Roth Out? Converting inherited accounts
Applies only to eligible rollover distributions from employer plans
May be rolled to an inherited Roth IRA
Distributions must be taken from a Roth IRA
Does it make sense to convert?
Two changes introduced by the Pension Protection Act of 2006 (PPA) have opened the door to Roth IRA conversions of inherited employer retirement plan accounts. The first change, discussed in the preceding slide, allows individuals to make a direct conversion from employer retirement plans to a Roth IRA. The second allows non-spousal beneficiaries of employer retirement plans to roll over these accounts into inherited IRAs. All plans must allow these non-spousal rollovers beginning in 2010 and thereafter.
These two changes were brought together in Notice , in which the Internal Revenue Service announced that a decedent's retirement account can be directly rolled over into a Roth IRA for a non-spousal beneficiary. The Roth IRA is treated as an inherited Roth IRA rather than the beneficiary's own Roth IRA. Thus, amounts must begin to be distributed to the beneficiary the year after the plan participant died, and the account generally must be liquidated over a beneficiary's remaining life expectancy. By comparison, a person is never required to receive a distribution from his or her own Roth IRA during his or her lifetime.
So, when might this make sense?

20. Are You Looking to Accelerate a Deduction?
Section 691(c) deduction
Itemized deduction for estate taxes paid
Conversion causes you to pay income taxes sooner, BUT also accelerates use of this deduction, potentially reducing tax bill in half
We will explore Roth conversions in greater detail at the end of the presentation. For now, let’s note that an opportunity may exist when the decedent’s estate was so large that it was subject to the federal estate tax. A beneficiary of retirement assets is entitled to claim an itemized deduction [known as “the Section 691(c) deduction”] for the federal estate tax that was paid on the retirement assets. Although it's usually advantageous to defer income, it can also be advantageous to accelerate tax deductions. By directly rolling over a retirement account into a Roth IRA, you can immediately claim the entire Section 691(c) deduction in the year of the conversion, effectively cutting the income tax rate almost in half. There are other situations in which a conversion could be beneficial, such as prepaying the income tax to reduce an estate’s size for a future estate tax liability.
According to the American Taxpayer Relief Act of 2012, the federal estate, gift, and generation skipping transfer (GST) tax exemption amounts are all $5,000,000 (indexed for inflation effective for tax years after 2011); the maximum estate, gift, and GST tax rates are 40%. The exemption amount for 2016 is $5,450,000.
According to the American Taxpayer Relief Act of 2012, the federal estate, gift, and generation- skipping transfer (GST) tax exemption amounts are all $5,000,000 (indexed for inflation effective for tax years after 2011); the maximum estate, gift, and GST tax rates are 40%. The exemption amount for 2016 is $5,450,000.

21. Conversion Do-Overs Recharacterization Reconversion (later of)
By tax return due date, including extensions (October 15)
Reconversion (later of)
Doing over the do-over
In year following year of conversion, or
30 days after recharacterization
A contribution made to one type of IRA may be treated as having been made to a different type IRA. This is known as a recharacterization. Both regular contributions (to either a traditional IRA or Roth IRA) and conversion contributions (to a Roth IRA) may be recharacterized. The deadline to recharacterize is the due date of the tax return for the year of the original contribution, including extensions; for most of us, this would be October 15. The year of the original regular contribution means the year to which the contribution relates, not the year the contribution was actually made.
When a contribution is switched to a different IRA according to these rules, the new IRA is treated as if it received the contribution in the first place. This rule may be especially helpful for undoing a Roth IRA conversion when the value of the account declines following the conversion, thereby avoiding having to pay income tax on an asset value that no longer exists.
An IRA owner who converts to a Roth IRA and then recharacterizes back to an IRA cannot "reconvert" before the later of:
The beginning of the following tax year from the prior conversion tax year,
The end of the 30-day period beginning on the day that the IRA owner transfers the Roth IRA to a traditional IRA via recharacterization

22. Do-Over Timeline 1 4/1/15 8/1/15 1/1/16 2 12/25/15 1/24/16 3 4/15/16
Scenario
Conversion
Recharacterization
Reconversion 1
4/1/15
8/1/15
1/1/16 2
12/25/15
1/24/16 3
4/15/16
5/15/16
This slide depicts timeline examples for recharacterizing and reconverting Roth IRA conversions.

23. Roth 401(k) and 403(b) Established 1/1/06
No MAGI limits for contributions
Required distributions
Tricky rollover rules
Finally, a rollover from a Roth 401(k) or Roth 403(b) may be made to a Roth IRA. These employer-sponsored retirement plan Roth accounts, known as designated Roth accounts (DRACs), were established January 1, 2006, and have become popular. The chief advantage of these accounts is the same as that of the Roth IRA: the ability to have investment earnings avoid income taxation. There are differences as well, two of which deserve mention here. Unlike Roth IRAs, DRACs have no MAGI limits for contributions. Also, these accounts do not escape the required minimum distribution rules for their owners as do Roth IRAs. Therefore, many individuals will want to roll over these accounts to a Roth IRA to avoid the distribution requirements. The rollover rules are tricky and will be discussed after the next section on Roth IRA distributions.

24. Roth IRA Distributions
Qualified
Nonqualified
Required (for beneficiaries)
Roth IRA distributions can be classified into two categories:
Qualified distributions.
Nonqualified distributions.
There are also required distributions for Roth IRA beneficiaries.

25. Qualified (Tax-Free) Distributions
Two requirements:
Five years since you established a Roth IRA
Distribution is made for one of the following reasons:
Age 59½ or older
Disability
Death of owner
First-time home buyer
A qualified distribution is any distribution that meets BOTH of the following requirements:
It is made after the five-year period beginning with the first taxable year for which a contribution was made to a Roth IRA.
The distribution is made for one of the following reasons:
On or after age 59½.
Because of disability.
To a beneficiary after the Roth IRA owner’s death.
To purchase a first home (up to the $10,000 lifetime limit).
With qualified distributions, withdrawals of earnings are both income-tax-free and penalty-tax-free.

26. Nonqualified Distributions
If you take a distribution but fail to meet requirements for a qualified distribution, then the distribution is made in the following order:
Regular contributions
Conversion and rollover contributions
Additional 10% federal tax if within five years
Earnings
Taxes and 10% if no exception
Failure to meet either the five-year rule or one of the other necessary triggers (age 59½, disability, death, or first-time home buyer) means that the distribution from the Roth IRA is not a qualified distribution. The portion of the distribution allocable to earnings may be subject to income tax, and a portion of the distribution may also be subject to the additional 10% federal tax.
There are ordering rules for nonqualified distributions. These distributions are ordered as follows:
Regular contributions.
Conversion and rollover contributions.
Earnings.
If a nonqualified distribution includes a conversion or rollover contribution and occurs within five years of the conversion or rollover, then the additional 10% federal tax generally applies to that portion of the distribution. This additional tax only applies in the year of the conversion and the following four taxable years. For example, if you made a conversion in 2016, the additional tax won't apply to any distribution on or after January 1, Also, the additional tax doesn't apply if you are older than age 59½, or if you can fit within any of the exceptions to the early distribution rules. In addition, this additional tax generally applies to the earnings portion of the nonqualified distribution. The traditional IRA exceptions to the early distribution tax are available to avoid this tax in either scenario. These exceptions include age 59½, death, disability, and 72(t) payments, among others.

27. Tricky Rollover Rules Roth 401(k)/403(b) Roth IRA
New Roth IRA, then new five-year period
Existing Roth IRA, then rollover tracks Roth IRA five-year period
Roth 401(k)/403(b)
Roth IRA
As mentioned earlier, distributions from a Roth 401(k) or Roth 403(b) account can generally be rolled over to a Roth IRA. There’s an important hitch in these rules, however: the years of participation in the designated Roth account (DRAC) do not count toward the five-year requirement to take tax-free distributions from the Roth IRA. Therefore, if rolling to a new Roth IRA, a new five-year period begins in order to take a qualified distribution from the Roth IRA. The good news is that when rolling to an existing Roth IRA, the rollover takes on the existing five-year period of the Roth IRA. Opening a Roth IRA in anticipation of a DRAC rollover offers this advantage.

28. Qualified Distribution Nonqualified Distribution
Tricky Rollover Rules
Qualified Distribution
Nonqualified Distribution
Rollover amount treated as basis in Roth IRA
Rollover amount divided into basis and earnings in Roth IRA
Designated Roth accounts (DRACs) also have their own set of rules for qualified distributions. A qualified distribution is any distribution that meets BOTH of the following requirements:
It is made after the five-year period beginning with the first taxable year for which a contribution was made to the DRAC.
The distribution is made for one of the following reasons:
On or after age 59½.
Because of disability.
To a beneficiary after death of the DRAC owner.
If a qualified distribution is rolled from a DRAC to a Roth IRA, then the entire amount rolled over is included as basis in the Roth IRA. However, the holding period from the DRAC still does not transfer to the Roth IRA.
If a nonqualified distribution is rolled over, then the rollover amount is divided into basis and earnings in the Roth IRA.

29. DRAC Rollover Example
Amount includes $65,000 after-tax contributions and $35,000 earnings
Qualified distribution
$100,000 included as Roth IRA basis
Nonqualified distribution
Basis and earnings track to the Roth IRA
Here’s an example. Over a period of six years, $65,000 is contributed to a DRAC. The DRAC owner then leaves the employer and rolls the entire account, worth $100,000, to an existing Roth IRA. If the owner is at least age 59½ when the DRAC distribution occurs, the amount being rolled is a qualified distribution, and the entire $100,000 is included in the basis of the Roth IRA. That means the owner can withdraw up to $100,000 from the Roth IRA income-tax-free at any time. If the owner is younger than age 59½ when the DRAC distribution occurs, the amount being rolled is a nonqualified distribution. In that case, the owner would get $65,000 of basis in the Roth IRA and would be able to withdraw up to $65,000 tax-free at any time.
If, before this rollover, the DRAC owner did not have a Roth IRA, the owner will have to wait five years before he or she can take a tax-free withdrawal of any earnings in the account. With the qualified distribution, this means any earnings on the $100,000 rolled over. With the nonqualified distribution, this includes the $35,000 rolled over.

30. You May Wish to Get Started
In anticipation of a DRAC rollover, establish a Roth IRA now with either:
Contributory Roth IRA
Nondeductible IRA that is then converted to Roth IRA
BUT beware of the aggregation rule
To avoid having to begin a new five-year holding period, you should consider establishing a Roth IRA now. This may be done by regular contributions or, if income is too high to make a regular contribution, by making a contribution to an IRA that is nondeductible and then converting that IRA to a Roth IRA. Beginning in 2010, anyone can convert regardless of level of income. It is important to note that converted IRAs containing after- tax contributions trigger the aggregation rule so that all IRAs are treated as one IRA.

31. Required Distributions at Death
Death before required beginning date (RBD) rules
Designated beneficiary (DB)
May use five-year rule or life expectancy
No DB
Must use five-year rule
For Roth IRA owners, there is no required beginning date (RBD). While the owner is alive, he or she is not required to take distributions during his or her lifetime. What this means at the owner’s death is that he or she is treated as having died before his or her RBD (again, because there is none).
Death before RBD introduces the five-year rule for distributions. Generally, the entire interest in the Roth IRA must be distributed by the end of the fifth calendar year after the year of the owner's death unless the account is payable to a designated beneficiary (an individual or certain trusts) over the life or life expectancy of the designated beneficiary. If the five-year rule applies, no distribution is required for any year before that fifth year.
A designated beneficiary is able to set up an inherited Roth IRA and take payments over his or her life expectancy using life expectancy factors provided by the IRS. These single life expectancy factors can be found in IRS Publication 590-B, Appendix B, Table I (Single Life Expectancy). The inherited Roth IRA account must include the name of the decedent. The designated beneficiary is able to name a beneficiary under the inherited Roth IRA. However, if the designated beneficiary dies prematurely, the named beneficiary can only continue payments over the remaining life expectancy of the original (now deceased) designated beneficiary. The new beneficiary cannot re-determine the life expectancy over his or her own life expectancy.

32. Nonqualified Death Distributions
Roth IRA owner dies before end of five-year period beginning with:
First taxable year for which a contribution was made
Year of conversion contribution from traditional IRA or rollover
A distribution to a beneficiary may not be a qualified distribution, in which case it is generally includable in the beneficiary's gross income in the same manner it would have been included in the owner’s income, had it been distributed to the IRA owner when he or she was alive. A distribution would not be qualified if the owner of a Roth IRA dies before the end of:
The five-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for the owner’s benefit.
The five-year period starting with the year of a conversion contribution from a traditional IRA or a rollover from a qualified retirement plan to a Roth IRA.

33. Qualified Death Distributions
Spousal rollover
Earlier of spouse’s or decedent’s five-year holding period
All others
Decedent’s five-year holding period
The five-year holding period for qualified distributions by beneficiaries is determined as follows:
[Read slide.]

34. Who’s Your Beneficiary?
Designated beneficiary (DB)
Spouse
Non-spousal individual
Qualifying trusts
Non-DB—estates, charities, etc.
The rules for determining required minimum distributions (RMDs) for beneficiaries depend on what “type” of beneficiary is named. Designated beneficiaries are individuals and beneficiaries of certain qualifying trusts. The rules for these beneficiaries generally allow them to take distributions over their life expectancies. All other beneficiaries must use the five-year rule.

35. Spouse Lump sum Five-year rule Inherited Roth IRA Rollover
Annuitization
Spouse’s recalculated life expectancy
Delayed until owner would have reached age 70½
Rollover
The distribution options for spousal beneficiaries are:
Lump sum.
Five-year rule.
Inherited Roth IRA: The spouse can either annuitize or take systematic withdrawals. With systematic withdrawals, the spouse can take payments over his or her recalculated life expectancy. These distributions may be delayed until the decedent would have reached age 70½.
Rollover: The spouse may treat the Roth IRA as his or her own, in which case no distributions are required.

36. Non-Spousal Individual
Lump sum
Five-year rule
Inherited Roth IRA
Annuitization
Life expectancy of beneficiary
The distribution options for non-spousal individual beneficiaries are:
Lump sum.
Five-year rule.
Inherited Roth IRA: The beneficiary can either annuitize or take systematic withdrawals. With systematic withdrawals, the beneficiary can take payments over his or her non-recalculated life expectancy. These distributions must begin before the end of the calendar year following the year of the owner’s death. Some providers may not accommodate this line of business.

37. Qualifying Trusts and Designated Beneficiaries (DBs)
Valid under state law
Irrevocable at death
Identifiable beneficiaries
Trust documentation by 10/31 of the year following the year of death
A trust beneficiary may qualify as a designated beneficiary (DB) if the following requirements, as outlined in Treasury Regulation Section 1.401(a)(9)-4, are met.
[Read slide.]

38. Qualifying Trusts Lump sum Five-year rule
Trust-owned inherited Roth IRA
Life expectancy of oldest trust beneficiary
The distribution rules for qualifying trusts are:
Lump sum.
Five-year rule.
Trust-owned inherited Roth IRA: The trust can take systematic withdrawals. With systematic withdrawals, the oldest trust beneficiary is used to set the distribution period; it is his or her life expectancy that is used. Again, these distributions must begin before the end of the calendar year following the year of the owner’s death.

39. Non-Designated Beneficiaries
Lump Sum
Five-Year Payout
The options for beneficiaries who are not designated beneficiaries (such as a charity or estate) are more restrictive and include a five-year payout or lump sum.

40. Important Dates for the Year AFTER Death
9/30
10/31
12/31
DB Determination
Trust Document
Separate Accounts
These dates become critical in this planning on:
9/30 the year after the owner’s death is the designated beneficiary date.
10/31 the year after the owner’s death is the date that a copy of the trust document or certified list of all beneficiaries, including contingent and remainderman, must be supplied to the IRA provider
12/31 the year after the owner’s death is the separate account date.

41. Case Study Son Granddaughter
$750,000 Roth IRA 75-year-old owner dies having named two beneficiaries
Age 50 Begins Distributions
Son
Age 25 Begins Distributions
Granddaughter
Let’s look at a case study that illustrates some of these planning opportunities.
[Read slide.]

42. Opportunity for Separate Accounts
Separate accounts established by 12/31 of the year following the year of the owner’s death
Son has 34.2 years during which to take distributions
Granddaughter has 58.2 years during which to take distributions
If separate accounts are established for each beneficiary by 12/31 of the year following the year of the owner’s death, then each beneficiary is allowed to use his or her own life expectancy to determine the distribution period. The granddaughter's distribution period is greater by 24 years.

43. Thanks, but No Thanks Disclaimers Son executes a qualified disclaimer
His sons, ages 22 and 20, may inherit his interest
Separate accounts established by 12/31 deadline
22-year-old son’s distribution period is 61.1 years
20-year-old son’s distribution period is 63 years
Disclaimers offer another way to maximize tax deferral. If the son executes a qualified disclaimer, then he is treated as having predeceased the Roth IRA owner. If the beneficiary form has his interest passing to his children, then his children are treated as DBs for RMD distribution purposes. With separate accounts, each son is allowed to take distributions over his individual life expectancy.
It’s important to verify with the IRA custodian or the Individual Retirement Account rules regarding their per stirpes and/or per capita death benefit payout procedures.
Disclaimers should only be done after you have consulted with an estate planning attorney.

44. Managing the 3.8% Net Investment Income Tax (NIIT)
Beginning in 2013, the Health Care Reform Act created a new 3.8% federal tax on net investment income
3.8% federal tax will apply to the LESSER of:
Net investment income
The excess of MAGI thresholds–$200,000 for single taxpayers; $250,000 for married taxpayers filing a joint tax return
Effective January 1, 2013, the Health Care Reform Act created a 3.8% net investment income tax (also called the Medicare tax) that may impact certain higher-income individuals. Taxpayers are subject to the 3.8% Medicare tax when specific modified adjusted gross income (MAGI) thresholds are exceeded ($200,000 for single filers and $250,000 for married filing jointly), and they have net investment income (unearned income received from taxable interest and dividends, capital gains, annuity income, passive rental income, and royalties). These threshold amounts are not indexed for inflation.
The key to limiting one’s exposure to the Medicare tax is managing the following two factors considered when applying this federal tax:
Modified adjusted gross income (MAGI)
Net investment income
There are some options taxpayers could consider, depending on what component (MAGI or net investment income) they are trying to manage. Because qualified distributions from a Roth IRA are tax-free, a taxpayer might consider converting IRA accounts to a Roth IRA to avoid future required minimum distributions (from the IRA) that could put him or her over the MAGI limit. Keep in mind that if a taxpayer is converting to a Roth IRA, the taxable conversion is included in his or her MAGI in the year of the conversion and can result in the thresholds being exceeded.

45. Roth IRA Advantages Potential for earnings without tax
No required lifetime distributions
Not included in definition of income for taxation of Social Security benefits
Management of NIIT
Roth IRAs offer the following advantages:
The potential for untaxed investment earnings through qualified distributions.
The ability to avoid required distributions during the owner’s lifetime.
An alternative form of income while collecting Social Security benefits that is not included (currently) in the definition of provisional income for Social Security income taxation purposes.
Potential to manage 3.8% federal net investment income tax for higher-income taxpayers.

46. Roth IRA Disadvantages
No deduction for contributions
Pay tax on conversions
Roth IRAs also have some disadvantages. They are funded with after-tax money, and income tax must be paid when converting pretax money.

47. Additional Considerations
Before moving assets from qualified plan to a Roth IRA consider:
Investment options (may vary)
Fees and expenses (may vary)
Services offered (may differ)
Loan access (Roth IRA does not allow Loans)
Creditor protection (may differ)
FINRA Regulatory Notice provides some items for consideration before moving assets from a qualified plan to a Roth IRA.
An individual should always compare the investment options available in their qualified plan versus a Roth IRA. An investor who is satisfied by the low-cost institutional funds available in some plans may not regard an IRA’s broader array of investments as an important factor. Any difference in fees and expenses should also be taken into account. Some employers may pay for some or all of a qualified plan's administrative expenses while all of an IRA’s account fees would be paid by the IRA owner.
Services offered can also vary. Always evaluate the level of service offered by a qualified plan administrator versus any suggested IRA provider.
A qualified plan may also permit loans, while IRAs do not.
Lastly, creditor protection may also vary when assets are housed in a qualified plan versus an IRA. Generally, plan assets have unlimited protection from creditors under federal law, while IRA assets are protected in bankruptcy proceedings only. Outside of bankruptcy, IRAs may be afforded more or less protection depending on applicable state law. Always confirm with legal and tax advisors in your state if these issues arise.
Keep in mind that this is not an exhaustive list and other factors not discussed here may come into play when determining whether to move assets from a qualified plan to an IRA.

48. Do the Math
Analysis is required, because everyone’s situation is different
Conversion calculators
Tools to help analyze a Roth IRA conversion
Assumptions include:
When distributions will be taken
What tax rates will be at the time of distributions
Earnings during the interim
So when does it make sense to go the Roth IRA route? That depends on an individual’s personal situation and also on what assumptions are made about the future. How long before the money is withdrawn? What will tax rates be at the time of distribution? What earnings are anticipated in the interim? Analysis is required, but the bottom line is that many individuals may be better off with the Roth IRA. The chief reasons are that Roth IRAs can provide clients with tax-free distributions in retirement—providing an opportunity to effectively manage their assets for retirement and legacy planning.

49. Possible Opportunities
You don’t need your traditional IRA for income and wish to leave it to someone
You need your IRA to fund a trust
You are willing to pay income tax on conversion to reduce your estate (and thus your estate tax)
You have charitable deduction carryovers, investment tax credits, etc., that will offset income on conversion
Finally, there are certain situations in which a Roth IRA may make sense.
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50. In Summary Better understanding of funding Roth IRAs Roth conversions
Distributions and beneficiary options
Decisions should be reviewed with your tax and legal advisors before making any changes
Individuals have more ways to move retirement assets into a Roth IRA today than ever before. Hopefully, our discussion today has given each of you a better understanding of the general rules and concepts of the Roth IRA and converting to a Roth IRA. If you think converting to a Roth IRA is right for you, you should discuss this strategy with your tax and legal advisors.
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51. This material is not intended to be used, nor can it be used by any taxpayer, for the purpose of avoiding U.S. federal, state, or local tax penalties. This material is written to support the promotion or marketing of the transaction(s) or matter(s) addressed by this material. Pacific Life, its affiliates, their distributors, and respective representatives do not provide tax, accounting, or legal advice. Any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor or attorney.

52. Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity Company. Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the products it issues.
Pacific Life Insurance Company
P.O. Box 2378
Omaha, NE
(800)
In New York, Pacific Life & Annuity Company
P.O. Box 2829
Omaha, NE
(800)