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The Power of RothRevolutionized for 2010
This material is not intended to replace the advice of a qualified attorney, tax advisor, investment professional or insurance agent. Before making any financial commitment regarding the issues discussed here, consult with the appropriate professional advisor.
Not FDIC insured May lose value No bank guarantee
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The Roth Conversion -Wall Street Journal, December 29, 2009
Roth IRAs in the News…
5 Reasons to Convert to a Roth IRA
-SmartMoney, September 15, 2009
How Will You Pay for a Roth Conversion?
-Time Magazine, January 8, 2010
New Rules Ease Roth Conversion, but Benefits Vary
-NYTimes, January 9, 2010You Can’t Take It with You, but You Can Convert
-Barron’s, January 18, 2010
Should You Roth?-Business Week, October 22, 2009
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Agenda
The Roth Advantage
Converting to Roth in 2010
Roth and Preparing for the Future
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IRAs Can Provide Flexibility to Meet Multiple Objectives
RetirementPlanning
Estate Planning
Tax Planning
InvestmentPlanning
IRA
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Not All IRAs Are Created EqualTraditional IRA and Roth IRA — what is the difference?Feature Traditional IRA Roth IRA
Maximum Annual Contribution
(50 or older)
$5,000
($6,000)
$5,000
($6,000)
Income Restrictions (2010 Modified AGI)
None$120,000 (single)
$177,000 (joint)
Who May Establish Age limit 70 ½ No age limit
Mandatory Withdrawals at 70½ (Required Minimum Distributions—RMDs)
YesNo (not for original
shareowner)
When do you pay taxesTax-deferred growth
(taxes paid on withdrawals)
Tax-free growth, Tax-free income1 (taxes
already paid on contributions)
1 A qualified Roth distribution is a withdrawal from a Roth IRA account that has been established for at least 5 years AND the account holder is 59½, disabled or passed away.
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The Roth Advantage Combine tax-free compounding growth with tax-free income
Roth contributions made with “after-tax” dollars
Contributions can be withdrawn tax-free — at anytime
Earnings can be withdrawn tax and penalty-free when:
– Roth account established for 5 or more years
AND
– Attained 59½, death or disabled
Non-qualified distributions of earnings would be subject to income tax and, if made prior toage 59½, may be subject to an additional 10% federal tax penalty.
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Expected Tax Rate in Retirement
Traditional IRA is more
beneficial
Roth IRA is more
beneficial
Higher (Pay taxes today at the lower rate)
Same Indifferent
Lower (Pay taxes later at the lower rate)
When Is Roth Beneficial?Conventional wisdom is to pay taxes at the lowest rate
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The Roth AdvantageWays to invest in Roth IRA
Contributions
– Up to $5,000 ($6,000 if age 50 or older)
– Income < $120,000 for single filers ($177,000 for married filing joint)
Rollovers: Directly from 401(k), 403(b), pensions, profit sharing plans, etc., to Roth IRA
– If allowed by plan
– Became available with the passage of the Pension Protection Act (PPA) of 2006
Conversions: Change Traditional IRA to Roth IRA
– No income or age limits
– Conversion may be full or partial
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Agenda
The Roth Advantage
Converting to Roth in 2010
Roth and Preparing for the Future
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Why Consider Roth Conversion Now?Reasons to take another look at Roth
Income limits on conversion lifted in 2010
Tax rates scheduled to increase in 2011
– Recent stimulus bills may put further pressure on future tax rates
Spread tax liability
Flexibility regardless of market conditions
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Roth Now Available to Everyone: Income Limits Lifted for ConversionsBut income limits for Roth IRA contributions remain in effect
Before 2010 2010 and Beyond
Modified Adjusted Gross Income (AGI)* limitation
Under $100,000 household income
No restrictions
Marital Status limitation
Married, filing separately not permitted
No restrictions
*Modified Adjusted Gross Income. See IRS Publication 590 which contains a worksheet for determining MAGI for Roth conversion purposes.
Income limits for Roth contributions remain in effect and are $120,000 AGI for single filer; $177,000 AGI for married filing jointly
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Taxes for Conversions in 2010 — Choose When to Pay Your TaxesSpreading taxes not available for conversions in 2011 and beyond
2010 2011 2012 2013
Convert anytime during year
Declare 100% of taxable conversion amount as income on 2010 tax return
Due 4/15/11*
Convert anytime during year
Declare 50% of taxable conversion amount as income on 2011 tax return
Due 4/15/12*
Declare 50% of taxable conversion amount as income on 2012 tax return
Due 4/15/13*
Option A
Option B
*April 15th is the tax filing due date for most individuals. Check with your tax advisor if you are unsure.
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Making The Decision — Impact of Future Tax RatesTax rates scheduled to increase in 2011
Most tax brackets will see an increase of 10% or more in taxes beginning in 2011
2010 2011
Highest 35% 39.6%
5th Bracket 33% 36%
4th Bracket 28% 31%
3rd Bracket 25% 28%
2nd Bracket 15% 15%
Lowest Bracket 10% 15%
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IRS Allows You to Undo (Recharacterize) the ConversionTurn Roth IRA back to Traditional IRA without tax or penalty; can reconvert at later date
Ability to “undo” conversion (recharacterize) if market goes down
– Treats the conversion as if it never happened
– “Undoes” the corresponding tax liability
– Recharacterize until October 15 of year following the conversion
“Redo” conversion (reconvert) at later of:
– January 1 of year following conversion
– If conversion happens after January of year following conversion, can reconvert 30 days after recharacterization
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Example: Recharacterization after Market Drop Recharacterization allows you to undo a conversion if the market drops
Traditional IRA account value $100,000
Will owe $25,000 in taxes
Converts to Roth IRA
Traditional IRA account valuewould have been $80,000
Would only owe $20,000 in taxes
Can Mary lower the tax bill on her conversion if her Roth IRA account value is lower?
Mary has a $100,000 Traditional IRA and is in 25% tax bracket
If Mary had waited
6 months to convert…
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“Undo” (Recharacterize) the ConversionUndo conversion if market declines — can “redo” conversion later
Mary can “undo” her conversion if the market value drops
The steps are:
* Recharacterization, or the ability to “undo” a conversion must take place by October 15th of the year following the conversion. The later of 30 days must pass after recharacterization (or after January 1st of following year) before a new conversion can take place.
Recharacterize back to Traditional IRA (undo the conversion)
This will restore the Traditional IRA with $80,000 (value of Traditional IRA on date of recharacterization)
– No taxes on the recharacterized amount
– No taxes on the initial conversion
Can “Redo” conversion at later date
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Agenda
The Roth Advantage
Converting to Roth in 2010
Roth and Preparing for the Future
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How Can Roth Help Prepare for the Future?
Help maximize Social Security benefits
Provide flexibility in retirement income
Create a greater legacy for future generations
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Your Social Security Benefits Roth IRA distributions may help maximize your Social Security Benefits
Did you know that Social Security Benefits may be taxed if Adjusted Gross Income (AGI) exceeds certain
thresholds?
$32,000 for married couples filing jointly
$25,000 for single filers
Examples of income sources that would be included in income calculations
Employment or rental income
Traditional IRA distributions
Qualified Roth IRA distributions1 are not included in income calculations
1 A qualified Roth distribution is a withdrawal from a Roth IRA account that has been established for at least 5 years AND the account holder is 59½, disabled or passed away.
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What’s Your Retirement Income Strategy?With Roth IRAs, you have access to tax-free income when you choose
Traditional IRAs require that the account owner must begin taking Required Minimum Distributions (RMDs) at age 70½
– Amount determined by age
– RMDs from Traditional IRAs are generally taxable
RMDs are not required for Roth IRAs for the original account owner and spouse*
– As a Roth IRA owner, you choose when withdrawals begin and how much you want to take
– Don’t need to take withdrawals??—Pass it on!
*If surviving spouse assumes Roth IRA upon inheritance
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Building a LegacyRoth IRA is one of the most tax-efficient assets you can leave your heirs
No RMDs required, which can erode inheritance
Tax-free compounded growth over time
Tax-free income for your heirs*
*A qualified Roth distribution is a withdrawal from a Roth IRA account that has been established for at least 5 years AND the account holder is 59½, disabled or passed away.
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Case Study: Traditional IRA vs. Roth IRA — Impact of RMD on Legacy Building Husband and wife want to maximize legacy, avoid RMDs
Father is 67 years old, Mother is 65 years old
Son is currently 41 years old, granddaughter is currently 11 years old
Father has a Traditional IRA worth $200,000
Father and mother are in the 25% tax bracket
They want to draw retirement income from other sources, will not need RMD income
Goal: Want to leave as much money to son as possible
Is it better for the father to convert to Roth IRA or stay with Traditional IRA?
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Case Study: Traditional IRA vs. Roth IRA — Impact of RMD onLegacy Building Assume conversion taxes paid from Traditional IRA
If father converts to the Roth IRA, he will pay $50,000 in taxes(25% x $200,000)
Assuming he pays taxes from Traditional IRA, he starts the Roth IRA with $150,000
Additional Assumptions
– Tax rate remains at 25% across all lives
– Assumed annual growth rate is 6% across all lives
Note: It is usually most advantageous to pay taxes from outside sources. This example illustrates the worst case scenario of using your Traditional IRA to pay taxes on the conversion. Please consult a qualified tax advisor.
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Case Study: Traditional IRA vs Roth IRA — Impact of RMD on Legacy BuildingRMD in Traditional IRA works against father’s legacy goal
Traditional IRA Roth IRA
Father’s beginning account value
$200,000 pre-tax $150,000 after-tax
Number of years of RMD(father’s life)
6 years None
Total RMDs during his lifetime
$42,000 after-tax None
Account value at father’s death (age 75)
$250,000 pre-tax $240,000 after-tax
RMD begins when father is 70½; readjusted each year based on his life expectancyAssume 6% growth rate and 25% tax rate
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Case Study: Traditional IRA vs. Roth IRA—Impact of RMD on Legacy Building RMD in Traditional IRA works against surviving spouse’s legacy goal
Traditional IRA Roth IRA
Wife’s beginning account value (age 73)
$250,000 pre-tax $240,000 after-tax
Number of years of RMD (mother’s life)
9 None
Total RMDs during her lifetime
$85,000 after-tax None
Account value at mother’s death(age 81)
$270,000 pre-tax $405,000 after-tax
Wife does not cash out IRA. She assumes the IRA as her own and continues RMDs based on her life expectancy (not her husband’s). RMDs are readjusted each year based on her life expectancy.Assume 6% growth rate and 25% tax rate
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Case Study: Traditional IRA vs Roth IRA — Impact on RMD onLegacy BuildingSon begins “Stretch”; Roth IRA generates substantial legacy advantage over Traditional IRA
Traditional IRA Roth IRA
Son’s beginning account value (age 59)
$270,000 pre-tax $405,000 after-tax
Number of years of RMD (son’s life)
20 20
Total RMDs during his lifetime
$285,000 after-tax $570,000 after-tax
Account value at son’s death (age 78)
$205,000 pre-tax $300,000 after-tax
Initial RMD based on son’s life expectancy; future RMDs adjusted by a factor of one each year. Assume 6% growth rate and 25% tax rate
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Case Study: Traditional IRA vs. Roth IRA — Impact on RMDLegacy BuildingRoth continues to provide Granddaughter nearly double the after-tax income
Traditional IRA Roth IRA
Granddaughter’s beginning account value (age 48)
$205,000 pre-tax $300,000 after-tax
Number of years of continued RMD payments (based on son’s –her father’s- life expectancy)
6 6
Total RMDs during her lifetime $180,000 after-tax*
$350,000 after-tax
Initial RMD based on son’s life expectancy; future RMDs adjusted by a factor of one each year.Granddaughter takes over RMDs based on her father’s life expectancy; forced to cash out after year 6. Granddaughter’s age doesn’t factor into this example.Assume 6% growth rate and 25% tax rate* Pre-tax distributions were $235,000
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Case Study: Traditional IRA vs. Roth IRA — Impact of RMD on Legacy BuildingRoth provides more after-tax income to heirs
$285,000
$570,000
$350,000
$180,000
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
Traditional IRA (after-tax) Roth IRA
Son Granddaughter
$920,000
$465,000
Assumptions: 6% assumed growth rate, 25% taxes across all lives; RMD for Traditional IRA begins with the parent’s lives; RMD for Roth IRA begins when the beneficiary inherits the account. The RMD during the parents’ lives on the Traditional IRA plays a large role in reducing the account balance that the heirs inherit.
23285-02-0210| February 2010 | Page 30
Case Study: Traditional IRA Stretch vs. Roth IRA Stretch – Cumulative TaxesRoth IRA may provide multi-generational tax optimization
$14,000$50,000$28,000
$96,000
$60,000
$0
$50,000
$100,000
$150,000
$200,000
Traditional IRA Roth IRA
Father's Life Mother's Life Son's Life Granddaughter's Life
$50,000
$198,000
$156,000
Assumptions: 6% assumed growth rate, 25% taxes across all lives; RMD for Traditional IRA begins with the parent’s lives; RMD for Roth IRA begins when the beneficiary inherits the account. The RMD during the parents’ lives on the Traditional IRA plays a large role in reducing the account balance that the heirs inherit.
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Tax ConsiderationsAvoid unexpected taxes for conversions
Conversion may bring you up and over your next tax bracket
10% early withdrawal penalty
– Waived on converted assets
– Not waived on amounts taken from Traditional IRA to pay conversion taxes
Convergent Retirement Plan Solutions, LLC©
State tax considerations
Conversion must be completed by end of calendar year (unlike contributions which can be made until April 15)
Conversion may be full or partial
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Questions
???
Is a Roth Conversion Right for You?Talk to your financial advisor
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Neither Pioneer, nor its representatives are legal or tax advisors. In addition, Pioneer does not provide advice or recommendations. The investments you choose should correspond to your financial needs, goals, and risk tolerance. For assistance in determining your financial situation, please consult an investment professional.
Before investing, consider the product’s investment objectives, risks, charges and expenses. Contact your advisor or Pioneer Investments for a prospectus containing this information. Read it carefully.
Investment Suitability Is Important
Securities offered through Pioneer Funds Distributor, Inc. Underwriter of Pioneer mutual funds, Member SIPC
60 State StreetBoston, Massachusetts
www.pioneerinvestments.com2010 Pioneer Investments
23285-02-0210| February 2010 | Page 34
About Pioneer
Founded in 1928
Pioneer Fund - Third oldest mutual fund
Diversified fund family including Pioneer IbbotsonAsset Allocation Series
Serve over 1 million shareholders
23285-02-0210| February 2010 | Page 36
Appendix
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Over Half of Traditional IRA Contributions Are Nondeductible Nondeductible Contributions Impact Taxable Amount of Roth Conversions
Traditional IRA may consist of:
– Tax-deferred earnings
– Previously deducted contributions
• Available when income below $56,000 for single filers, $89,000 for married couples filing jointly
• Received income tax deduction for contributions
• Owe income taxes on withdrawals or conversions
– Nondeductible contributions
• Required when income exceeds $56,000 for single filers, $89,000 for married couples filing jointly
• Did not receive income tax deduction for contributions
• Do not owe income taxes on contributions when withdrawn or converted
For a full discussion of nondeductible contributions please see Publication 590.
Source: Accumulation and Distribution of Individual Retirement Arrangements, 2004 ; IRS Statistics of Income Bulletin, Spring 2008
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Conversion with Nondeductible IRA ContributionsIRS Considers All of a Client’s Traditional IRAs to Be “One Big IRA”
All withdrawals and conversions represent proportionate share of tax-deferred earnings, previously deducted contributions and nondeductible contributions
% of conversion that is non-taxable is:
Total non-deductible contributions
Total December 31 balance all Traditional, SEP or SIMPLE IRAs
in year of conversion
x amount converted
A nondeductible contribution is a contribution to a Traditional IRA that does not qualify for tax deductions. Assuming the client or spouse participates inan employer’s retirement plan, the 2010 deduction for traditional IRA contributions begin to phase out at $56,000 for single filers, $89,000 for married couples filing jointly.
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Case Study: Conversion with Non-Deductible ContributionsCalculating Conversion Taxes When Nondeductible ContributionsAre Comingled
John has $30,000 Traditional IRA
– $25,000 is nondeductible contributions
– $5,000 is earnings
If he converts, what amount will he owe taxes on?
A nondeductible contribution is a contribution to a Traditional IRA that does not qualify for tax deductions. Assuming the client or spouse participates inan employer’s retirement plan, the 2010 deduction for traditional IRA contributions begin to phase out at $56,000 for single filers, $89,000 for married couples filing jointly.
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Case Study: Conversion with Non-Deductible Contributions Pro-Rata Rule Used to Calculate Conversion Taxes
Earnings
$5,000 (17% of IRA)
Non-Deductible
Contributions
$25,000(83% of IRA)
$30,000 Traditional IRA
Of the $30,000 that is converted, John will only pay taxes on $5,000
Assumes John only has Traditional IRA
23285-02-0210| February 2010 | Page 41
Case Study: Conversion with Rollover & Non-Deductible Contributions Rollovers Dilute Tax-free Benefits of Converting Non-Deductible Contributions
Assume John will be retiring or changing jobs in thenext year
401(k) balance on December 31 is $220,000
John also has the Traditional IRA from the previous example worth $30,000
– $25,000 consists of non-deductible contributions
John wants to convert $30,000
John converts after the rollover, what will be the tax consequence?
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Non-Deductible Contributions Effect Taxable Portion of ConversionStep 1: Determine non-deductible portion of Traditional IRA
Rollovers and
Earnings
$225,000(90% of IRA)
Non-Deductible
Contributions
$25,000(10% of IRA)
$250,000 Traditional IRA$220,000 Rollover from 401(k)
$30,000 from prior IRA
90% of Traditional IRA is pre-tax
Assumes client only has Traditional IRA
23285-02-0210| February 2010 | Page 43
Non-Deductible Contributions Lower the Taxes Owed on Conversion
Step 2: Pre-tax portion is same percent as taxable portion of conversion
Taxable$27,000
(90% of conversion)
Non-Taxable$3,000
(10% of conversion)
$30,000 Partial Roth Conversion
90% of IRA is pre-tax
Of the $30,000 that is converted, now John pays taxes on $27,000
23285-02-0210| February 2010 | Page 44
Case Study: Conversion with Rollover & Non-Deductible ContributionCase Study Takeaway: tax cost of conversion increases if Johnconverts after a rollover
If John converts before the rollover, he pays taxes on $5,000
Total taxes based on 25% tax rate = $1,250
If John converts after the rollover, he pays taxes on $27,000
Total taxes based on 25% tax rate = $6,750
23285-02-0210| February 2010 | Page 45
Case Study: Conversion with Non-Deductible ContributionsGoal: Careful Preparation Can Reduce Conversion Taxes
Reduce taxable amount of conversion by:
Waiting to roll over retirement plans from former employers until year after conversion
If rollover already occurred, roll back to employer sponsored retirement plan, if permitted, by December 31 in year of conversion
23285-02-0210| February 2010 | Page 46
Form 8606 Should be Filed for Non-deductible Contributions Form 8606: Instructions to Calculate Taxable Conversion Amount
