Roth IRA Conversions 11/1/2011. Note. Cautions you need to know. Deb Repya, J.D, CLU, ChFC Vice President, Advanced Markets

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1 Allianz Life Insurance Company of North America Roth IRA Conversions Cautions you need to know Deb Repya, J.D, CLU, ChFC Vice President, Advanced Markets ENT 974 (R 6/2011) Our Mission: Allianz Life Insurance Company of North America is the trusted authority in insured retirement solutions for consumers working with a financial professional. Note This presentation is designed to provide general information on the subjects covered. Pursuant to IRS Circular 230, it is not, however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Please note that Allianz Life Insurance Company of North America, its affiliated companies, and their representatives and employees do not give legal or tax advice. Please keep in mind that producers must be currently registered with a broker/dealer to recommend the liquidation of funds held in securities products, including those within an IRA or other retirement plan, for the purchase of an annuity. Please remember that converting your client s traditional IRA to a Roth IRA is a taxable event and could result in additional impacts to their personal tax situation, including the taxation of current Social Security benefit payments. Be sure to have your client consult with a qualified tax advisor before making any decisions regarding their IRA. It is generally preferable that your clients have funds to pay the taxes due upon conversion from funds outside of their IRA. If they elect to take a distribution from their IRA to pay the conversion taxes, please keep in mind the potential consequences, such as an assessment of product surrender charges or additional Internal Revenue Service penalties for premature distributions. This presentation is for educational purposes only. 2 1

2 Agenda 1. Increasing taxable income 2. Estimated tax payments 3. Taxation in retirement 4. Converting after tax IRAs 5. Withdrawl order 6. Entire interest value 3 1 Increasing taxableincome 4 2

3 Increasing taxable income Increased income may affect many tax issues Increased marginal rates Increased taxes on Social Security income Medical and miscellaneous deductions may be reduced (part of Schedule A, but treated separately) Exemptions and Schedule A deductions have, at times, been phased out based on income May push taxpayer into Alternative Minimum Tax (AMT) situation Increased Medicare Part B Premium Please keep in mind that producers must be currently registered with a broker/dealer to recommend the liquidation of funds held in securities products, including those within an IRA or other retirement plan, for the purchase of an annuity. 5 Increasing taxable income Monthly Part B premiums for 2011 Individuals with a MAGI of $85,000 or less Married couples with a MAGI of $170, or less Individuals with a MAGI above $85,000 up to $107,000 Married couples with a MAGI above $170,000 up to $214,000 Individuals with a MAGI above $107,000 up to $160,000 Married couples with a MAGI above $214,000 up to $320,000 Individuals with a MAGI above $160,000 up to $214,000 Married couples with a MAGI above $320,000 up to $428,000 Individuals with a MAGI above $214,000 Married couples with a MAGI above $428,000 Income related monthly adjustment amount $0.00 Modified adjust gross income (MAGI) Total monthly premium amount $ standard premium $46.10 $ $ $ $ $ $ $ If you are married and lived with your spouse at some time during the taxable year, but filed a separate tax return, the following chart will apply: Income related monthly adjustment amount Individuals with a MAGI of $85,000 or less $0.00 Total monthly premium amount $ standard premium Individuals with a MAGI above $85,000 up to $129,000 $ $ Individuals with a MAGI above $129,000 $ $ part b premium amounts for person with higher income levels. 3

4 Increasing taxable income Monthly Part B premiums for 2011 Individuals with a MAGI of $85,000 or less Married couples with a MAGI of $170, or less Individuals with a MAGI above $85,000 up to $107,000 Married couples with a MAGI above $170,000 up to $214,000 Individuals with a MAGI above $107,000 up to $160,000 Married couples with a MAGI above $214,000 up to $320,000 Individuals with a MAGI above $160,000 up to $214,000 Married couples with a MAGI above $320,000 up to $428,000 Individuals with a MAGI above $214,000 Married couples with a MAGI above $428,000 Income related monthly adjustment amount $0.00 Make sure you calculate the extra cost Modified adjust gross income (MAGI) Total monthly premium amount $ standard premium $46.10 $ $ $ A $44,000 conversion that moves the Medicare premium from $115.40/month to $161.50/month is an additional cost of 1.26% of the converted amount. $ $ $ $ If you are married and lived with your spouse at some time during the taxable year, but filed a separate tax return, the following chart will apply: A $50,000conversion that moves the Medicare premium Income related monthly from $161.50/month to $230.70/month adjustment is amount an additional cost of 1.66% of the converted amount. Individuals with a MAGI of $85,000 or less $0.00 Total monthly premium amount $ standard premium Individuals with a MAGI above $85,000 up to $129,000 $ $ Individuals with a MAGI above $129,000 $ $ part b premium amounts for person with higher income levels. 2 Estimated tax payments 8 4

5 Estimated tax payments Roth IRA conversions may require estimated tax payments so your clients don t end up with a penalty for underpayment of taxes. If your clients did a Roth conversion in 2010 and are splitting the conversion income between 2011 and 2012, remember to deposit the attributable taxes appropriately. Encourage your clients to work with their CPA or tax advisor on estimated tax payments and the exceptions to the payment requirements. 9 3 Taxation in retirement 10 5

6 Taxation in retirement Be cautious when converting just before retirement. Retirement can change the dynamics of one s tax scenario, resulting in a lower marginal tax bracket No Social Security/Medicare tax to pay No saving for retirement Increased deductions for those age 65 or over A maximum of 85% of Social Security is taxed 11 Taxation in retirement 2010 John & Mary age 60 Pre retirement income: John $ 86,750 Mary 86, ,500 SS/Medicare 1 13, (k) 17,350 Fed income tax 26,730 Excess income $116,147 The 401(k) contributions tib ti were made in the 28% marginal tax bracket This is the amount John and Mary need to replace in retirement 1 During 2011 the employee share of SS withholding has been reduced from 6.2% to 4.2%. Since this reduction is most likely temporary, we have illustrated 6.2% SS % Medicare withholding. This is a hypothetical example and does not represent actual clients. Please note the that 85% of the Social Security amount used in the illustration above is taxable. 12 6

7 Taxation in retirement John & Mary age 60 John & Mary age 66 Pre retirement income: Retirement income: John $ 86,750 Rti Retirement tplans $116,713 Mary 86,750 Social Security 20, , ,713 SS/Medicare 1 13,273 SS/Medicare 0 401(k) 17, (k) 0 Fed income tax 26,730 Fed income tax 20,566 Excess income $116,147 Excess income $116,147 The 401(k) contributions tib ti were made in the 28% marginal tax bracket In this scenario the excess income has been replaced and they are $24,487 under the 28% tax bracket 1 During 2011 the employee share of SS withholding has been reduced from 6.2% to 4.2%. Since this reduction is most likely temporary, we have illustrated 6.2% SS % Medicare withholding. This is a hypothetical example and does not represent actual clients. Please note the that 85% of the Social Security amount used in the illustration above is taxable. 4 Converting after taxiras 14 7

8 Converting after tax IRAs IRA 1 $300,000 IRA 2 After tax $100,000 Untaxed All untaxed Please keep in mind that producers must be currently registered with a broker/dealer to recommend the liquidation of funds held in securities products, including those within an IRA or other retirement plan, for the purchase of an annuity. Encourage your clients to consult with a qualified tax advisor. This example is shown for educational purposes only. 15 Converting after tax IRAs After tax $100,000 IRA 1 $300,000 IRA 2 Can we convert just this IRA? Untaxed All untaxed Please keep in mind that producers must be currently registered with a broker/dealer to recommend the liquidation of funds held in securities products, including those within an IRA or other retirement plan, for the purchase of an annuity. Encourage your clients to consult with a qualified tax advisor. This example is shown for educational purposes only. 16 8

9 Converting after tax IRAs IRA 1$500,000 aggregated value $300,000 IRA 2 After tax $100,000 After Tax $100,000 Untaxed $400,000 Untaxed All untaxed 20% of any conversion will be considered after tax dollars This example is shown for educational purposes only. 17 Converting after tax IRAs After tax $100,000 IRA 1 $300,000 Untaxed IRA 2 While you can convert this IRA, 80% of its value will be taxable income. All untaxed Please keep in mind that producers must be currently registered with a broker/dealer to recommend the liquidation of funds held in securities products, including those within an IRA or other retirement plan, for the purchase of an annuity. Encourage your clients to consult with a qualified tax advisor. This example is shown for educational purposes only. 18 9

10 5 Withdrawal order 19 Withdrawal order Withdrawals from Roth IRAs can be complicated. Make sure your clients seek tax advice from a competent professional. Order of withdrawal: 1. Regular contributions and certain designated Roth IRA account rollover assets 2. Conversion contributions and retirement plan rollover assets (excluding designated Roth IRA account rollover assets) 1 3. Earnings and certain designated Roth IRA account rollover assets 1 Special rules apply if any of the conversion or rollover was nontaxable at the time of the transaction and if there has been more than one conversion or rollover. This example is shown for educational purposes only

11 Withdrawal order Example Roth IRA #1 Roth IRA #2 $20,000 earnings $25,000 earnings $25,000 contribution $50,000 conversion amount This example is shown for illustrative and educational purposes only. 21 Withdrawal order Example Roth IRA #1 Roth IRA #2 $20,000 earnings $25,000 earnings $25,000 contribution $50,000 conversion amount This example is shown for illustrative and educational purposes only

12 Withdrawal order Example No 10% penalty if at least 5 years from conversion or if exception applies $45,000 earnings $50,000 conversion amount No income tax or 10% penalty if the 5 year requirement is met, and meets one of: age 59½, death, disability, first time time homebuyer up to $10,000 and owner is at least age 59½ (exception can apply to the 10% penalty) $25,000 contribution Always available income tax free and penalty free This example is shown for illustrative and educational purposes only Entire interest value 24 12

13 Entire interest value When doing a conversion of a traditional IRA to a Roth IRA, the owner may pay income tax on an amount greater than the contract value. Please keep in mind that producers must be currently registered with a broker/dealer to recommend the liquidation of fund held in securities products, including those within an IRA or other retirement plan, for the purchase of an annuity. 25 Summary 1. Increasing taxable income 2. Estimated tax payments 3. Taxation in retirement 4. Converting after tax IRAs 5. Withdrawl order 6. Entire interest value 26 13

14 Allianz Life Insurance Company of North America (Allianz) This presentation is designed to provide general information on the subjects covered. Pursuant to IRS Circular 230, it is not, however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Please note that Allianz Life Insurance Company of North America, its affiliated companies, and their representatives and employees do not give legal or tax advice. Encourage your clients to consult with their tax advisor or attorney. Guarantees are backed by the financial strength and claims paying ability of Allianz Life Insurance Company of North America. Not FDIC insured May lose value No bank or credit union guarantee Not a deposit Not insured by any federal government agency or NCUA/NCUSIF Products are issued by Allianz Life Insurance Company of North America, 5701 Golden Hills Drive, Minneapolis, MN Thank you. Any questions? 28 14

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