1 EXPLORING YOUR IRA OPTIONS Whichever you choose traditional or Roth investing in an IRA is a good step toward saving for retirement.
3 EXPLORING YOUR IRA OPTIONS Planning for retirement can be a challenging process, requiring the guidance of a financial advisor and investment vehicles such as individual retirement arrangements (IRAs), more commonly known as individual retirement accounts. This brochure is designed to help you understand how using IRAs can help you plan for a more secure retirement by explaining: Why taking personal responsibility for planning your financial future using vehicles such as IRAs is more important than ever. How the features and benefits of the two main types of IRAs traditional and Roth differ, and how you can determine which may be right for addressing your retirement needs. Why you may want to consider taking advantage of special IRS rules for rolling over or converting your existing traditional IRA to a Roth IRA in How IRA contribution and distribution rules vary depending on factors such as your income level, tax-filing status, age and the type of IRA you select. How working with a financial advisor can help ensure you attain the most benefit from your IRA. 1
4 HELPING TO BUILD A FINANCIALLY SECURE RETIREMENT Successfully building a secure financial future with an adequate retirement nest egg is dramatically different from what it was for previous generations. Many baby boomers will likely not be able to rely on the same types of pension plans their parents enjoyed. Similarly, those younger than the baby boomers have their own concerns primarily, whether or not Social Security will provide any income by the time they retire. Despite these possible changes, one thing is certain: Taking personal responsibility in planning your financial future is more important than ever. The amount of retirement savings you accumulate will have a direct impact on whether you ll be able to maintain your standard of living in retirement. In other words, it s largely up to you. Selecting appropriate savings alternatives is key to helping you accomplish your goals and ensuring the wealth you ve worked for provides the retirement you ve envisioned. Fortunately, there are now more options to save for retirement than ever. To help you make the most of your retirement plan, Raymond James offers the individual retirement arrangement (IRA) to help meet your objectives. The Cost of Waiting $700, , , , , , ,000 0 $611,729 $561,416 $394,772 Age 35 Age 36 Age 40 TIME IS MONEY This chart illustrates the potential cost of delaying asset accumulation for retirement. Waiting one year costs more than $50,000, while delaying five years means losing out on more than $200,000. This is a hypothetical example and is not intended to represent the performance of any specific security or portfolio. Withdrawals are subject to income taxes and, if withdrawn prior to age 59½, may also be subject to a 10% federal penalty. $5,000 contribution each year until age 65, 8% rate of return 2
6 CONTRIBUTING TO A TRADITIONAL IRA An individual retirement arrangement (IRA) allows individuals to direct income toward investments that can grow tax-deferred. Contributions to a traditional IRA may be tax-deductible depending on the taxpayer s income, tax-filing status and other factors. An individual may contribute up to $5,500 a year to a traditional IRA. You can make this contribution as long as you have earned income and are under age 70½. If you are not covered by an employer sponsored plan, this contribution is deductible no matter how much income you earn. If you are covered by an employer sponsored plan, your adjusted growth income (AGI) will determine if this contribution is deductible. This contribution is aggregated with your Roth contribution and, between the two, no more than $5,500 can be contributed ($6,500 if you are over 50). A nonworking spouse or spouse who is not covered by an employer sponsored plan may also contribute, assuming the working spouse has enough earned income to cover both contributions. Contribution Limits for a Traditional IRA Calendar Year Contribution Limit 2013 $5, $5, Indexed for inflation thereafter Catch-Up Provisions People who reach the age of 50 before the end of the taxable year may contribute an additional $1,000 for 2014 if they make their contributions by April 15, Calendar Year Contribution Limit 2013 $1, $1, Indexed for inflation thereafter DEDUCTIBILITY LIMITS FOR TRADITIONAL IRAS Once taxpayers who are covered by workplace plans attain certain AGI levels, the deductibility of their IRAs is gradually phased out until, eventually, no deduction is allowed. If you are single, the new threshold for full deductibility has increased to $60,000 for The deduction is incrementally reduced for AGIs above $60,000, reaching zero at $70,000. 4
7 EXPLORING YOUR IRA OPTIONS If you are married and filing jointly, the deductibility threshold for 2014 is an AGI of $96,000. The deductibility is phased out with AGIs between $96,000 and $116,000. Traditional IRA Deductibility Schedule Tax-Filing Status Single Married Filing Jointly Married Filing Separately Noncovered Spouse Year Deduction Threshold $59,000 $60,000 $95,000 $96,000 Deduction Phase-Out Level $69,000 $70,000 $115,000 $116,000 All $0 $10, $178,000 $181,000 $188,000 $191,000 Modified adjusted gross income (MAGI) is a measure used to determine if your IRA contribution is deductible. MAGI is calculated as your adjusted gross income from taxable sources and other items such as foreign income, foreign housing deductions, student loan deductions, IRA contribution deductions and deductions for higher education costs. The Power of Tax Deferral $611,729 TAX-DEFERRED ACCOUNT = $611,729 $700,000 TAXABLE ACCOUNT = $419, , , , , , , Tax- Deferred Account / Tax-Free Account 15 Taxable Account 20 $419, Assumptions: $5,000 contribution per year for 30 years at 8%; 25% tax rate This is a hypothetical example and is not intended to represent the performance of any specific security or portfolio. Withdrawals are subject to income taxes and, if withdrawn prior to age 59½, may also be subject to a 10% federal penalty. Rollovers Today, there is greater portability between the various retirement savings alternatives and IRAs than ever before. Although previously prohibited, assets distributed from a government 457 plan can now be rolled into an IRA. Additionally, after-tax contributions made to a qualified retirement plan may be rolled into a traditional or Roth IRA. Finally, amounts distributed to an IRA from a qualified plan, 457 plan or 403(b) arrangement may be moved into one of these plan types, regardless of whether the original distribution was made from a similar plan. 5
8 CONTRIBUTING TO A ROTH IRA An individual may contribute up to $5,500 a year to a Roth IRA (less any contribution made to a traditional IRA for that year). This nondeductible contribution is available to single individuals with earned incomes and AGIs of less than $114,000, or to married individuals filing joint returns with modified AGIs of less than $181,000. For single filers, the allowed contribution is phased out for AGIs between $114,000 and $129,000. For married individuals, the allowed contribution is phased out for AGIs between $181,000 and $191,000. No contribution is allowed if an individual is married and files separately, unless the AGI is less than $10,000. Contribution Limits for a Roth IRA The contribution limits and eligibility to participate in a Roth IRA are shown below. Calendar Year Roth IRA Deductibility Schedule Contribution Limit 2013 $5, $5, Indexed for inflation thereafter Tax-Filing Status Single Married Filing Jointly Married Filing Separately Year Deduction Threshold $112,000 $114,000 $178,000 $181,000 Deduction Phase-Out Level $127,000 $129,000 $188,000 $191,000 All $0 $10,000 In a Roth IRA, contributions are made after-tax. The account grows tax-deferred and qualified distributions* are tax-free. Similar to other retirement plan accounts, certain nonqualified distributions from a Roth IRA may be subject to tax and a penalty upon withdrawal. Catch-Up Provisions People who reach the age of 50 before the end of the taxable year may contribute an additional $1,000 for 2014 if they make their contributions by April 15, Calendar Year Contribution Limit 2013 $1, $1, Indexed for inflation thereafter * Unless certain criteria are met, Roth IRA owners must be 59 ½ or older and must have held the IRA for five years before taxfree withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. 6
9 EXPLORING YOUR IRA OPTIONS ROLLOVER OR CONVERSION OF AN EXISTING IRA Distributions from a traditional IRA or employer sponsored retirement plan may be rolled over or converted to a Roth IRA, and the distribution amount is treated as ordinary income.* In 2010, the $100,000 AGI limit for conversions was eliminated. Conversions in 2014 will require all the taxes to be paid in full the following tax year. Remember, while the income limit for conversion is eliminated, the income limits for contributions remain intact, although periodically indexed. In addition, a distribution from a traditional IRA being rolled over or converted into a Roth IRA is not subject to the 10% premature withdrawal penalty tax imposed on withdrawals from traditional IRAs before age 59½. ROLLING OVER OR CONVERTING A TRADITIONAL IRA TO A ROTH IRA WHO SHOULD CONSIDER THIS STRATEGY? The answer depends on your financial situation. A number of factors should be considered with the help of your tax advisor, including: Can you pay the taxes due on the distribution from sources other than your IRA? To what extent is your traditional IRA funded with nondeductible contributions? What is your tax bracket? What is your age? If you are being taxed at a lower rate and have many years to grow the Roth IRA, the implications of tapping your account to pay the tax bill will be offset by years of tax-free earnings and, ultimately, tax-free withdrawals. Are you concerned about leaving tax-free money to heirs? Are you approaching the mandatory distribution age of 70½? A partial rollover could potentially reduce future tax bills. Can you leave the money in the account for at least five years and until you reach age 59½? If not, the earnings will be taxable, even if you are older than 59½, and there may be a 10% penalty for withdrawal if you are under 59½. Consider this Example Carl and Lisa, both 42, are evaluating the pros and cons of the Roth IRA from the standpoint of net spendable income in retirement and/or net proceeds to their heirs. Lisa has $200,000 in a rollover IRA from her former employer s retirement plan, and they are considering converting it to a Roth IRA. Two factors will make the Roth IRA an attractive alternative if Carl and Lisa assume 1) their current tax rate (25%) will be the same in their retirement years and 2) they will pay the tax due ($50,000) on the distribution from the traditional IRA with funds from sources outside the IRA. Carl and Lisa plan to retire at age 62. The comparison calculation projects a retirement cash flow of $45,000 annually for 20 years and assumes an annual return of 6% on IRA investments. The result is that the funds in the traditional IRA would be depleted when Carl and Lisa reach 78, while the Roth IRA would, even after adding in the projected value of the tax savings during the accumulation phase, show a net value of more than $500,000 at age 78 and, with distributions of $45,000 annually, could continue until age 94. This is a hypothetical example and is not intended to represent the performance of any specific investment or portfolio. Results will vary. * Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. 7
11 EXPLORING YOUR IRA OPTIONS Many experts now suggest that individuals have both traditional and Roth IRA money to draw from, depending on anticipated future tax rates. Your financial advisor can discuss the pros and cons of each and how they could affect you. FOUR KEY REASONS TO CONSIDER A ROTH IRA All distributions from the account can be tax-free. Although contributions to a Roth IRA are not taxdeductible, earnings grow free of taxes. When you reach age 59½, if the Roth IRA has been in place for at least five years, any withdrawal is tax-free. Avoiding the tax bite on your withdrawals means more income in retirement. This may be particularly attractive to individuals unable to deduct IRA contributions due to their participation in an employer s plan. No required minimum distributions. The tax deferral can be extended beyond the age-70½ threshold of a traditional IRA. Contributions can be made after age 70½. You can continue contributing to a Roth IRA as long as you have earned income. People are living and working longer the average 65-year-old today can expect to live another 18 years, while the average 70-year-old s life expectancy has increased to nearly 87. Withdrawals may be made penalty-free for a firsttime home purchase. As with a traditional IRA, you can withdraw funds from your Roth IRA (up to a lifetime maximum of $10,000) to make a down payment on a first-time home purchase. A firsttime homebuyer is defined as someone who has not owned a home for two years prior to the purchase of the new home. Traditional IRA versus Roth IRA Assuming $5,000 annual contributions and 8% annual return $400,000 $350, , , , , ,000 50,000 0 $32,691 Outside Account $118,763 After-Tax Proceeds Traditional IRA 15 years $158,351 After-Tax Proceeds Roth IRA 15 years $77,057 Outside Account $319,765 After-Tax Proceeds Traditional IRA 25 years $426,354 After-Tax Proceeds Roth IRA 25 years Contributions to the traditional IRA are assumed to be tax-deductible with the tax savings reinvested at a 6% after-tax rate of return. The participant is taxed at a 25% rate upon distribution of all IRA assets after the end of the period. This is a hypothetical example and is not intended to represent the performance of any specific investment or portfolio. Results will vary. 9
12 TRADITIONAL IRA ROTH IRA Annual Contribution Limit Eligibility Deductibility Tax on Distributions Tax or Penalty on Premature Distributions Required Minimum Distributions For 2014, $5,500 ($6,500 for those 50 and older) either deductible or nondeductible (in combination with Roth IRA) Available to anyone who has earned income and is under age 70½ Full deduction is allowed if the individual is not an active participant in an employer sponsored retirement plan. Deductibility for active participants is determined by AGI. The noncovered spouse of an active participant can deduct a contribution of up to $5,500 ($6,500 for those 50 and older) for 2013, subject to AGI limit ($178,000 for joint filers). Distributions and earnings from a deductible IRA are taxed as ordinary income. Distributions of nondeductible contributions are considered nontaxable returns of capital. Ordinary income tax applies to the entire distribution. A 10% penalty on distributions prior to age 59½ applies unless it is made for death or disability, for a first-time home purchase ($10,000 lifetime maximum), for medical expenses in excess of 7.5% of AGI, for certain educational expenses, to an alternate payee pursuant to a divorce decree or separation agreement, for payment of health insurance premiums during certain times of unemployment, or as part of a series of substantially equal payments based on the owner s life expectancy. Must begin by April 1 of the year following the year age 70½ is attained For 2014, $5,500 ($6,500 for those 50 and older) in combination with traditional IRA Available to anyone with earned income; single filers with AGIs of $114,000 or less; joint filers with AGIs of $181,000 or less Always nondeductible Qualified distributions, distributions of contribution amounts and distributions of conversion amounts are tax-free. The earnings portions of nonqualified distributions are subject to income tax. Distributions of conversion amounts made prior to five years are subject to penalty. The earnings portion of nonqualified distributions are taxable as ordinary income and subject to penalty unless made for death or disability, firsttime home purchase ($10,000 lifetime maximum), medical expenses in excess of 7.5% of AGI, certain educational expenses, or as part of a series of substantially equal payments based on owner s life expectancy. Only applies to beneficiaries upon death of IRA owner 10
13 EXPLORING YOUR IRA OPTIONS THE RAYMOND JAMES TRADITIONAL IRA AND ROTH IRA ADVANTAGE FLEXIBILITY The Raymond James traditional IRA allows many different investment options, including common and preferred stocks, corporate bonds, government securities, mutual funds, CDs and REITs. It provides the flexibility and diversification necessary to respond to changes in the financial markets, while also enabling you to select those investments most appropriate to your financial needs and objectives. CONSOLIDATED RECORDKEEPING To keep up with the many IRS rules, you must maintain accurate and detailed IRA records. Raymond James, as custodian, receives your contributions, provides detailed records of transactions, prepares statements reflecting all assets, makes distributions based on your instructions and handles tax reporting. You receive a consolidated statement reflecting all account activity during the year. SIMPLICITY If you maintain IRAs at more than one institution, gathering information for tax preparation each year may be difficult and time-consuming. If you are currently receiving monthly or quarterly statements for all of your IRAs, you may be constantly overwhelmed with paper. Combining your assets into one IRA has distinct advantages. Transferring IRAs held elsewhere to a Raymond James traditional IRA can be done quickly and easily. Most securities can be transferred to Raymond James without having to sell them. A COST-EFFECTIVE CHOICE You may be able to reduce the custodial fees you are paying. At Raymond James, you can maintain your IRA for one reasonable annual fee. And IRAs with a value of $500,000, or cumulative assets held at Raymond James equaling $500,000 or more, pay no annual fee. A Raymond James traditional IRA offers the professional service of your personal financial advisor, substantial investment flexibility and access to our nationally recognized securities research. 11
14 Taking the Next Step To learn more about the features and benefits of IRAs, as well as to determine which type may be appropriate for addressing your retirement needs, contact your Raymond James financial advisor. 12 Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. While we are familiar with the tax provisions of the issues presented herein, as Raymond James financial advisors, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.
16 LIFE WELL PLANNED. INTERNATIONAL HEADQUARTERS: THE RAYMOND JAMES FINANCIAL CENTER 880 CARILLON PARKWAY // ST. PETERSBURG, FL // LIFEWELLPLANNED.COM ADV Raymond James & Associates, Inc., member New York Stock Exchange/SIPC 2013 Raymond James Financial Services, Inc., member FINRA/SIPC Raymond James is a registered trademark of Raymond James Financial, Inc KA 11/13