1 IRA Mistakes and Opportunities Dru Donatelli, JD-MBA, ChFC, CLU AVP, Field Director, and Advanced Planning Attorney Special Markets Wood Logan Academy We give financial professionals a lot of credit Not FDIC Insured Not Bank Guaranteed May Lose Value Not Insured by Any Federal Government Agency Not a Deposit
2 The IRA Rollover Market % of U.S. wealth ($13.4 trillion) is in retirement-registered accounts Total IRA rollover market 2006: $4 Trillion 2012: $7 Trillion + $3 Trillion Annual IRA rollover 2006: $273 Billion 2012: $523 Billion + $250 Billion People over the age of 55 control 70% of investable wealth Source: FRC: Engaging Powerboomers: Winning Investment Products and Retirement Solutions When considering an annuity for use in an IRA, it s important to first inform your client of the material features of the contract, and to base your recommendation on your belief that the client would benefit from factors other than tax deferral, which is already provided by the IRA, and that the client is willing to incur the costs associated with the annuity to receive such benefits. Such factors may include availability of guaranteed payments for life, guaranteed death benefit, or access to specific portfolio choices.
3 Common IRA Mistakes Beneficiary designation mistakes Generation skipping tax No primary or contingent beneficiary IRA distributions to trusts No successor beneficiary Spousal continuation mistakes Failure to fully utilize estate tax exemption Failure to split IRAs Overlooking IRD Leaving money in qualified plans
4 No Designated Beneficiary Subject IRA to probate Time Probate costs Estate administration issues Loss of Stretch Die prior to RMDs 5-year payout Die after RMDs remaining life expectancy No more than a 15.3 year distribution According to IRS Life Expectancy Tables.
5 Update Beneficiary Designation After Divorce Divorce rate First Marriage is 41% * Second Marriage is 60% * * US Census Bureau. US Department of Commerce 2001
6 Grandchildren and GST Tax To the extent total lifetime transfer to a skip generation exceeds the GST exemption the transfer will be subject to a GST tax 2007 GST tax rate 45% 2007 GST exemption $2,000,000
7 Trust As Beneficiary Trust can be a beneficiary as long as: 1) The Trust is valid under state law; 2) The Trust is or will become irrevocable upon the death of the IRA owner; 3) The required beneficiary information is provided to the IRA administrator by October 31 st of the year following the year of the IRA owner s death; 4) The beneficiaries of the Trust are clearly ascertainable.
8 Dangers With Naming Trust As Beneficiary Trust must be drafted to be a look through Trust otherwise 5-year payout Trust must be drafted to allow the greater of Trust income or RMD to be paid out to the Trust beneficiaries To the extent Trust is not a mere conduit, any IRA assets remaining in Trust will be taxed at the Trust tax rates 35% for income above $10,700 (for 2008)
9 Mistakes Made by Beneficiaries Failure to name successor beneficiary Jane, age 30, inherits IRA and Stretches distribution over her lifetime 53.3 years Jane unexpectedly dies at age 43 If no successor beneficiary, 5-year payout If successor beneficiary named, the Stretch can continue for another 40.3 years
10 Spousal Continuation Mistakes Do not automatically make surviving spouse IRA owner if: Surviving spouse under age of 59½ and needs money Decedent younger than 70½, but surviving spouse over the age of 70½ and does not need money Estate Tax Exemption is not fully utilized
11 Estate Tax Exemption Reason why many couples lose first exemption because they own most assets jointly or leave all assets to each other Estate Tax Exemption 2008 $2,000, $3,500, N/A 2011 $1,000,000 Pursuant to the IRS Estate Tax Tables.
12 Hypothetical Estate Tax Example Tom Linda Linda Daughter $2,500,000 IRA $1,500,000 in own assets Primary beneficiary of IRA Contingent beneficiary Tom dies in 2008
13 Hypothetical Estate Tax Example Tom s Estate $2,500,000 Unlimited marital estate tax deduction No taxable estate No estate taxes Pursuant to the IRS Estate Tax Tables.
14 Hypothetical Estate Tax Example Linda s estate $4,000,000 $2,000,000 estate tax exemption (2008) Taxable estate $2,000,000 $900,000 estate taxes Estate breakdown $1,500,000 own assets $2,500,000 inherited IRA Linda dies before 2009 Pursuant to the IRS Estate Tax Tables.
15 Disclaim If Exemption Not Fully Used Hypothetical example Linda inherits Tom s $2,500,000 IRA Linda will timely disclaim $2,000,000 Daughter receives $2,000,000 Linda will receive $500,000 Pursuant to the IRS Estate Tax Tables.
16 Disclaim If Exemption Not Fully Used Hypothetical example Tom s Estate Tom s estate $2,500,000 Linda s Estate After Disclaimer Linda s estate $2,000,000 $2,000,000 estate tax exemption (2007) $500,000 marital estate tax deduction $2,000,000 estate tax exemption (2008) No taxable estate No estate taxes No taxable estate No estate taxes Pursuant to the IRS Estate Tax Tables.
17 Income In Respect of Decedent IRD is a valuable, and often overlooked, income tax deduction for the beneficiaries IRD is income the decedent would have received had he or she not died It s included in the decedent s taxable estate Beneficiary gets income tax deduction equal to the estate tax attributable to the IRD
18 IRD Hypothetical Example Owner dies with an IRA worth $ 1,000,000 Estate tax attributable to IRA $ 360,000 Beneficiary receives $ 1,000,000 IRD deduction ($ 360,000) Taxable portion of IRA $ 640,000 Beneficiary is in 35% tax bracket X.35 Total Tax on $1,000,000 IRA $ 224,000 Total Savings with $ 126,000 IRD Deductions
19 Keeping Money in Qualified Plans Limited investment options Most qualified plans are not estate planning friendly Rights under plan may change Access to assets limited Plan restrictions may apply
20 Inherited IRA Decision Checklist If plan to disclaim, do so before taking any withdrawals Do not pay estate taxes from IRA-may cause estate to become beneficiary Don t overlook IRD deduction Set up inherited IRA properly Name successor Beneficiary Know deadlines September 30, October 31, December 31 Transfer inherited IRAs directly (no 60-day period)
21 IRA Rollover Opportunities Plan document review In-service withdrawals Keogh plans Local HR departments Networking with Attorneys and CPAs
22 Plan Document Review Summary Plan Description (SPD) Distribution rights Stretch In-service withdrawals In-kind distribution of company stock
23 401(k) In-service Withdrawals Permitted in-service withdrawals include: Age 59½ Prior rollover assets After tax contributions Employer contributions Five years of service * William Mercer, 2001
24 Keogh Plans Often abandoned Does not provide Stretch Does not survive business Terminate and roll into an IRA Still making contributions roll into SEP-IRA
25 Work with Local HR Departments Investment seminars to employees Review SPD Look for company with recent layoffs
26 Network with Estate Attorneys and CPAs Stretch Split IRAs Trust as Beneficiary IRD RMD rules
27 Conclusion The IRA Rollover Market Is Growing! Greater Concern About Protection of IRA assets Advisers That Are IRA Experts Will Be Most Successful
28 Thank You Contact or visit for more information, including a prospectus that contains complete details on investment objectives, risks, fees, charges and expenses as well as other information about the investment company, which should be carefully considered. Please advise your clients to read the prospectus carefully prior to investing. The prospectus contains this and other information on the product and the underlying portfolios. Venture Annuities and the optional riders are not available in all states;product features may vary, subject to state regulation. Annuities are not FDIC insured and are long-term contracts designed for retirement purposes. Early withdrawals may be subject to withdrawal charges and will reduce the death benefit and optional benefits. In addition, withdrawals of taxable amounts will be subject to ordinary income tax and, if made prior to age 59½, a 10% IRS penalty tax may apply, unless made to a beneficiary. Purchasing an annuity for any tax-qualified retirement plan will not provide any additional tax-deferred treatment of earnings beyond the treatment provided by the plan. An annuity should be purchased for its other benefits, such as a guaranteed death benefit and the ability to receive lifetime income. Venture Combination Fixed and Variable Annuities are distributed by John Hancock Distributors LLC, member NASD. Issuer and Administrator John Hancock Life Insurance Company (U.S.A.), Bloomfield Hills, MI Annuity Service Office P.O. Box Boston, MA John Hancock Life Insurance Company (U.S.A.). A Manulife Financial Company. All rights reserved.
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