Roth IRA Conversion Analysis Report

Transcription

1 Roth IRA Conversion Analysis Report for Joseph Sample Prepared by Lewis Chamberalin AIF Next Level Investment Management 1005 Redbud Drive Redding, CA February 4, 2010

2 Section I: Report Overview This report summarizes the results of a Roth IRA conversion analysis conducted by our firm based on information you provided to us. The purpose of this analysis is to assist you in gaining a better understanding of the impact which either a full or partial Roth IRA conversion could potentially have on your retirement and your financial legacy. The results summarized within this report are intended to provide you with an introductory framework for exploring what, if any, level of Roth IRA conversion might be appropriate for you based on your overall circumstances. Following a preliminary analysis in which we reviewed 10 unique conversion scenarios ranging from a conversion of 10% of your available IRA assets to a conversion of 100% of your available IRA assets, it appears a partial conversion of approximately 50% of your available IRA balance might yield the best results for your situation. This is derived from the information you provided to us as well as the various assumptions factored into the analysis. Based on these preliminary projections, the report findings summarized within this analysis report focus on three primary Roth IRA conversion scenarios: Scenario 1 0% Conversion (Projected cost of conversion: $0) Scenario 2 50% Conversion (Projected cost of conversion: $58,306) Scenario 3 100% Conversion (Projected cost of conversion: $125,729) 2

3 Section II: Summary of Input Variables The projections contained within this analysis report are based on the following inputs Your Date of Birth 01/1/1945 Spouse's Date of Birth 01/1/1946 Next Generation Beneficiary's Date of Birth 01/1/1965 Filing Status Married Year of Projected Conversion 2010 Available Outside Assets $125,729 Total IRA Assets Included in Analysis $400,000 Special 2010 Conversion Tax Option Applied? Yes Taxable Income for Year of Conversion $86,000 Projected Year of Retirement 2015 Projected Tax Rate in Retirement 30% Monthly Income Goal from IRA Assets During Retirement $1,100 Projected Duration of Retirement 27 Projected Duration of Next Generation Payout 13 Monthly Income Goal from IRA Assets for Next Generation $1,100 Projected Tax Rate for Next Generation 35% Annual Rate of Return Assumption 8% State Tax Rate for Year of Conversion 0% Inflation Adjustment for Monthly Consumption Needs 3% 3

4 Section III: Potential Impact of Full or Partial Roth IRA Conversion 1st Generation Estimates This subsection summarizes the projected aggregate, after-tax income received by you (and, if applicable, your spouse) during the timeframe identified as the "1st Generation Payout Period". Monthly Income Goal (After-Tax): $1,100 Duration Goal for 1st Generation Income Period: 27 years 1st Generation Projected Income Totals 0% Conversion: 50% Conversion: 100% Conversion: $622,956 4

5 2nd Generation Estimates This subsection of the report summarizes the projected aggregate, after-tax income received by your 2nd Generation Beneficiary during his or her lifetime. Monthly Income Goal (After-Tax): $1,100 Duration Goal for 2nd Generation Income Period: 13 years 2nd Generation Projected Income Totals 0% Conversion: 50% Conversion: 100% Conversion: $530,866 5

6 Residual Asset Estimates This subsection of the report summarizes the projected residual assets remaining at the end of your 2nd generation beneficiary's life expectancy. Projected Residual Assets at the end of your 2nd 0% Conversion: 50% Conversion: 100% Conversion: $5,806,312 6

7 Section IV: Assumptions Used in the Roth Conversion Optimizer Conversion 1. Conversion is assumed to be made on January 1 of the conversion year. 2. All assets entered are assumed to be eligible for conversion. 3. If account owner is married and both spouses have assets eligible for conversion, the older spouse's assets are presumed to be converted first for illustration purposes, followed by the conversion of the younger spouse's assets. 4. In situations where spousal information is not entered, for purposes of estimating the federal income tax cost of conversion, it is assumed the account owner files his or her federal income tax return for the year of conversion as a single filer. 5. Estimated tax for a 2009 conversion projection is based on actual 2009 federal income tax rates and tax brackets. Estimated tax for a 2010 conversion projection (taxed in 2010) is based on actual 2010 federal income tax rates and brackets. Estimated taxes on conversion projections taxed in 2011 and 2012 are based on pre-egtrra tax rates and pre-egtrra tax brackets increased by actual cost-of-living adjustments for years , and increased by an assumed 3 percent cost-of-living adjustment for 2010 and thereafter. 6. State and local taxes that may apply to the conversion are not factored in the projection unless an amount is explicitly entered for the "State Tax Rate for Year of Conversion". 7. If IRA assets of the primary IRA owner, the spouse (or both) are used to pay some or all of the conversion taxes on a Roth IRA conversion, and the owner of the IRA assets will be age 59-1/2 or younger, the taxable amount distributed (and not converted) will generally be subject to a 10 percent early distribution penalty unless the owner of the IRA assets qualifies for a penalty exception. The projections generated by this tool do not reflect this potential 10 percent early distribution penalty. 8. If a future conversion year is selected, the IRA assets available for possible conversion grow at the user-defined "Future Rate of Return". 9. The user may modify the dollar amount of "Outside Assets" that are assumed to be available to pay conversion taxes (the initial default assumption is that the user has "Outside Assets" sufficient to pay 100% of the estimated federal income tax due on a 100% conversion). For projection purposes, conversion taxes are first assumed paid from the "Outside Assets". When the amount of "Outside Assets" is insufficient to pay the projected conversion taxes for a given conversion scenario, the conversion amount is reduced by the amount necessary to pay the projected conversion taxes. For 2010 conversion scenarios where the 2011/2012 tax spread option is applied, any Roth IRA assets needed for conversion taxes are first deposited to the Roth IRA at the time of conversion, then subsequently distributed in 2011/2012, as needed, for conversion taxes. When the amount of "Outside Assets" exceeds the projected conversion taxes due for a given conversion scenario, any assets remaining after payment of the projected conversion taxes remain in the taxable account of "Outside Assets". The earnings on the "Outside Assets" account are assumed to be taxed, annually, at the user-defined "Future Tax Rate" applicable to taxable, Traditional IRA distributions. However, users may override this default by selecting an alternative "Effective Tax Rate for 'Outside Assets'". The "Outside Assets" account is deemed to earn the same annual rate of return as IRA assets (i.e., the "Future Rate of Return"). 7

8 10. When nondeductible IRA basis is converted to a Roth IRA, tax is not paid on the portion of the conversion that represents the return of basis. For partial conversion projections, a pro rata portion of the IRA basis is deemed to be converted. 11. For 2009, the "Projected Taxable Income in Year of Conversion" may not exceed $100,000 (not including the taxable amount of any conversion). The $100,000 income restriction is eliminated January 1, For 2009, married individuals who file a separate federal income tax return are ineligible to convert. Beginning January 1, 2010, this eligibility restriction is eliminated. For purposes of this tool, if the account owner is married and spousal information is entered, it is assumed that a joint federal tax return is filed. 13. For 2010 conversions where the 2011/2012 ratable taxation is applied, the "Outside Assets Available to Pay Conversion Tax" are assumed to be available within the "Outside Assets" account at the time of conversion and grown at the user-defined "Future Rate of Return". 14. If SIMPLE IRA assets are included as retirement assets available for possible conversion, it is assumed that it has been at least two years since the account owner first participated in any SIMPLE IRA plan maintained by the individual's employer. Tax Filing Status 1. If account owner is married and spousal information is entered, it is assumed that a joint federal tax return is filed. Outside Assets 1. "Outside Assets" are assets in a taxable account that are available to pay conversion tax. The "Outside Assets" not used to pay conversion tax remain in the "Outside Assets" account. 2. The earnings on the "Outside Assets" account are assumed to be taxed, annually, at the user-defined "Future Tax Rate" applicable to taxable, Traditional IRA distributions. Users may override this default by selecting an alternative "Effective Tax Rate for 'Outside Assets'" explicitly for determining the applicable tax to be applied, annually, to projected taxable earnings on the "Outside Assets" account. 3. Growth on "Outside Assets" account is based on the user-defined "Future Rate of Return". Consumption Withdrawals 1. Consumption withdrawals for both first and next generation are presumed to be taken first from the "Outside Assets", then from the Traditional IRA (if married, oldest spouse first) and finally from the Roth IRA (if married, oldest spouse first) Monthly consumption needs are not automatically increased for inflation. However, some iterations of the planning tool allow the user to select an annual inflation assumption for monthly consumption needs.

9 3. If the primary IRA owner, the spouse (or both) will be age 59-1/2 or younger in the "Consumption Start Year", withdrawals taken prior to age 59-1/2 are potentially subject to a 10 percent early distribution penalty. The projections generated by this tool do not reflect this potential 10 percent early distribution penalty. Distributions 1. For projection purposes, all Traditional IRA distributions (except for the return of basis) are taxed at the applicable "Future Tax Rate". 2. All projected Roth IRA distributions are assumed to be nontaxable. 3. Required minimum distributions (RMDs) from Traditional IRA assets for the account owner (and his/her spouse, if married) start in the year(s) the individual attains age 70-1/2. 4. Projected required minimum distributions (RMDs) from Traditional IRA assets for the first generation are based on the Uniform Lifetime table according to the IRA owner's date of birth, unless the account owner is married and his/her spouse is more than 10 years younger than the account owner. If the account owner is married and his/her spouse is more than 10 years younger than the account owner, projected RMDs are calculated using the couple's dates of birth and the Joint and Last Survivor table. 5. Projected distributions are only taken from Traditional IRA assets when necessary, either to satisfy federal RMD requirements (of either the first or next generation), or in the event that the available "Outside Assets" are insufficient to meet the projected "Consumption Withdrawal" for a given year. 6. Projected required minimum distributions (RMDs) that are not needed to meet the projected "Consumption Withdrawal" needs for a given year are added to the "Outside Assets". 7. Projected distributions are only taken from the Roth IRA to meet the required minimum distribution requirements of the next generation or in the event that the projected "Consumption Withdrawal" needs for a given year (of either the first or next generation) cannot be satisfied by withdrawals from the "Outside Assets" or Traditional IRA assets. 8. "Consumption Withdrawals" are assumed to be withdrawn annually on January 1 (e.g., if the user-defined monthly consumption withdrawal amount is $2,000, a withdrawal of $24,000 (net of any applicable taxes) is deemed to be made on January 1 of each year beginning with the "Consumption Start Year"). 9. Required minimum distributions (RMDs) from Traditional IRA assets (first and next generation) and from Roth IRA assets (next generation only) are assumed to be withdrawn on January 1 of the applicable distribution year. Consumption Start Year 9 1. The default "Consumption Start Year" is the year the account owner attains 65 years of age or the conversion year, whichever is later. This variable is dynamic and may be modified by the user.

10 Consumption Number of Years 1. The user-defined "Consumption Number of Years" represents the duration of the projected payout period of the first generation. The first generation payout period begins with the "Consumption Start Year" and ends with the assumed year of death of the primary owner (and spouse, if married). The next generation beneficiary is assumed to begin distributions in the year following the last year of the first generation payout period. The projected payout period for the next generation beneficiary is based on the single life expectancy of the next generation beneficiary determined in the first year of the next generation payout period. 2. The default "Consumption Number of Years" for the first generation is the single life expectancy of the account owner, or if married, the joint life expectancy of the account owner and his/her spouse determined in the "Consumption Start Year". This variable is dynamic and may be modified by the user. 3. It is assumed that, if married, both spouses live until the end of the first generation payout period. In some versions of this tool, this variable is dynamic and may be modified by the user. If the user assigns a date of death for the account owner (or spouse) prior to the end of the first generation, it is assumed that the surviving spouse treats the inherited IRA assets as his/her own effective January 1 of the year following the year of death. Future Rate of Return 1. The "Future Rate of Return" is the projected annual rate of return on investments held within the IRA Owner's (and spouse's if applicable) Traditional and/or Roth IRA as well as within the individual's (or couple's) "Outside Assets" account. This assumed "Future Rate of Return" applies during both the first generation payout period as well as during the next generation payout period. Future Tax Rate 1. The "Future Tax Rate" represents the user's estimate of the overall effective tax rate that will apply to taxable distributions from any Traditional IRA assets. The "Future Tax Rate" for the first generation is independent of the "Future Tax Rate" for the next generation. 10

11 Mathematical calculations generated by the Roth Conversion Optimizer illustrate hypothetical retirement income scenarios and do not reflect actual or guaranteed future investment results. The Roth IRA Conversion Analysis Report is supplied by Archimedes Systems, Inc. Archimedes does not guarantee the accuracy, timeliness, completeness, suitability or usefulness of these results. Please consult with your financial advisor before acting on these results. Your use of this tool is solely at your risk. Copyright 2009 by Archimedes Systems, Inc.