Increase IRA Rollovers

Transcription

1 Increase IRA Rollovers Exit Strategies for Retirement Plan Assets Dru Donatelli, JD-MBA, ChFC,, CLU Advanced Planning Attorney Assistant Vice President Field Director, Special Markets Tax Landscape - Estate Taxes Have Estate Taxes been Repealed? Presently No Estate Tax Modified carryover basis $3 mm spouse; $1.3 mm non-spouse $1 mm Exclusion from Gift Tax 35% tax rate No Generation Skipping Transfer tax National Sales Meeting - January 8-11,

2 Tax Landscape - Estate Taxes What s the future hold? H. R Dec 4, / 200 $3.5 mm Exclusion from Estate Tax 45% top marginal rate ~99.75% would pay no Estate Tax $5 mm Exclusion; 35% tax Tax Landscape - Estate Taxes What s the future hold? 2011; EGTRRA $1 mm Exclusion from Estate Tax 55 % top marginal rate; Surcharge? Stepped-up basis? State death tax credit $1 mm Exclusion from Gift Tax Unification? $1 mm GSTT Exemption National Sales Meeting - January 8-11,

3 Tax Landscape - What s Coming Income Tax Rate Hikes Income Tax Top two tax rates will increase to 36% & 39.6% Standard Deduction decrease and reduced itemized deduction phase-out limitation Capital gain and dividends Increase top capital gains rate to 20%? 28%? Dividend income will be taxed at 39.6% Eliminate dividend and capital gain tax on those in the 10% and 15% bracket FICA Social Security 6.2%/$106,800 Medicare 1.45%; $250k %; 3.8% 3.8% Surcharge Planning 3.8% on lesser of 1) excess Modified Adjusted Gross Income above threshold or 2) Net Investment Income Applies to taxable interest (8a), dividends (9), capital gains (13), taxable income from annuities (16), and rents, royalties, entity income (17) Does not apply to tax-exempt interest municipal bonds (8b), and distributions from qualified plans, IRAs, and Roth IRAs (line 15b) National Sales Meeting - January 8-11,

4 Action-3.8% Surcharge Planning 3.8% on lesser of 1) excess Modified Adjusted Gross Income above threshold or 2) Net Investment Income Bob and Betty have only $300,000 of W-2 W 2 income Widow 5 rental properties -each + $50,000 = $250,000 -potentially 3.8% on $50,000 -disposition 1 property and reposition proceeds to $50,000 Tax Exempt Muni Bond income? Tax Landscape - RMDs Worker, Retiree & Employer Recovery Act of 2008 Suspended Required Minimum Distributions (RMDs( RMDs) for 2009 only Applied to both owner accounts & beneficiary IRAs Required Sponsors to amend Plan Documents to allow non-spouse beneficiaries to roll into beneficiary IRA Effective for plan years beginning after January 1, 2010 Must be Trustee-to to-trustee Transfer Rollovers from a Roth 401(k) to a Roth IRA are not subject to Roth IRA Contribution AGI Limits National Sales Meeting - January 8-11,

5 What Is an Exit Strategy? Transitioning from the Accumulation Phase of retirement planning to the Distribution Phase of retirement planning Distributing retirement plan assets effectively and efficiently Asset protection and longevity strategies Tax strategies Legacy planning Rollover and asset consolidation opportunities Neither John Hancock Life Insurance Company (U.S.A.), John Hancock Life Insurance Company of New York, John Hancock Distributors LLC, nor any of their representatives provide tax, accounting, or legal advice. Any tax statements contained herein were not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Please consult your own independent advisor as to any tax, accounting, or legal statements made herein. 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 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. National Sales Meeting - January 8-11,

6 The Retirement Timeline IRA rollover opportunities may present themselves at various ages 50 59½ 65 70½ 75+ Age 50 Age 59½ Age 65 Age 70½ Age 75+ Create exit strategy Begin to implement exit strategy (in service withdrawals) Consolidate retirement assets Create systematic withdrawal plan Legacy plan Age Client Want assets to grow to support retirement objectives Max-out contributions Catch-up contributions Advisor Can help consolidate old retirement accounts Conduct Beneficiary audit Review objectives and create an Exit Strategy National Sales Meeting - January 8-11,

7 Create an Exit Strategy Long Before Retirement 50 Assets rapidly leave a plan following participant termination Within 2 months after leaving employer months after leaving employer months after leaving employer More than 12 months after leaving employer Retirees Job Changers Source: Opportunities in the Pension Rollover Market, LIMRA 2006 Advisors Have a Significant Impact on Asset Destination 50 Rolled over or transferred to an Individual Retirement Account (IRA) Left in former employer's plan Withdrew the money and paid the taxes due Transferred to a retirement plan at new employer Elected installment distribution option 42% 74% 29% 30% 12% 38% 15% 5% 20% 8% 4% Total 10% Advised 5% Not Advised 6% 4% Source: 2004 Brightworks Intermediaries 4 Study National Sales Meeting - January 8-11,

8 Conduct a Beneficiary Audit 50 Gather IRA information Consolidate IRAs Avoid mistakes Estate planning/ Stretch opportunities Target Antiquated Retirement Plans 50 Keogh, money purchase, singleparticipant profit sharing plans OftenOften abandoned Require plan documentation, 5500 filing and other administrative costs and burdens Often Often does not provide Stretch National Sales Meeting - January 8-11,

9 New IRA Rollover Opportunities Pension Protection Act of 2006 Beginning on December 31, 2007, distributions from Qualified Retirement Plans, TSAs,, and Governmental 457 Plans can be rolled directly to a Roth IRA Tax Increase Prevention & Reconciliation Act (TIPRA) Beginning in 2010, affluent clients can convert traditional IRAs to Roth IRAs (not limited to $100,000 AGI) The Roth Opportunity $1.4 Trillion of retirement assets Depressed market = low-cost conversion opportunity No RMDs Increase tax-free savings Tax diversification in retirement Hedge against increasing tax rates Estate planning benefits National Sales Meeting - January 8-11,

10 Tax Benefits of Roth Conversions Hedging Conversions Tactical Conversions Wealth Transfer Conversions What If Market Tanks After Conversion? Take a Mulligan Recharacterization: A converted Roth IRA can be recharacterized recharacterized as a traditional IRA up to October 15th of the year following the year of conversion Example Donna converts $100,000 IRA in January It s later worth $70,000 Recharacterize by 10/15/10 and avoid $100,000 of income for 2009 National Sales Meeting - January 8-11,

11 5 yr Rule Consider Market Gains to Pay Tax January April Donna converts $100,000 IRA Roth IRA is worth $120,000 She owes $19,600 in taxes for the conversion * Donna could use the market growth in the contract to pay the tax upon conversion since distributions come out FIFO If under 59½, would be subject to 10% upon withdrawal If no earnings, then recharacterize * Assumes Donna files mfj and pays 28% tax on the conversion dollars. Using Annuity Gains to Pay the Tax Roth IRA with $20,000 Market Gains Started with $100,000 IRA Taxable Not guaranteed Used gains to pay tax liability Ended with $100,000 Roth IRA Tax-Free 35% (7.7%); 40% (8.2%); 51% (10%) Guaranteed National Sales Meeting - January 8-11,

12 Age 59½ Client Continue equity exposure, but limit downside risk May need to start withdrawals Needs flexibility Advisor Help consolidate retirement assets Recommend appropriate allocation mix Determine whether client s retirement plan permits withdrawals at age 59½ If a withdrawal is greater than the allowed percentage of the benefit base, and it is not a Required Minimum Distribution, then the guaranteed annual withdrawal amount may be reset, and ultimately be less than the total purchase payments. Summary Plan Description (SPD) In-service withdrawals Age 59½ Prior rollover assets After tax contributions Employer contributions Five years of service 59 1/2 National Sales Meeting - January 8-11,

13 In-service Withdrawals and RMD Strategy 59 1/2 At age 60, consider taking in-service withdrawal and rolling it into an IRA variable annuity with a GMWB with the following features: Bonus Step-up RMD Friendly At age 70, RMDs will be taken from at least 150% of in-service withdrawal Automatically capture upside potential Retirement income will be the greater of RMD or LIA The guarantee is backed by the claims paying ability of the issuer, and does not apply to the investment performance or safety of the underlying portfolios. When considering an annuity for use by your client in an IRA (which is already tax deferred) it s important that your client has been informed of the material features of the contract and that you base your recommendation on your belief that the client would benefit from other factors such as access to specific investment choices, the ability to have guaranteed payments for life and other guaranteed benefits. Remember, there is no additional tax deferral benefit for contracts purchased in an IRA or other tax-qualified plan, since these are already afforded tax-deferred status. Thus, an annuity should only be purchased in an IRA or qualified plan if your client values some of the features of the annuity and is willing to incur any additional costs associated with the annuity to receive such benefits. See the prospectus for details. Reasons to Roll to an IRA at 59½ 59 1/2 No plan imposed restrictions No QJSA requirements Greater estate planning flexibility No mandatory 20% withholding on withdrawals Greater control and investment opportunity Roth IRA conversions National Sales Meeting - January 8-11,

14 Why Keep Money in a Retirement Plan? Five reasons 1. Loans if Plan permits 2. Early access to money Retired at or after age Delayed distributions Age 70½ and still working 4. ERISA Title I credit protection 5. Net Unrealized Appreciation (NUA) Age 65 Client Normal Retirement Age as defined by most retirement plans May consolidate retirement accounts and advisors Advisor Review and update beneficiary designations Investigate NUA possibilities Review asset allocation and retirement strategy Asset allocation does not ensure a profit or protection against loss. Please note that asset allocation may not be appropriate for everyone, particularly those interested in directing the underlying portfolio options of their annuity contract on their own. National Sales Meeting - January 8-11,

15 Asset Consolidation at Retirement 65 Clients consolidate assets at retirement Most retirees roll qualified assets to an IRA at retirement 74% of plan participants believe that their retirement plan provider does not care what they do with their retirement plan assets * 87% of Powerboomers likely to roll retirement plan assets to an IRA ** Most retirees reduce advisors 46% of Powerboomers preparing an IRA Rollover will stop working with at least one advisor ** *Brightworks Partners, Inc., 2006 **FRC: Engaging Powerboomers: Winning Investment Products and Retirement Solutions Net Unrealized Appreciation 65 Hypothetical example Qualified Employer Stock $100,000 FMV* $ 10,000 Cost basis $ 90,000 NUA $ 10,000 x 35%= $3,500 $ 90,000 x 15%= $13,500 Total taxes $17,000 * FMV: Fair Market Value Hypothetical example for illustrative purposes only. These figures do not reflect the performance of any portfolio National Sales Meeting - January 8-11,

16 Age 70½ Client Wants to minimize taxes and risk while taking withdrawals Take Required Minimum Distributions (RMDs( RMDs) Advisor Create tax- efficient liquidation plan Create a systematic and sustainable withdrawal plan with a GWMB IRS Form /2 IRA provider must submit Form 5498 to IRS by May 31 each year with the following information: Fair Market Value Contributions Rollovers RMDs (Box 11) National Sales Meeting - January 8-11,

17 How to Liquidate Assets 70 1/2 In order of spending 1 st Taxable assets Long-term capital gains Unless earmarked for beneficiaries Other taxable amounts 2 nd nd Tax-deferred assets Nondeductible IRAs, non-qualified annuities, qualified plan after-tax tax contributions IRAs, qualified retirement plans 3 rd Roth accounts No RMDS Distributions/Withdrawals 70 1/2 Factors to consider 1 Longevity 2 Rate of returns 3 Volatility of returns 4 Sequence of returns 5 Amount of withdrawals National Sales Meeting - January 8-11,

18 Case Study 70 1/2 RMDs and the sequence of returns Sam retires at age 70 with $1,000,000 IRA Sam turns 70½ in 2006 Sam must begin taking RMDs April 1, 2007 but is concerned about: Longevity risks Inflation and market risks Sequence of return risks Hypothetical example for illustrative purposes only. These figures do not reflect the performance of any portfolio. Case Study 70 1/2 RMDs and the sequence of returns Sam s RMDs will increase each year 3.65% by 70½ 4% by 73 5% by 79 6% by 83 7% by 86 Hypothetical example for illustrative purposes only. These figures do not reflect the performance of any portfolio. National Sales Meeting - January 8-11,

19 Case Study 70 1/2 RMDs and the sequence of returns Sam must begin taking RMDs at a time of poor market performance Year 1: 12% market loss Year 2: 21% market loss Year 3: 14% market loss Hypothetical example for illustrative purposes only. These figures do not reflect the performance of any portfolio. Case Study 70 1/2 RMDs and the sequence of returns Age IRA Balance Return RMD% RMD$ End Value 70 $1,000,000-12% 3.65% $32,120 $847, $847,880-21% 3.77% $25,252 $644, $644,573-14% 3.91% $21,674 $532,659 By age 73, Sam has taken $79,046 in total withdrawals but has only about half of his original IRA to last him the rest of his life Hypothetical example for illustrative purposes only. These figures do not reflect the performance of any portfolio. National Sales Meeting - January 8-11,

20 Case Study RMDs and the sequence of returns with a GMWB for life rider Age 70 IRA Balance $1,000,000 Return -12% RMD% 3.65% LIA $50, /2 71 $830,000-21% 3.77% $50, $605,700-14% 3.91% $50,000 By age 73, Sam has taken $150,000 in total withdrawals and has IRA Balance has dropped to 605,700 but he is still guaranteed $50,000/year for the rest of his life. Even if the IRA Balance continues to decline. Hypothetical example for illustrative purposes only. These figures do not reflect the performance of any portfolio. Age 75+ Wealth transfer planning Review client s overall estate planning goals Review and update beneficiary designations Create a legacy plan for your client s retirement assets National Sales Meeting - January 8-11,

21 Stretch and Restricting Beneficiary Payouts 75 + Set up retirement accounts to take advantage of Stretch Beneficiary is restricted to systematic withdrawals Restriction may be lifted in later years Pick and choose which beneficiaries are restricted Flexibility PLUS control helps enhance the benefit for the beneficiary IRA Maximization Client profile Has large qualified plan/ira Does not need the RMDs for retirement Has a potential estate tax problem Wants to maximize wealth transfer to their beneficiaries National Sales Meeting - January 8-11,

22 Using IRAs to Fund an ILIT IRA is paid down, reducing IRD problem RMDs from IRAs are gifted to the ILIT Annual gift exclusion (currently $13,000 per donee) ) may be used RMDs are used by ILIT to purchase life insurance Upon death, life insurance proceeds are paid to the beneficiaries income and estate tax- free * * Federal tax only When considering an annuity for use by your client in an IRA (which is already tax deferred) it s important that your client has been informed of the material features of the contract and that you base your recommendation on your belief that the client would benefit from other factors such as access to specific portfolio choices, the ability to have guaranteed payments for life and other guaranteed benefits. Remember, there is no additional tax deferral benefit for contracts purchased in an IRA or other tax-qualified plan, since these are already afforded tax-deferred status. Thus, an annuity should only be purchased in an IRA or qualified plan if your client values some of the features of the annuity and is willing to incur any additional costs associated with the annuity to receive such benefits. See the prospectus for details. Risks of Using IRAs to Fund ILIT RMDs fluctuate and may be less the annual life insurance premiums IRAs could be depleted while IRA owner/insured still alive Forcing the liquidation of other assets to make annual premium obligation Forcing the lapse of the policy National Sales Meeting - January 8-11,

23 IRA Maximization GMWB Rider Funding an ILIT IRA Annuity contract with GMWB rider ILIT Beneficiaries Benefits An IRA annuity with a GMWB rider may provide Guaranteed income for life* Ability to capture market gains Assures that the premiums will always be paid during IRA/insured lifetime *The guarantees are backed by the claims paying ability of the issuer IRA Max Hypothetical Example Investor: Sam Malone (67-years old, widowed and in good health) Four children: Carla, Norm, Cliff and Woody Current estate value: $5,000,000 Projected estate value in 19 years: $12,033,096 * Projected estate taxes: $6,618,203 ** * These figures do not reflect the performance of any portfolio. This hypothetical illustration assumes investment grows at a hypothetical return of 5%. It is for illustration purposes only and should not be deemed a representation of past or future performance, or a guarantee of future results. Withdrawals may be subject to withdrawal charges and will reduce the death benefit and optional benefits. 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. Assumes no subsequent payments or withdrawals. ** Assumes estate tax rates reverted to pre-egtrra amounts of an estate tax rate of 55% and a $1,000,000 applicable exemption. In 2011, the estate tax rates will sunset will revert to pre-egtrra levels unless Congress creates new legislation. National Sales Meeting - January 8-11,

24 IRA Max Hypothetical Example Sam s strategy Purchase $2,000,000 life insurance policy, the premium of which is $44,461 * Utilize the $12,000 annual gift exclusions ILIT purchases life insurance on IRA owner s life Purchases an IRA annuity with a GMWB worth $1,000,000 * to pay life insurance premiums Result Sam s is guaranteed to receive the greater of $50,000 or the RMD for life Assures that the premiums will always be paid Ability to capture and lock-in potential market gains * Hypothetical insurance quote; insurance quote may vary These figures do not reflect the performance of any portfolio. This hypothetical illustration assumes investment grows at a hypothetical return of 7%. It is for illustration purposes only and should not be deemed a representation of past or future performance, or a guarantee of future results. Withdrawals may be subject to withdrawal charges and will reduce the death benefit and optional benefits. 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. Assumes no subsequent payments or withdrawals. Strategy Comparison At age 85, Sam passes. During his lifetime, he took $1,092,848 in withdrawals Old strategy Net to beneficiaries $5,414,893 after payment of estate taxes New strategy Net to beneficiaries $8,760,438 $2,000,000 life insurance to help pay estate taxes IRA Annuity death benefit of $1,345,545; may be stretched over each child s life expectancy * These figures do not reflect the performance of any portfolio. This hypothetical illustration assumes investment grows at a hypothetical return of 5%. It is for illustration purposes only and should not be deemed a representation of past or future performance, or a guarantee of future results. Withdrawals may be subject to withdrawal charges and will reduce the death benefit and optional benefits. 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. Assumes no subsequent payments or withdrawals. ** Assumes estate tax rates reverted to pre-egtrra amounts of an estate tax rate of 55% and a $1,000,000 applicable exemption. In 2011, the estate tax rates will sunset will revert to pre-egtrra levels unless Congress creates new legislation. National Sales Meeting - January 8-11,

25 Conclusion 42% of US wealth held in retirement-registered registered accounts * There Will Be More Than 6 Trillion Dollars in IRA Rollover Assets by 2012 * IRA Rollovers Are the Leading Source of New Assets for Advisers *FRC: Engaging Powerboomers: Winning Investment Products and Retirement Solutions Questions Answers National Sales Meeting - January 8-11,