Roth Conversion Comparison. Prepared for Joe and Judy Testclient

Transcription

1 Conversion Comparison Prepared for Joe and Judy Testclient August 14, 2010

2 IMPORTANT DISCLOSURE INFORMATION IMPORTANT: The projections or other information generated by the MoneyGuidePro Conversion Comparison (the "Comparison") regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. The return assumptions in the Comparison are not reflective of any specific product, and do not include any fees or expenses that may be incurred by investing in specific products. The actual returns of a specific product may be more or less than the returns used in the Comparison. Rates of return, tax rates, and other assumptions are used as the basis for the results shown. They should not be considered a guarantee of future performance or a guarantee of achieving your financial objectives. Past performance is not a guarantee or a predictor of future results of any particular investment. The Comparison does not provide recommendations for any products or securities. The results of the Comparison may vary with each use and over time. Methodology and Results This Report shows the hypothetical results when converting traditional qualified accounts (either individual retirement accounts (IRAs) or qualified retirement plan accounts) to a IRA. This conversion is subject to federal, state, and, if applicable, local income taxes. In order to compare traditional qualified accounts to a converted IRA, if you indicate conversion taxes will be paid from an outside source (i.e., a source other than the accounts being converted), the Comparison includes the potential future value of the conversion tax amount. The Comparison uses the current federal tax guidelines for conversions, and does not implement any additional rules or limitations defined by any U.S. state. Assumptions and Limitations Investment returns are hypothetical and used for comparison purposes only. Returns are not reflective of any specific investment product, and do not include fees or expenses that may be incurred by investing in specific products. There is no guarantee you would receive these returns, either now or in the future. Tax rates are hypothetical and are used for illustrative and comparison purposes only. There is no guarantee the tax rates are accurate or appropriate for you, either now or in the future. The actual taxes due when converting traditional qualified accounts to a IRA may be more or less than those used to calculate the results in this Report. Additionally, the results shown in this Report do not include tax penalties, which can occur with disbursements or distributions from traditional qualified accounts and IRAs prior to age 59 ½. Report Does Not Provide Legal, Tax, or Accounting Advice This Report does not provide legal, tax, or accounting advice. Before making decisions with legal, tax, or accounting ramifications, you should consult appropriate professionals for advice specific to your situation. For More Information You should seek the services of your legal and/or tax advisors when converting qualified accounts to a IRA. It is also recommended that you obtain a copy of IRS Publication 590 from your local IRS office, or call TAX-FORM or visit the IRS website at for additional information on converting qualified accounts to a IRA. Results Based on Information Provided by You The results included in this Report are dependent on the information you have entered--the investment returns, tax rates, and time periods for accumulation and distribution of the accounts. Even small changes in this information can have a substantial impact on the results shown in this Report. It is your responsibility to ensure that all information entered is representative of your specific situation. For example, you must determine your marginal tax rates, which can be affected by the conversion itself or by other factors. You must ensure that the traditional qualified accounts you might convert are eligible for conversion. Report Not a Solicitation This Report is not a solicitation or recommendation that you convert traditional qualified accounts to a IRA, and you should not rely on the information presented herein when making that decision. 08/14/2010 Page 1 of 4

3 IMPORTANT DISCLOSURE INFORMATION The Pro Rata Rule for IRA Distributions (This section is provided for educational purposes only, and does not constitute tax or legal advice.) If you have made nondeductible contributions to any traditional IRA, the Pro Rata Rule requires that each distribution from a traditional IRA contain a proportionate amount of pre-tax and after-tax dollars, based on the pre-tax and after-tax amounts in ALL traditional IRAs owned by you. If you have made only deductible contributions to all your traditional IRAs, then all distributions from any traditional IRA are fully taxable. If you have made nondeductible contributions to a traditional IRA, the IRA has a "basis" equal to the sum of all nondeductible contributions you have made, minus all nondeductible distributions. This basis is not taxed when distributed (the "after-tax" amount). To determine the correct ratio of pre-tax to after-tax amounts (to satisfy the Pro Rata Rule when making a distribution from any of your traditional IRAs), you must calculate the basis for all your traditional IRAs. And, each distribution from any traditional IRA will consist partly of basis (an after-tax amount) and partly of earnings, gains, and deductible contributions (the pre-tax amount). Documents Needed to Determine After-tax Amounts for this Comparison Each year you make a nondeductible contribution to a traditional IRA, you must file Form 8606 with the IRS. This form also reconciles values when nondeductible contributions and distributions were made in the same year. If you have ever taken distributions from any traditional IRA, prior years' tax forms may be required. To accurately calculate the pre-tax/after-tax ratio required for distributions from traditional IRAs, the following documents may be needed: Form 1040 (or Forms 1040 A, 1040NR, or 1040T) for each year you have made a nondeductible contribution to a traditional IRA. Form 8606 for each year in which a nondeductible contribution was made. Forms 5498 showing contributions to a traditional IRA or IRA. Forms 1099-R or W-2P for each year you have received a distribution. Note that Forms 1040-T and W-2P were used in prior tax years. More information about nondeductible contributions can be found in IRS Publication 590: Individual Retirement Arrangements (IRAs). If you have questions or need additional information, contact your tax professional. 08/14/2010 Page 2 of 4

4 Conversion Comparison - Accumulation and Distribution to Heir This page shows a hypothetical comparison of traditional qualified accounts (either traditional IRAs or an eligible Employer Retirement Plan) and a conversion of these accounts to a IRA. Value at End of Accumulation at age 90 in 2069 Annual Income Provided to Heir beginning in 2069 Total Distributions from 2069 to 2101 $132,571 $19,113 $630,730 $3,200,000 $2,800,000 $2,400,000 2,838,830 2,971,401 $160,000 $140,000 $120, , ,437 $5,000,000 $4,000,000 4,564,700 5,195,430 $2,000,000 $1,600,000 $100,000 $80,000 $3,000,000 $1,200,000 $60,000 $2,000,000 $800,000 $400,000 $40,000 $20,000 $1,000,000 Input Your Current Age What type of asset are you converting? 31 IRA Amount to Convert : $42,000 Have you ever made nondeductible contributions to any traditional IRA? No Accumulation Period Investment Return during accumulation : Marginal Tax rate during accumulation : Your Age at Death 8% 30% 90 Your Age at Death : Current age of intended heir : Do you prefer to spread the taxes due on the conversion over 2011 and 2012? 90 5 Yes 2011 Tax rate for Tax Split : 28% Amount of Tax Paid from an Outside Source : % Taxes due on the Conversion : $5,880 $5,880 $100 $100 08/14/2010 Page 3 of 4

5 Conversion Comparison - Accumulation and Distribution to Heir Notes All values in the bar charts are after-tax, future dollars. The "" column in each graph includes a Account and a Side Account. The Account represents the value of either the IRAs or eligible Retirement Plan (e.g., 401(k), 403(b)) you might convert. This Account grows at the investment rate of return specified. If you plan to pay all or part of the conversion taxes from an outside source (i.e., a source other than the traditional qualified accounts being converted), the same amount is invested in the Side Account. In addition, during the accumulation period, the after-tax values of all Required Minimum Distributions are also invested in the Side Account. This Account grows at the investment rate of return specified and is tax-adjusted each year, at the marginal tax rate specified, unless otherwise indicated. The "" column in each graph includes only the IRA, which represents the value of the Account being converted less the conversion taxes not paid from an outside source. This Account grows at the investment rate of return specified. If you convert to a IRA in 2010, you have the option to defer paying taxes until 2011 and In this case, the conversion income is split equally between the two years. Tax penalties, which can occur with disbursements or distributions from traditional qualified accounts and IRAs prior to age 59 ½, are not included in the calculations. If you selected the "Accumulation Only" option: The "Value at End of Accumulation" results assume each Account grows at the investment return specified for the number of years specified. Then, the Account is taxed at the marginal tax rate specified, simulating a lump sum distribution. If you selected the "Accumulation and Distribution to Owner" option: The "Value at Start of Distributions" results assume each Account grows at the investment return specified for the number of years specified. Then, the Account is taxed at the marginal tax rate specified, simulating a lump sum distribution. The "Annual Distribution Amounts" are the first year s after-tax distributions, in future dollars, calculated so that each Account is paid out in equal pre-tax installments for the number of years specified. All Accounts grow at the investment return specified. Each annual distribution from the Account is taxed at the marginal tax rate specified, and this distribution is assumed to exceed the Required Minimum Distribution amount. The "Total Distributions" amount, for each Account, is the sum of all after-tax installment payments. If you selected the "Accumulation and Distribution to Heir" option: The "Value at End of Accumulation" results assume each Account grows at the investment return specified until the age specified. Then, the Account is taxed at the marginal tax rate specified, simulating a lump sum distribution. The Side Account in this result is not adjusted for taxes, modeling investments where taxes can be deferred until the assets are sold or transferred. The Side Account receives a step-up in basis (i.e., the basis is set equal to the current value of the Side Account) at your death. The "Annual Income Provided to Heir" results are the first year s after-tax distributions calculated so that each Account is paid out in equal pre-tax installments for the distribution period. The distribution period is determined by the heir s IRS Lifetime Annuity factor at the time of your death. All Accounts grow at a hypothetical investment return of 4%. Each annual income payment from the Account is taxed at a hypothetical tax rate of 25%, and this payment is assumed to exceed the Required Minimum Distribution amount. The "Total Distributions" amount, for each Account, is the sum of all after-tax installment payments. 08/14/2010 Page 4 of 4