THE JOBS AND GROWTH TAX RELIEF RECONCILIATION ACT OF So what does this mean to your clients? Lower Income Tax Rates. 35% 2nd Highest 38.

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1 Premiere Select RETIREMENT SOLUTIONS JGTRR IN THIS ISSUE THE JOBS ND GROWTH TX RELIEF RECONCILITION CT OF 2003 > So what does this mean to your client? > Lower Income Tax Rates > Reduction in Capital Gains Tax Rate > Net Unrealized ppreciation > So what should you do? Signed into law on May 28, 2003, the Jobs and Growth Tax Relief Reconciliation ct of 2003 ( JGTRR ) is the third largest tax cut in U.S. history. 1 Many of the new provisions under the act may have a direct or indirect effect on retirement planning. These changes include: > Lower federal ordinary income tax rates > Lower federal tax rates on certain types of capital gains and dividends > Enhanced Net Unrealized ppreciation advantage So what does this mean to your clients? s with most tax cuts, your clients may have more money in their pockets due to the reduced federal ordinary income tax rates applicable to taxpayers in the higher brackets. But the good news doesn t stop there at the federal level. With lower long-term capital gains tax rates, an increased child tax credit, increased alternative minimum tax ( MT ) exemption amounts, and marriage penalty relief, now may be the right time to meet with your clients to reevaluate their short-term and long-term retirement planning needs. Lower Income Tax Rates JGTRR accelerates the federal ordinary income tax rate reductions that were going to take effect over the next few years. comparison of the federal ordinary income tax rates for tax years are as follows: INCOME TX BRCKET Highest 38.6% 35% 35% 2nd Highest 35% 33% 33% 3rd Highest 30% 28% 28% 4th Highest 27% 25% 25% 5th Highest Lowest Chart source: What the 2003 Tax ct Means for Investors: n Overview of the Jobs & Growth Tax Relief Reconciliation ct of 2003, by Ernst & Young, Fidelity.com, 10/2003. B

2 JGTRR PGE 2 Most employers should have already lowered withholding amounts as instructed by the IRS. 2 For those who make federal estimated quarterly tax payments, those payments may be lower for the balance of In addition, the federal MT exemption amount has been increased for 2003 and For married taxpayers filing jointly, the MT exemption is now $58,000 for 2003 and For single, unmarried taxpayers, the amount is $40,250. For all provisions mentioned, the net affect may mean that your clients have more money in their pockets to direct towards retirement savings. Do the new rates affect Roth conversions? Yes. Generally conversions of assets from a Traditional IR to a Roth IR are taxed as ordinary income at the federal level. Now that there is lower ordinary income tax rates, this may mean a lower federal tax bill at the time of conversion for your clients. Therefore it may be the right time to suggest that you clients convert their Traditional IR to a Roth IR because the tax bite upon conversion may be lower. nother suggestion could be to make partial Roth conversions over time. Clients may be eligible 3 to make Roth IR conversions over time, and, as with all conversions, any future growth and distributions may be tax-free. Should my clients continue making contributions to their workplace savings plan, like a 401(k)? What about their contributions to an IR? Yes, in many cases. Remember your clients initial focus may be saving enough for retirement and choosing investments that meet their overall asset allocation strategy. It may be a great time to have your clients increase their salary deferral rates to the maximum allowable limit ($12,000 for 2003 and $13,000 for 2004). Your client may also want to consider increasing his or her IR contribution to $3,000 for 2003 and 2004 if your client has not done so already. Bear in mind, though, that purchasing securities that are expected to generate qualified dividends or long-term capital gains within a 401(k) or IR may not be to an investor s advantage. lthough tax-deferral is still achieved, income that would be taxed at a potentially lower rate (as qualified dividends or long-term capital gains) if generated within a taxable account would be taxed at a potentially higher rate (as ordinary income) when distributed from a retirement account. To the extent that rebalancing can be achieved with minimal tax consequences, it may be best to shift fixed-income securities and other securities generating income that would otherwise be taxable as ordinary income to the 401(k) or IR, while increasing holdings of securities expected to generate qualified dividends or long-term gains within taxable accounts.

3 JGTRR PGE 3 Should my clients continue to fund an IR with non-deductible contributions? Perhaps. This depends heavily on the types of investments in your client s portfolio. If your client is invested in fixed-income securities or other investments that generate current income that would be taxable as ordinary income at the federal level if the asset was held in a taxable account, the deferral of current taxes with an IR may continue to be an advantageous planning move. However, if your client invests in securities that are expected to generate qualified dividends or long-term gains, which are taxed at lower rates, the net after-tax return may be higher with a taxable non-retirement account. Your clients should speak with a tax advisor regarding questions specific to their tax situation. Reduction in Capital Gains Tax Rate The top federal individual tax rate on adjusted long-term net capital gains is reduced to. For taxpayers in the or ordinary income tax brackets, the long-term capital gains tax rate will be 5%, further reduced to zero percent in Refer to the table below for details. LONG-TERM CPITL GINS TX RTE Top four ordinary income tax brackets 20% 20% before 5/6/03; thereafter & ordinary income tax brackets before 5/6/03; 5% thereafter 5% Chart Source: What the 2003 Tax ct Means for Investors: n Overview of the Jobs & Growth Tax Relief Reconciliation ct of 2003, by Ernst & Young, Fidelity.com, 10/2003. Does this new rate apply to short-term gains? No. Short-term gains will continue to be taxed at the federal level at your client s ordinary income tax rate, at rates as high as 35%. How does this new rate affect income and transfer tax planning? Under the new ct, the 5% rate applies to gains recognized on assets held more than a year. The five-year holding period rules have been repealed through Therefore, your client may wish to transfer assets to their children or other low-income taxpayers, in order to cut the effective tax rate by two-thirds (from to 5%). Keep in mind that the transferee (e.g., child) will have legal ownership, and gift and generation-skipping taxes may apply. In addition, the kiddie tax continues to apply to children under 14.

4 JGTRR PGE 4 Does this make me revisit my client s 529 or state-sponsored education program? bsolutely. Because the effective capital gains tax rate may be 5%, it may be more advantageous to gift investments to your children, rather than having the assets in an education program grow tax deferred. However, some education plans may offer tax-free distributions or may be impacted by state income tax requirements. There are many factors that determine which is the best plan for your client. Please review your clients various educational plans and have your client speak with their tax advisor for more specific tax information. Should my client change the types of investments in their plan? s previously noted, this may be the right time to revisit the types of investments in your client s retirement portfolio. The benefit of the lower capital gain rates will not apply to gains generated within a tax-deferred retirement account, like a 401(k) or IR. Distributions will still be taxed as ordinary income. Thus it may be more tax-advantageous to have income-producing investments continue to be utilized in a tax-deferred account, while capital gains vehicles may be better in an after-tax account. Reduction in Dividends Tax Rate Dividends received by an individual shareholder from domestic corporations and certain qualified foreign corporations 1 will be treated as net capital gains for purposes of applying the capital gains tax rates for both the regular tax and alternative minimum tax. Therefore, most corporate dividends will be taxed at a rate of rather than at your client s ordinary income tax rate. Please see the capital gains tax rate chart on the previous page for specific detail. How does this affect my client s current stock dividends? It could be a terrific positive. Since your client will be taxed at a rate of rather than at their ordinary income tax rate, your client will be able to keep 85% of all dividend distributions. This will have a positive effect on after-tax yields of certain dividend -producing investments. Will mutual funds be eligible for this lower rate? Yes. However, only the portion of the distribution that comes from corporate stock dividends is eligible for the lower dividend rate. Money market mutual fund and bond mutual fund distributions will not be eligible for the lower rate. Does this rate count toward annuities? No. nnuities will continue to be taxed at ordinary income rates both for distributions and any capital gains of an annuity.

5 JGTRR PGE 5 Net Unrealized ppreciation 5 n often overlooked provision at the time of a rollover from an employer-sponsored retirement plan is Net Unrealized ppreciation ( NU ). NU is available to employees who have accumulated employer stock in a tax-deferred retirement program, such as a 401(k). Please note: The employee must elect NU tax treatment. Rather than roll these assets over to an IR to retain the assets tax-deferred status, your client may instead take the company stock as a distribution. t the time of asset transfer, your client would pay ordinary income tax on the cost-basis of the stock, then ultimately pay the capital gains tax rate on all future gains realized upon sale of the employer stock. Your client should also consider paying taxes on the cost basis from other sources if he/she wants to continue holding the employer stock. Your client should also consider their overall asset allocation when considering the tax impact of the 12-month holding period requirement in order to qualify for the capital gains rate on any post distribution appreciation over and above the Net Unrealized ppreciation. So what should you do? Schedule meetings with your clients. It may be the right time to meet with your client to discuss the effects of JGTRR and NU to their retirement planning needs. Topics you could discuss include: > Saving more for retirement > Portfolio review from a tax-efficiency perspective > Portfolio review for appropriate investment choices > Utilize NU of employer stock 5

6 JGTRR PGE 6 F 200 SEPORT BOULEVRD, Z2K BOSTON, M Source: New Tax Impact on Retirement ccounts, Ed Slott, Ed Slott s IR dvisor, irahelp.com, 10/ Source: irs.gov: 10/ In order to meet eligibility requirements to convert an IR assets to a Roth IR, your MGI must not be more than $100,000. lso, married individuals filing separately are not eligible to convert IR assets into a Roth IR except if the married individual has lived apart from their spouse for the entire taxable year. 4 Please speak with a tax advisor for more information. 5 NU is not made available by JGTRR. Views are subject to change based on market conditions. ll tax rate reductions and other tax law changes introduced by the Jobs and Growth Tax Relief Reconciliation ct of 2003 (JGTRR) will expire December 31, 2008, unless extended by legislative action. t that time, tax laws that would have been in effect had JGTRR not been enacted will take effect. Information provided is general and educational in nature. It is not intended to be, and should not be construed as, legal or tax advice. Fidelity does not provide legal or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Consult an attorney or tax advisor regarding your specific legal or tax situation. National Financial Services LLC, Member NYSE, SIPC