Your Financial Legacy An Illustration to Help You Pass Your IRA Assets to Future Generations Prepared for John F. Sample and Susan G. Sample Prepared by Michael J. Prestwich ImagiSOFT, Inc. PO Box 1328 Albuquerque, NM 87192 (877) 51-472 michael.prestwich@imagisoft.com October 3, 217 Page 1 of 13
Disclosure Page Important - Please Read This analysis compares different options available to you. It provides only a broad, general and non-exhaustive guideline which may be helpful in shaping your thinking about your retirement planning. Nothing contained herein should be considered as a recommendation of any specific option, unless otherwise stated. The report and graphs are dependent upon the quality and accuracy of data furnished by you. Any changes in, or inaccuracy of, the information you have provided to us may affect the information presented in this financial analysis. Calculations illustrating income tax concepts and deductions are estimates only and should not be relied upon in filing income tax returns or in making tax-related decisions. Tax laws, including tax rates, are amended from time to time and such amendments may affect the options and information presented in this illustration. Assumed asset growth rates and hypothetical investment returns are used at various places in this financial analysis. All assumed growth rates and investment returns are for illustration purposes only and are not intended to represent the actual future performance or growth of any specific investment or asset. All illustrations demonstrating investment growth assume a constant annual growth rate whereas actual rates may vary. All illustrations assume reinvestment of all earnings, but do not consider the effect of taxes or investment fees and expenses unless otherwise noted. Past performance is not indicative of future results and nothing contained herein should be construed as a guarantee of a particular result. This material is for estimating purposes only and must be monitored periodically. Michael J. Prestwich does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. Page 2 of 13
Your 78-Year Income Generating Machine Your $1,, IRA Rollover May Generate $2,863,568 of Total Income Defer Taxes Time (RMD) Steady Return Safety Proper Planning John's $1,, IRA Rollover John passes away at age 86 Generates paychecks for John totaling $828,646 over 18 years Generating paychecks for Susan totaling $666,41 over 1 years Generates paychecks for Robert totaling Generates paychecks for Johnny totaling Generates paychecks for Bobbie totaling $475,83 over 23 years $435,375 over 48 years $457,316 over 5 years With proper planning Susan Continues with $925,957 IRA Susan passes away at age 95 With proper planning Next Generation Divides Inheritance of $573,24 into Individual IRA Rollover s The hypothetical rates of return in this illustration were selected by your financial professional based on his/her knowledge of your risk tolerance, investment strategy, and historical returns where you may be likely to invest your IRA. This rate is not a guarantee, nor is it intended to be indicative of any particular investment product or investment vehicle. If your IRA earns rates of return lower than the rates selected in this illustration, then your total distributions under the "stretch" method will be lower than what is illustrated; if your actual rates of return are higher, your total distributions should also be higher. If your IRA earns a negative rate of return, the owner, spouse, and beneficiaries will receive less than the initial value, less the income taxes due. Page 3 of 13
Will You Leave Your Family a Legacy or a Tax Bill? Your retirement account's contributions were made with pre-tax money. Growth compounds income tax free, but not forever. Uncle Sam requires that you start withdrawing down your retirement account starting at age 7½ and these distributions will be fully taxable. Upon your death your retirement account may trigger a huge tax bill if your beneficiaries are forced to take a taxable lump sum distribution, which most company-sponsored retirement plans require. To avoid this, rollover all or part of your current retirement assets into an IRA that allows your beneficiaries to "stretch" their inheritance over their lifetimes to avoid the higher tax impact of a lump sum payment. This strategy also gives your heirs the benefit of earning tax-deferred interest over their lifetimes to maximize the income they will receive from their inherited IRA. I Want My Share $347,37 Your beneficiaries should follow the advice of an expert financial advisor who knows exactly what to do-and what not to do-with your IRA assets after you die. What follows illustrates a few examples of the pitfalls into which your beneficiaries may fall without proper planning: Pitfall 1 Pitfall 2 Stretch $925,957 $666,41 $666,41 $ $573,24 $1,368,521 Total Federal Income Taxes Paid $347,37 $375,3 $576,15 Total After-tax Income $578,587 $864,395 $1,458,772 Total Distributions to Spouse Total Distributions to Next Generation Beneficiaries Pitfall 1: Spouse takes lump sum distribution; Next Generation gets nothing Pitfall 2: Spouse takes Required Minimum Distributions (RMD); Next Generation beneficiaries take lump sum Stretch: Spouse and Next Generation both take Required Minimum Distributions (RMD) Income tax calculations assume each beneficiary has a taxable income of $5, and pays taxes at 217 federal income tax rates for a Single filer. Annual distributions are then added to the taxable income and income taxes are recomputed to determine the income tax on the distribution. This method is only an approximation of the income tax effect on distributions, but demonstrates the impact of how lump sum distributions are taxed in higher tax brackets. Actual taxes may be higher or lower than shown above depending on each beneficiary's individual situation. Tax rates are subject to change and may differ from this analysis. State income taxes are not included in these examples. Page 4 of 13
Benjamin Franklin's Financial Legacy In 179 Benjamin Franklin left $4, jointly to the city of Philadelphia and the state of Pennsylvania. He left instructions that the money be conservatively invested, but not withdrawn, until 2 years after his death. In 199 this fund had grown to $1,5,. The Pennsylvania State Legislature distributed the assets of the fund to several charitable foundations, including a scholarship fund for the students of Penn College. Because of his remarkable foresight and planning, Benjamin Franklin benefited thousands of lives even though he had been dead for more than 2 years. Turn $1,, into $2,863,568 Income Over 78 Years Franklin understood the interrelationship between time and compound interest. His lump sum investment of a mere $4, earned a modest 3.% percent annual return, yet his money increased to $1,5,-375 times the original value. Franklin knew that time would be the key element in maximizing the return on his investment, which is why he insisted that the money be allowed to accumulate for 2 years. Maximize Your Retirement 's Payout The purpose of this illustration is to help you understand how to legally maximize the time your assets remain invested. The longer your retirement account remains intact the more income it may produce. This illustration demonstrates that it is hypothetically possible to "stretch" your IRA assets over 78 years and to produce income across several generations. This is accomplished by having each beneficiary withdraw their required minimum distribution (RMD) each year. The ledgers that follow illustrate how the RMD percentage increases each year until the beneficiary's life expectancy age is reached, where the payout is 1%. Based on the assumptions in this report, it is possible, but not guaranteed, for the $1,, assets in your IRA account to generate approximately $2,863,568 in future income to you and your beneficiaries. See the ledger pages that follow for details. The maximum benefits of the "Multi-Generation Concept" or "Stretch IRA" distribution strategy are best realized by those who do not need the assets illustrated as their primary source of retirement income, however, each participant may withdraw more than the amount illustrated when income needs change. See page 7 for other factors that may impact the assumptions of this report in the future. Required Minimum Distributions Beginning with age 7½, you are required by law to withdraw a certain minimum amount from your IRA each year. This illustration assumes that you take at least the required minimum distribution at the end of each year. After your death your beneficiaries are also required to withdraw a minimum amount from their inherited IRA. This illustration assumes that your beneficiaries withdraw only the minimum amount each year. Required Minimum Distribution regulations were proposed by the Treasury Department (IRS) in 1987 and in 21. Final regulations on IRA distributions were issued on April 17, 22 and are the basis of this illustration. Future beneficiaries may be subject to different types of taxation. Tax laws are complex, subject to change, and may apply differently to your particular circumstances. Neither ImagiSOFT, Inc. nor its agents or employees provide tax, legal, financial, or accounting advice. You should consult with your attorney or qualified tax advisor regarding these matters. Page 5 of 13
You Need a Proper IRA Custodial Agreement Many retirement plan trustees or custodians limit the beneficiary's distribution period from one to five years. We strongly recommend that you read your plan document carefully to ensure your beneficiaries can elect to receive a lifetime incomeas is demonstrated in this report. This will give them a) the highest possible income from your retirement plan, and, b) help your heirs avoid the dramatic income tax consequences they may incur if they are forced to receive the proceeds of your retirement plan in a lump sum. Leave Them A time Income IRA Distribution Planning Details The "Multi-Generation Concept" or "Stretch IRA," concept is not a special or new type of IRA. Rather, the "Stretch IRA" is a bona fide strategy whereby an IRA owner may extend the period of distributions of tax-deferred earnings for several generations. Creating an IRA distribution plan is essential if your goal is to pass as much of your IRA assets on to your beneficiaries as possible in the most tax-efficient manner. To make your assets last as long as possible, the goal of your IRA distribution plan is to: 1. Provide your beneficiaries with an income stream over their life expectancies. 2. Help spread your beneficiaries' tax liability over their life expectancies. 3. Take advantage of your IRA's tax-deferred growth to increase the amount of money that may eventually pass to your beneficiaries. Keep in mind, however, that the primary use of your IRA is to generate retirement income for yourself. Neither you or your beneficiaries are under any obligation to withdraw only the Required Minimum Distribution each year. You may also change the beneficiaries to your IRA at any time. Those considering the "Stretch IRA" concept should understand that this strategy is generally designed for those who will not depend on the funds directed to the IRA, as their primary source of income either presently or in retirement. This illustration will provide you and your advisors information so that the IRA distribution plan you put in place will best meet your objectives. It starts with two important steps. Step 1) Name Your IRA Beneficiaries By designating each beneficiary of your IRA, you control who inherits this important asset after your death, and ensure that each gets a lifetime payout based on their own life expectancy. If you fail to name a beneficiary prior to your death, your IRA will generally pass to your estate and will be subject to applicable state probate laws, where the court will determine how your IRA assets will be divided. Step 2) Withdraw Your Required Minimum Distribution (RMD) Each Year Starting with the year you attain age 7½, you are required to withdraw your RMD from your IRA by December 31st of each year. Important: The RMD must be recalculated each year. We recommend that you seek the help of a trained professional for the RMD calculation and that you evaluate your IRA distribution plan annually with your financial advisor. How to Calculate Your RMD Most IRA owners will use the calculation method based on The Uniform time Table. If your spouse who is more than 1 years younger than you is named as sole beneficiary for the entire year, you may use Joint Expectancy Table. Non-spouse beneficiaries who inherit an IRA must calculate the RMD based on the Single Expectancy Table. This illustration uses these formulas. Page 6 of 13
Steps Used to Calculate Your RMD 1. Determine your age at the end of the year. 2. If older than age 7½, look up the life expectancy factor from the appropriate table. 3. Locate your IRA statement from the previous year then find the value on December 31st. 4. Divide the December 31st IRA balance by your life expectancy factor. Hypothetical Example: RMD for 217 Age Expectancy Factor December 31, 216 RMD Amount 7 27.4 $1, $1, / 27.4 = $3,65 Hypothetical Rate of Return Assumptions The hypothetical rates of return in this illustration were selected by your financial professional based on his/her knowledge of your risk tolerance, investment strategy, and historical returns where you may be likely to invest your IRA. This rate is not a guarantee, nor is it intended to be indicative of any particular investment product or investment vehicle. If your IRA earns rates of return lower than the rates selected in this illustration, then your total distributions under the "stretch" method will be lower than what is illustrated; if your actual rates of return are higher, your total distributions should also be higher. If your IRA earns a negative rate of return, the owner, spouse, and beneficiaries will receive less than the initial value, less the income taxes due. Time Duration / Possible Future Changes This "Stretch IRA" illustration spans 78 years with assets being distributed over several generations. Some of the assumptions in this illustration may change during this timeframe that may affect the total distributions received by you and your beneficiaries. For example, lower or higher rates of return than those illustrated, distributions higher than the RMD, tax law changes, and changing beneficiaries are events that may impact the assumptions of this illustration. Distributions Higher Than The RMD This illustration assumes that you, your spouse, and your beneficiaries will withdraw the Required Minimum Distribution each year. Although you are free to do so, withdrawing more than your RMD may dramatically impact future distributions to you and your beneficiaries. Potential Tax Law Changes This illustration is based on current tax laws, which are subject to change, possibly making the "Stretch IRA" distribution strategy obsolete in the future. Neither ImagiSOFT, Inc. nor its agents or employees provide tax, legal, financial, or accounting advice. You should consult with your attorney or qualified tax advisor regarding these matters. Beneficiary Changes The plan owner may add, delete, or change beneficiaries at any time. Changing beneficiaries will impact the assumptions and future distributions shown in this illustration. Consider Inflation This illustration does not reflect that inflation may erode the purchasing power of the future dollars shown. Possible Estate Taxes Traditional IRA assets are part of your estate when you die. Estates of decedents who die during 217 have a basic exclusion amount of $5,49,. Under current law, this amount is adjusted each year for inflation. Federal or state estate taxes, if paid from the IRA assets, will dramatically reduce the illustrated income paid to future beneficiaries. Please consult with your qualified tax professional to determine whether you may have an estate tax liability which could be detrimental to your "Multi-Generation IRA" distribution plan. Page 7 of 13
Assumptions for this Illustration Current Value of IRA: $1,, Owner: John F. Sample Date of Birth: March 27, 1949 Age on December 31, 217: 68 Assumed Age at Death: 86 Rate of Return Assumption Primary Beneficiary: Susan G. Sample (Spouse) Date of Birth: Age on December 31, 217: Age at John's Death: Assumed Age at Death: Inherits this Percentage: Rate of Return Assumption May 1, 195 67 85 95 1% Next Generation Beneficiaries: Johnny Sample Date of Birth: January 1, 29 Age at Susan's Death: 36 Inherits this Percentage: 25% Rate of Return Assumption Robert Sample Date of Birth: January 1, 1982 Age at Susan's Death: 63 Inherits this Percentage: 5% Rate of Return Assumption Bobbie Sample Date of Birth: January 1, 211 Age at Susan's Death: 34 Inherits this Percentage: 25% Rate of Return Assumption The hypothetical rates of return in this illustration were selected by your financial professional based on his/her knowledge of your risk tolerance, investment strategy, and historical returns where you may be likely to invest your IRA. This rate is not a guarantee, nor is it intended to be indicative of any particular investment product or investment vehicle. If your IRA earns rates of return lower than the rates selected in this illustration, then your total distributions under the "stretch" method will be lower than what is illustrated; if your actual rates of return are higher, your total distributions should also be higher. If your IRA earns a negative rate of return, the owner, spouse, and beneficiaries will receive less than the initial value, less the income taxes due. Page 8 of 13
John F. Sample Beginning December 31, 216 Year Age 217 68 218 69 219 7 22 71 221 72 222 73 223 74 224 75 225 76 226 77 227 78 228 79 229 8 23 81 231 82 232 83 233 84 234 85 Spouse Age Expectancy 67 68 69 27.4 7 26.5 71 25.6 72 24.7 73 23.8 74 22.9 75 22. 76 21.2 77 2.3 78 19.5 79 18.7 8 17.9 81 17.1 82 16.3 83 15.5 84 14.8 Deposits $1,, Interest Earnings 4, 41,6 43,264 43,416 43,514 43,555 43,534 43,446 43,286 43,5 42,742 42,346 41,868 41,34 4,648 39,897 39,46 38,88 Required Minimum Distributions 39,474 4,958 42,494 44,84 45,728 47,43 49,189 5,767 52,637 54,289 55,973 57,687 59,428 61,192 62,977 64,338 Elective Withdrawals 1,4, 1,81,6 1,85,39 1,87,847 1,88,867 1,88,338 1,86,143 1,82,159 1,76,256 1,68,54 1,58,644 1,46,7 1,32,595 1,16,212 997,433 976,138 952,27 925,957 At John's death this illustration assumes that Susan completes an IRA rollover. Total distributions during John's lifetime are $828,646. John takes distributions at age 7 and calculated life expectancy using the Uniform time Table. Susan is named beneficiary. Reflects an assumed hypothetical annual rate of return of which is not guaranteed. See page 8 for details. Distributions are based on the prior year's December 31 value. The initial distribution in this example is using the value of $1,, as of December 31, 216. Page 9 of 13
Susan G. Sample Inherited Year 235 236 237 238 239 24 241 242 243 244 Spouse Age 85 86 87 88 89 9 91 92 93 94 Expectancy 14.8 14.1 13.4 12.7 12. 11.4 1.8 1.2 9.6 9.1 $925,957 Interest Earnings 37,38 36,17 34,93 33,695 32,39 3,986 29,57 27,956 26,333 24,643 Required Minimum Distributions 62,565 63,86 65,118 66,329 67,478 67,952 68,34 68,518 68,575 67,71 Elective Withdrawals 9,43 872,587 842,372 89,739 774,65 737,684 698,887 658,325 616,82 573,24 Total distributions during Susan's lifetime are $666,41. At Susan's death, the IRA is distributed to the named beneficiaries. Susan takes distributions at age 85 and calculated life expectancy using the Uniform time Table. Reflects an assumed hypothetical annual rate of return of which is not guaranteed. See page 8 for details. Required Minimum Distributions are based on the prior year's December 31 value and the Uniform time Table. Extending Your Legacy You receive your Required Minimum Distributions on your IRA until the time of your death based on the Uniform time Table. At your death, Susan rolls over the remaining IRA balance and names new beneficiaries for her IRA. With Susan now the current IRA owner, the account will continue to earn interest, maintain its tax-deferred status, and avoid the $347,37 income tax as explained on page 4 about the tax impact of large lump sum payments. Required Minimum Distributions are based on the Uniform time Table. At Susan's death, her beneficiaries receives their percentage of the IRA and must take Required Minimum Distributions based on the single life expectancy table. If Susan's estate does not have enough liquidity outside the IRA to pay any applicable estate taxes, and is forced to liquidate some of the IRA assets for these expenses, distributions to the next generation beneficiaries could be greatly reduced. Page 1 of 13
Robert Sample Inherited Annual Year Age Exp. Distributions 245 63 22.7 12,622 246 64 21.7 13,15 247 65 2.7 13,71 248 66 19.7 14,277 249 67 18.7 14,879 25 68 17.7 15,57 251 69 16.7 16,165 252 7 15.7 16,853 253 71 14.7 17,573 254 72 13.7 18,327 255 73 12.7 19,118 256 74 11.7 19,948 $286,512 285,351 283,615 281,258 278,232 274,482 269,954 264,587 258,318 251,78 242,794 233,389 222,776 Annual Year Age Exp. Distributions 257 75 1.7 2,82 258 76 9.7 21,739 259 77 8.7 22,78 26 78 7.7 23,735 261 79 6.7 24,826 262 8 5.7 25,993 263 81 4.7 27,254 264 82 3.7 28,639 265 83 2.7 3,29 266 84 1.7 32,128 267 85.7 25,661 21,867 197,563 182,757 166,333 148,16 128,94 15,963 81,563 54,617 24,674 Total distributions received during Robert's lifetime $475,83 Calculated on December 31st of the year following death and reduced by one each year thereafter. Distributions are subject to income tax. The above assumes a rollover into an IRA that allows non-spouse beneficiary RMD distributions so the inheritance can be distributed over the maximum number of years. This strategy will allow the account to continue to earn interest, maintain its tax-deferred status, and will avoid the $95,485 income tax as explained on page 4 about the tax impact of large lump sum payments. Reflects an assumed hypothetical annual rate of return of which is not guaranteed. See page 8 for details. Page 11 of 13
Johnny Sample Inherited Annual Year Age Exp. Distributions 245 36 47.5 3,16 246 37 46.5 3,139 247 38 45.5 3,267 248 39 44.5 3,41 249 4 43.5 3,54 25 41 42.5 3,685 251 42 41.5 3,836 252 43 4.5 3,993 253 44 39.5 4,157 254 45 38.5 4,328 255 46 37.5 4,56 256 47 36.5 4,691 257 48 35.5 4,884 258 49 34.5 5,85 259 5 33.5 5,294 26 51 32.5 5,512 261 52 31.5 5,74 262 53 3.5 5,977 263 54 29.5 6,224 264 55 28.5 6,482 265 56 27.5 6,751 266 57 26.5 7,31 267 58 25.5 7,323 268 59 24.5 7,628 $143,256 145,97 148,67 151,349 154,2 156,622 159,22 161,734 164,29 166,621 168,958 171,21 173,368 175,419 177,351 179,151 18,85 182,297 183,612 184,733 185,64 186,315 186,737 186,884 186,731 Annual Year Age Exp. Distributions 269 6 23.5 7,946 27 61 22.5 8,278 271 62 21.5 8,624 272 63 2.5 8,986 273 64 19.5 9,364 274 65 18.5 9,759 275 66 17.5 1,172 276 67 16.5 1,63 277 68 15.5 11,55 278 69 14.5 11,527 279 7 13.5 12,23 28 71 12.5 12,542 281 72 11.5 13,87 282 73 1.5 13,661 283 74 9.5 14,265 284 75 8.5 14,92 285 76 7.5 15,578 286 77 6.5 16,297 287 78 5.5 17,67 288 79 4.5 17,92 289 8 3.5 18,822 29 81 2.5 19,876 291 82 1.5 21,21 292 83.5 12,348 186,254 185,426 184,219 182,62 18,541 178,4 174,953 171,347 167,147 162,35 156,775 15,54 143,437 135,514 126,669 116,834 15,929 93,87 8,557 65,878 49,691 31,82 11,873 Total distributions received during Johnny's lifetime $435,375 Calculated on December 31st of the year following death and reduced by one each year thereafter. Distributions are subject to income tax. The above assumes a rollover into an IRA that allows non-spouse beneficiary RMD distributions so the inheritance can be distributed over the maximum number of years. This strategy will allow the account to continue to earn interest, maintain its tax-deferred status, and will avoid the $43,29 income tax as explained on page 4 about the tax impact of large lump sum payments. Reflects an assumed hypothetical annual rate of return of which is not guaranteed. See page 8 for details. Page 12 of 13
Bobbie Sample Inherited Annual Year Age Exp. Distributions 245 34 49.4 2,9 246 35 48.4 3,18 247 36 47.4 3,142 248 37 46.4 3,27 249 38 45.4 3,44 25 39 44.4 3,543 251 4 43.4 3,688 252 41 42.4 3,839 253 42 41.4 3,996 254 43 4.4 4,16 255 44 39.4 4,331 256 45 38.4 4,58 257 46 37.4 4,693 258 47 36.4 4,886 259 48 35.4 5,87 26 49 34.4 5,297 261 5 33.4 5,515 262 51 32.4 5,742 263 52 31.4 5,979 264 53 3.4 6,226 265 54 29.4 6,484 266 55 28.4 6,752 267 56 27.4 7,32 268 57 26.4 7,324 269 58 25.4 7,629 $143,256 146,86 148,911 151,726 154,525 157,33 16,52 162,766 165,438 168,6 17,622 173,116 175,533 177,861 18,89 182,25 184,197 186,5 187,749 189,28 19,625 191,766 192,685 193,36 193,77 193,892 Annual Year Age Exp. Distributions 27 59 24.4 7,946 271 6 23.4 8,278 272 61 22.4 8,624 273 62 21.4 8,985 274 63 2.4 9,362 275 64 19.4 9,756 276 65 18.4 1,167 277 66 17.4 1,597 278 67 16.4 11,47 279 68 15.4 11,517 28 69 14.4 12,1 281 7 13.4 12,526 282 71 12.4 13,68 283 72 11.4 13,636 284 73 1.4 14,234 285 74 9.4 14,864 286 75 8.4 15,529 287 76 7.4 16,235 288 77 6.4 16,985 289 78 5.4 17,791 29 79 4.4 18,664 291 8 3.4 19,63 292 81 2.4 2,743 293 82 1.4 22,165 294 83.4 1,512 193,71 193,171 192,274 19,981 189,258 187,73 184,389 181,167 177,367 172,944 167,852 162,4 155,454 148,36 139,723 13,448 12,136 18,77 96,7 82,122 66,743 49,782 31,31 1,17 Total distributions received during Bobbie's lifetime $457,316 Calculated on December 31st of the year following death and reduced by one each year thereafter. Distributions are subject to income tax. The above assumes a rollover into an IRA that allows non-spouse beneficiary RMD distributions so the inheritance can be distributed over the maximum number of years. This strategy will allow the account to continue to earn interest, maintain its tax-deferred status, and will avoid the $43,29 income tax as explained on page 4 about the tax impact of large lump sum payments. Reflects an assumed hypothetical annual rate of return of which is not guaranteed. See page 8 for details. Page 13 of 13