IRA Tax Fundamentals and Strategies Presentation

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IRA Tax Fundamentals
and Strategies
IRD, NUA and Life Insurance
Presenter
Title
For Producer Use Only
RMDs vs. Account Value
RMD as % of Account Value
18%
16%
14%
12%
8%
10%
6%
8%
6%
3.6%
12%
10%
14%
4%
2%
0%
70
75
80
85
90
95
100
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Projected IRA Values
$160,000
$140,000
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
$0
70
75
80
85
90
95
100
105
110
115
$100,000 IRA; 7% hypothetical annual return
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RMD Table
Age
Uniform
Table
Divisor
SingleLife Table
Divisor
Age
Uniform
Table
Divisor
SingleLife Table
Divisor
Age
Uniform
Table
Divisor
SingleLife Table
Divisor
70
27.4
17.0
86
14.1
7.1
102
5.5
2.5
71
26.5
16.3
87
13.4
6.7
103
5.2
2.3
72
25.6
15.5
88
12.7
6.3
104
4.9
2.1
73
24.7
14.8
89
12.0
5.9
105
4.5
1.9
74
23.8
14.1
90
11.4
5.5
106
4.2
1.7
75
22.9
13.4
91
10.8
5.2
107
3.9
1.5
76
22.0
12.7
92
10.2
4.9
108
3.7
1.4
77
21.2
12.1
93
9.6
4.6
109
3.4
1.2
78
20.3
11.4
94
9.1
4.3
110
3.1
1.1
79
19.5
10.8
95
8.6
4.1
111
2.9
1.0
80
18.7
10.2
96
8.1
3.8
112
2.6
81
17.9
9.7
97
7.6
3.6
113
2.4
82
17.1
9.1
98
7.1
3.4
114
2.1
83
16.3
8.6
99
6.7
3.1
115 +
1.9
84
15.5
8.1
100
6.3
2.9
85
14.8
7.6
101
5.9
2.7
3
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I.R.D.
Income in Respect of a Decedent
4
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IRD: The Bad News Is. . .
1. No step-up in basis at death
2. Beneficiary pays income tax at owner’s death
– Taxes are calculated at Beneficiary’s tax rate
3. Deceased IRA owner must include the entire IRA
value in his / her estate for estate taxes
– Even though the $$ pass directly to the designated
beneficiary!
This is what’s known as the “Double-Tax”
5
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IRD: The Good News Is. . .
You can overcome these problems
The IRS gives you tools to do it!
1. Stretch the inheritance to spread the taxes over
many years and continue tax deferral
2. Consider charitable beneficiaries
3. NUA – more about this in a few minutes!
4. Beneficiary receives an income tax deduction
for estate taxes paid by owner
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Estate Taxes & IRD
 IRA values included in decedent’s gross estate
– Decedent’s estate pays the estate taxes
– Beneficiary pays the income taxes
 Unlimited Marital Deduction (since 1982)
– Allows first-decedent-spouse to pass IRA to surviving spouse
without incurring estate tax
 IRD income-tax-deduction for beneficiary’s
– For the estate taxes attributable to the IRA
 The Problem? ? ?
– Decedent’s CPA vs. Beneficiary’s CPA
7
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IRA Estate Tax Example:
Theory vs. Reality
IRA Value:
$1,000,000
Estate Tax (40%):
– $400,000
To Be Income Taxed:
Income Tax (40%):
Estate
Tax
$600,000
– $240,000
Net Inheritance:
$360,000
Total Taxes:
$640,000
% Lost to Tax:
64%
Income
Tax
Net
Remaining
8
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IRA Estate Tax Example:
Theory vs. Reality
Decedent
Beneficiary
IRA Value:
$1,000,000
$1,000,000
Estate Tax (40%):
– $400,000
– $0
Net Value:
$600,000
Income Tax (40%):
– $0
Total Taxes:
$800,000
% Lost to Tax:
80%
$1,000,000
– $400,000
10
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IRA Estate Tax Example:
Theory vs. Reality
$1,000,000
$900,000
$800,000
$700,000
Estate
Tax
$600,000
$500,000
$400,000
Income
Tax
$300,000
$200,000
$100,000
Net
Remaining
$0
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IRA Estate Tax Example:
Theory vs. Reality
Estate
Tax
Estate
Tax
Income
Tax
Income
Tax
Net
Remaining
Net
Remaining
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Estate Tax Exclusion:
Then and Now
1997:
$600,000
Per Person
2013:
$5,250,000
Per Person
14
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Stretching The IRD Deduction
 Recall the previous example:
– IRA Value = $1,000,000
– Estate Tax (40%) = $400,000
 Children inherit $1,000,000
– Stretch = $80,000 per year for 30 years (over-simplified)
– Estate Tax Deduction = 40%
• Calculation: $400,000 Estate Tax / $1,000,000 IRA Value
– So 40% of each stretch payment is excused from income
tax until the deduction is used up
 Each stretch payment is 40% income-tax-free
for 12.5 years!
– Unlimited deduction carry-forward
– Can amend prior 3-years’ tax-returns
15
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Stretching The IRD Deduction
$80,000
$70,000
$60,000
$50,000
Taxable
Tax-Free
$40,000
$30,000
$20,000
$10,000
$0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
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N.U.A.
Net Unrealized Appreciation
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NUA – What is it?
 It’s the appreciation on the “employer stock” in your 401(k)
 Upon separation from service, you can distribute your employer
stock (in-kind distribution) from your 401(k)  your brokerage
account.
 When you distribute your NUA, you only pay income tax on the
value of the stock when it was originally purchased in your
401(k)
 If you then hold the NUA stock for more than one year, you
receive Long-Term Capital Gains tax treatment on any
appreciation in the shares you sell
 You can still roll the balance of your 401(k) into a Rollover IRA
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NUA – Benefits
 Long-term capital gains tax treatment
– All gains in excess of “basis” are taxed as LongTerm Capital Gains
– There ARE Step-Up-In-Basis opportunities with
NUA!
 There is no “RMD” on NUA stock
– No requirement to sell it after age 70½
– Defer the growth for the rest of your life!
– Pass it on!
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NUA – 3 Components
Appreciation
Outside the
Plan
Appreciation
Inside the
Plan
Original
Stock Price
20
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NUA – 3 Components
Any appreciation on your NUA stock that occurs
after you’ve removed it from your 401(k) DOES
get a step-up in basis at your death
NUA appreciation that occurred while the
company stock was in your 401(k) does NOT get
a step-up in basis at your death, but is taxed at
long-term capital gains tax rates when sold
The original stock price becomes “cost basis”
when withdrawn from the 401(k) and taxed
21
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NUA – 3 Components
Appreciation
Outside the
Plan:
$400,000
Appreciation
Inside the
Plan:
$400,000
Long-Term
Capital Gains
Tax Rates
No RMD’s
Step-Up in Basis
Basis:
$200,000
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NUA – Caveats
 Be careful about selling the employer stock in
your 401(k) and investing it in something else
– Even if you later “buy back” some employer stock, the
newly purchased stock will have a new “basis”
• Functionally eliminates the value of the NUA distribution
– Continually remind your clients of the importance of
NUA:
1. Before they roll their 401(k) into an IRA; and
2. Before they sell employer stock inside of their 401(k)
23
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Story Selling
And IRA Wealth Transfer Strategies
24
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3 Circles
2 Questions
3-Point Value Proposition
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3 Circles
Your money can go to three
places when you’re done with it:
L.O.
C
G
Cross out the one you would least like
to get your money when you’re done with it.
26
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Client Questions & Value Proposition
Two questions:
1. Mr. & Mrs. Jones, if things go the way you have
planned, what’s going to happen to your IRA?
2. Why don’t you give it to them right now?
Three-point value proposition:
1. We’ll keep your IRA in your Care, Custody and
Control;
2. Potentially double, triple or quadruple the value to your
beneficiaries; and
3. Take no additional investment risk in your portfolio
27
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2 IRA
Wealth Transfer Strategies
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Typical IRA Transfer
IRA Owner(s)
Children
Grandchildren
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Typical IRA Transfer
IRA Owner(s)
$500,000
Children
$300,000
Grandchildren
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1. IRA Income Tax Offset
IRA
RMD’s
Beneficiaries
Life Insurance
(equal to taxes)
Taxes
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1. IRA Income Tax Offset
IRA
$500,000
RMD’s
Beneficiaries
$500,000
Life Insurance
$200,000
Taxes
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2. IRA Income Tax Elimination
IRA
RMD’s
Charity
Life Insurance
(equal to IRA)
Beneficiaries
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2. IRA Income Tax Elimination
IRA
$500,000
RMD’s
Charity
$500,000
Life Insurance
$500,000
Beneficiaries
Tax-Free Total:
$1,000,000
For Producer Use Only
34
The “Soft” Close
“I know you qualify for this program financially, but. . .
I don’t know if you qualify medically.”
You have time to think about it.
35
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IRA Tax Fundamentals
and Strategies
IRD, NUA and Life Insurance
36
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Important Information
Policies issued by American General Life Insurance Company (AGL), a member of American
International Group, Inc. (AIG)
The underwriting risks, financial and contractual obligations and support functions associated with
the products issued by AGL its responsibility. Guarantees are subject to the claims-paying ability
of the issuing insurance company. AGL does not solicit business in New York.
Policies and riders not available in all states. Keep in mind that American General Life Insurance
Company and their distributors and representatives may not give tax, accounting or legal advice.
Any tax statements in this material are not intended to suggest the avoidance of U.S. federal,
state or local tax penalties. Such discussions generally are based upon the company’s
understanding of current tax rules and interpretations. Tax laws are subject to legislative
modification, and while many such modifications will have only a prospective application, it is
important to recognize that a change could have retroactive effect as well. Individuals should seek
the advice of an independent tax advisor or attorney for more complete information concerning
their particular circumstances and any tax statements made in this material.
©2014. All rights reserved.
AGLC107161
37
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