Wealth strategies with
Roth IRA conversions
Not FDIC
Insured
May Lose
Value
No Bank
Guarantee
281184
4/13
|1
The retirement savings challenge
We are living longer while
“guaranteed” lifetime income
sources, such as pensions, decline.
And the responsibility for
investment and lifetime income
has shifted to the individual.
281184
4/13
|2
Sources of income in retirement
Social
Security
Retirement
plans and
IRAs
Personal
savings
281184
4/13
|3
How are these sources taxed?
Social
Security
Retirement
plans and
IRAs
Personal
savings
Up to 85%
included in
taxable income
Generally taxed
as ordinary
income
Taxed based
on underlying
investments
281184
4/13
|4
Taxes on traditional
retirement plans
Income
for expenses
Federal
income
taxes
A dollar inside a traditional (pretax)
retirement savings account may only
provide 60¢ of income in retirement
281184
4/13
|5
Taxes increase for some taxpayers
beginning in 2013
Ordinary income
Taxpayers with taxable income above $400K
($450K for couples) subject to a marginal tax
rate of 39.6%
Dividends and
capital gains
Taxpayers at same $400K/$450K income
threshold subject to a 20% tax rate (0% rate
still applies for lowest two brackets, 15% rate
for others below the new threshold)
Itemized deductions
and personal
exemptions
Income phase-outs return for taxpayers with
more than $250K in AGI ($300K for couples)
281184
4/13
|6
New health-care taxes
take effect in 2013
• Increase in the individual portion of the Medicare
payroll tax on wages from 1.45% to 2.35%
• New Medicare investment income tax of 3.8%
– Will affect interest, dividends, capital gains,
rental income
– Distributions from retirement accounts are excluded
– Interest from municipal bonds not affected
• Targeted at individuals with more than $200K
income (couples with $250K income)
281184
4/13
|7
What is the likelihood of taxes
increasing even more?
Annual U.S. federal budget surplus/deficit, 2000–2012 ($B)
($) 500
0
-500
-1,000
-1,500
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Congressional Budget Office, Monthly Budget Review, September 2012.
281184
4/13
|8
The aging of America will
further strain the system
Total U.S. population age 65+
41 million
Today
92 million
2060
Source: U.S. Census Bureau, Facts for Features, March 2013.
281184
4/13
|9
New rules opened the door to
Roth accounts for everyone
• Beginning in 2010, anyone can convert Traditional
IRA or retirement plan assets to a Roth IRA
• Roth 401(k) accounts and conversions are now
available
• Withdrawals from Roth accounts during retirement
are not taxed, assuming certain requirements are met
281184
4/13
| 10
Wealth strategies using Roth IRA
conversions
Situation
Roth conversion benefit
Large % of investment assets in
traditional retirement accounts
“Hedging” strategy against future tax
rate increases
You won’t rely on retirement accounts
for regular income
No RMDs means more years of
tax-free growth
Retirement accounts have experienced
market losses
Converting while account values are low
will result in less taxes
You’re concerned about Social Security
income being taxed
Roth IRA income does not impact taxation
of benefits
You find yourself in a low income
tax bracket
A conversion can generate income to match
against losses and deductions
281184
4/13
| 11
Using the Roth IRA to create a
tax-free legacy
• You are not required to take minimum distributions
at age 70½
• Your beneficiary spouse does not have to take
withdrawals
• Non-spouse beneficiaries must take withdrawals, but
the distributions are tax free
• Paying income taxes at conversion can help lower the
value of your estate if estate taxes are a concern
281184
4/13
| 12
Recharacterization:
The Roth “do over” rule
• This rule allows you to “undo” a Roth conversion by
transferring assets back into a Traditional IRA before
filing your tax return without any penalties or taxes
• When might a recharacterization make sense?
– Extra income from the Roth IRA conversion is too much
– The account value has decreased from the time of the
conversion
281184
4/13
| 13
Opportunities for certain small
business owners
• Certain business losses may be used to offset income
from a Roth IRA conversion
• These are known as “net operating losses” or NOLs
• There is no limit on how much income can be offset
by NOLs
– Unlike net capital losses, which can offset only $3,000 in
ordinary income each year
• Consult with your tax professional for more
information
281184
4/13
| 14
Factors you should consider
before converting
• Does a partial conversion strategy make sense?
• Do you have assets available outside of retirement
accounts to pay the taxes due at conversion?
• Are you in a high income tax bracket now?
• Do you expect to report significantly less income
in retirement?
• Are you applying for financial aid?
• Will a Roth IRA conversion affect Medicare Part B
insurance premiums?
281184
4/13
| 15
What’s next?
• Identify all your retirement accounts
• Talk to your advisor about a Roth strategy to provide
tax-free income in retirement or for heirs
– Does a Roth IRA conversion make sense?
– If so, what portion of Traditional IRA assets should be
targeted for conversion?
• Consider converting assets incrementally to minimize
the current tax bite
281184
4/13
| 16
A BALANCED APPROACH
A WORLD OF INVESTING
A COMMITMENT TO EXCELLENCE
EO013 280390
281184 3/13
4/13
| 17
| 17
This information is not meant as tax or legal advice. Please consult
your legal or tax advisor before making any decisions.
Putnam Retail Management
putnam.com
281184
4/13
| 18