An Opportunity to Fund Retirement with a Roth IRA
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Please note that this presentation has been designed to provide general
information. Neither Pacific Life nor its representatives offer legal or tax
advice. Clients should consult their attorneys and tax advisers as to the
applicability of this information to their specific circumstances and for
complete up-to-date information concerning federal and state tax law.
[Name of Financial Professional] and [Company] are not affiliated with
Pacific Life or its affiliated companies.
Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by
Pacific Life & Annuity Company. Product availability and features may vary by state.
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Agenda
Funding
Distributions
Planning
Roth IRAs

Established 1/1/98

Governed by IRA rules, except:
– No deductible contributions
– Tax-free qualified distributions
– Owner has no required distributions
Funding
Contributions
Conversions
FOUR WAYS
Rollovers from
Employer Plans
Rollovers from
Roth 401(k)/403(b)
Contributions for 2016

$5,500 (or $6,500 if 50 or older by end of year)

Two requirements
– Earned income at least equal to amount contributed
– Below modified adjusted gross income (MAGI) thresholds
MAGI Phase-Out Ranges
Married Filing Jointly
Single
$184,000 – $194,000
$117,000 – $132,000
What Is MAGI for Roth IRA?
Adjusted
Gross
Income
(From IRS Form
1040 Series)
•Roth Conversion
Amounts
•Roth Rollovers
from Employer
Plans
Certain
Deductions
& Exclusions
For example:
•Traditional IRA
•Qualified Bond
Interest
Conversions

Rollover of assets from a traditional IRA,
SEP-IRA or SIMPLE IRA to a Roth IRA
– Two-year period must be met if converting a SIMPLE IRA

IRA owner pays taxes on pretax dollars

Additional 10% federal tax does not apply
Conversion Process
1. Redesignation
• 1099R reporting
2. Direct rollover
• 1099R reporting
• No 60-day rule
3. Indirect rollover
• 1099R reporting
• 60-day rule applies
• No 12-month restriction
All Conversions in 2010 and Onward
Convert traditional IRA to Roth IRA
IRA
Roth IRA
No MAGI limits
Anyone can convert regardless of income level
Tax Changes for Top Income Earners
American Taxpayer Relief Act of 2012

Makes permanent for 2013 and beyond the lower
Bush-era income-tax rates (for most individuals)

Top income-tax rate 39.6%
Year
Single
Married Filing Jointly
2013
$400,000
$450,000
2014
$406,750
$457,600
2015
$413,200
$464,850
2016
$415,050
$466,950
Conversion Caution
Using assets outside of the IRA to pay tax:
– Reduces taxable estate
– Maximizes long-term tax deferral
Using IRA assets to pay tax may:
– Subject some assets to income taxation
– Incur an additional 10% federal tax
Converting IRAs After Age 70½
Required minimum distribution (RMD) amounts
cannot be converted or rolled to a Roth IRA
IRA
1. RMD
2. Roth IRA
1. Distribute RMD amount
from IRA
2. Convert balance to Roth IRA
Converting from an Employer Plan
Beginning 1/1/08
Two sets of rules:
1.
Conversion rules
2.
Rollover rules of the plan from
which rollover occurred
Converting from an Employer Plan
IRS Notice 2014-54

Description: The IRS issued notice 2014-54 that addresses
the question “If my 401(k) has both pre-tax money and
post-tax money, can I just take the post-tax money and
convert to a Roth IRA tax-free?”

Impacted Areas: Qualified Retirement Plans, IRAs, and
Roth IRAs

Changes: Clarifies the IRS’s prior position of applying the
pro-rata rule

Effective Date: January 1, 2015
Converting from an Employer Plan
IRS Notice 2014-54

Details: Permits participants to direct the pre-tax and
post-tax when disbursements are made to multiple
destinations (e.g., to an IRA and Roth IRA) and not
require application of the pro-rata rule
Converting from an Employer Plan
Examples:
Pre-IRS Notice 2014-54
Post-IRS Notice 2014-54
• $100,000 401(k) Plan
• $100,000 401(k) Plan
• $80,000 pre-tax
• $20,000 post-tax
• Receives pro-rata treatment
when converting to Roth IRA
• If you convert $20,000 into a
Roth IRA, then $16,000 would
be subject to tax
• $80,000 pre-tax
• $20,000 post-tax
• Can pick which bucket of assets (pretax or post-tax) to convert/distribute
• If you convert $20,000 into a Roth
IRA, then you can choose that all
$20,000 come from the post-tax
bucket and process a tax-free
conversion
Who Let the Roth Out?
Converting inherited accounts

Applies only to eligible rollover distributions from
employer plans

May be rolled to an inherited Roth IRA

Distributions must be taken from a Roth IRA

Does it make sense to convert?
Are You Looking to Accelerate a Deduction?
Section 691(c) deduction

Itemized deduction for estate taxes paid

Conversion causes you to pay income taxes sooner,
BUT also accelerates use of this deduction,
potentially reducing tax bill in half
According to the American Taxpayer Relief Act of 2012, the federal estate, gift, and generationskipping transfer (GST) tax exemption amounts are all $5,000,000 (indexed for inflation effective
for tax years after 2011); the maximum estate, gift, and GST tax rates are 40%. The exemption
amount for 2016 is $5,450,000.
Conversion Do-Overs
Recharacterization
– By tax return due date,
including extensions (October 15)
Reconversion (later of)
Doing over the do-over
– In year following year of conversion, or
– 30 days after recharacterization
Do-Over Timeline
Scenario Conversion Recharacterization
Reconversion
1
4/1/15
8/1/15
1/1/16
2
4/1/15
12/25/15
1/24/16
3
4/1/15
4/15/16
5/15/16
Roth 401(k) and 403(b)

Established 1/1/06

No MAGI limits for contributions

Required distributions

Tricky rollover rules
Roth IRA Distributions

Qualified

Nonqualified

Required (for beneficiaries)
Qualified (Tax-Free) Distributions
Two requirements:
1. Five years since you established
a Roth IRA
2. Distribution is made for one of the following reasons:
– Age 59½ or older
– Disability
– Death of owner
– First-time home buyer
Nonqualified Distributions
If you take a distribution but fail to meet requirements
for a qualified distribution, then the distribution is
made in the following order:

Regular contributions

Conversion and rollover contributions
– Additional 10% federal tax if within five years

Earnings
– Taxes and 10% if no exception
Tricky Rollover Rules
Roth
401(k)/403(b)
Roth IRA

New Roth IRA, then new five-year period

Existing Roth IRA, then rollover tracks Roth IRA
five-year period
Tricky Rollover Rules
Qualified
Distribution
Nonqualified
Distribution
Rollover amount
treated as basis in
Roth IRA
Rollover amount
divided into basis
and earnings in
Roth IRA
DRAC Rollover Example
Amount includes $65,000 after-tax contributions and
$35,000 earnings
Qualified distribution
– $100,000 included as Roth IRA basis
Nonqualified distribution
– Basis and earnings track to the Roth IRA
You May Wish to Get Started
In anticipation of a DRAC rollover, establish a Roth IRA
now with either:

Contributory Roth IRA

Nondeductible IRA that is then converted to Roth IRA
– BUT beware of the aggregation rule
Required Distributions at Death

Death before required beginning
date (RBD) rules
– Designated beneficiary (DB)
▪ May use five-year rule or life expectancy
– No DB
▪ Must use five-year rule
Nonqualified Death Distributions
Roth IRA owner dies before end of five-year period
beginning with:

First taxable year for which a contribution was made

Year of conversion contribution from traditional IRA
or rollover
Qualified Death Distributions
Spousal rollover
– Earlier of spouse’s or decedent’s five-year holding period
All others
– Decedent’s five-year holding period
Who’s Your Beneficiary?
Designated beneficiary (DB)
– Spouse
– Non-spousal individual
– Qualifying trusts
Non-DB—estates, charities, etc.
Spouse

Lump sum

Five-year rule

Inherited Roth IRA
– Annuitization
– Spouse’s recalculated life expectancy
▪ Delayed until owner would have reached age 70½

Rollover
Non-Spousal Individual

Lump sum

Five-year rule

Inherited Roth IRA
– Annuitization
– Life expectancy of beneficiary
Qualifying Trusts and
Designated Beneficiaries (DBs)

Valid under state law

Irrevocable at death

Identifiable beneficiaries

Trust documentation by 10/31 of the year following
the year of death
Qualifying Trusts

Lump sum

Five-year rule

Trust-owned inherited Roth IRA
– Life expectancy of oldest trust beneficiary
Non-Designated Beneficiaries
Lump Sum
Five-Year Payout
Important Dates for the Year AFTER Death
9/30
10/31
12/31
DB
Determination
Trust
Document
Separate
Accounts
Case Study
$750,000 Roth IRA
75-year-old owner dies having named two beneficiaries
Son
Granddaughter
Age 50
Age 25
Begins
Distributions
Begins
Distributions
Opportunity for Separate Accounts

Separate accounts established by 12/31 of the year
following the year of the owner’s death

Son has 34.2 years during which to take distributions

Granddaughter has 58.2 years during which to take
distributions
Thanks, but No Thanks
Disclaimers

Son executes a qualified disclaimer

His sons, ages 22 and 20, may inherit his interest

Separate accounts established by 12/31 deadline

22-year-old son’s distribution period is 61.1 years

20-year-old son’s distribution period is 63 years
Managing the 3.8% Net Investment Income Tax
(NIIT)

Beginning in 2013, the Health Care Reform Act
created a new 3.8% federal tax on net investment
income

3.8% federal tax will apply to the LESSER of:
1.
2.
Net investment income
The excess of MAGI thresholds–$200,000 for single
taxpayers; $250,000 for married taxpayers filing a joint
tax return
Roth IRA Advantages

Potential for earnings without tax

No required lifetime distributions

Not included in definition of income
for taxation of Social Security benefits

Management of NIIT
Roth IRA Disadvantages

No deduction for contributions

Pay tax on conversions
Additional Considerations
Before moving assets from qualified plan to a
Roth IRA consider:

Investment options (may vary)

Fees and expenses (may vary)

Services offered (may differ)

Loan access (Roth IRA does not allow Loans)

Creditor protection (may differ)
Do the Math
Analysis is required, because
everyone’s situation is different
Conversion calculators

Tools to help analyze a Roth IRA conversion
Assumptions include:

When distributions will be taken

What tax rates will be at the time of distributions

Earnings during the interim
Possible Opportunities

You don’t need your traditional IRA for income and
wish to leave it to someone

You need your IRA to fund a trust

You are willing to pay income tax on conversion to
reduce your estate (and thus your estate tax)

You have charitable deduction carryovers, investment
tax credits, etc., that will offset income on conversion
In Summary

Better understanding of funding Roth IRAs

Roth conversions

Distributions and beneficiary options

Decisions should be reviewed with your tax and legal
advisors before making any changes
This material is not intended to be used, nor
can it be used by any taxpayer, for the purpose
of avoiding U.S. federal, state, or local tax
penalties. This material is written to support
the promotion or marketing of the
transaction(s) or matter(s) addressed by this
material. Pacific Life, its affiliates, their
distributors, and respective representatives do
not provide tax, accounting, or legal advice.
Any taxpayer should seek advice based on the
taxpayer’s particular circumstances from an
independent tax advisor or attorney.
Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity
Company. Insurance products are issued by Pacific Life Insurance Company in all states except New
York and in New York by Pacific Life & Annuity Company. Product availability and features may vary
by state. Each insurance company is solely responsible for the financial obligations accruing under
the products it issues.
Pacific Life Insurance Company
In New York, Pacific Life & Annuity Company
P.O. Box 2378
P.O. Box 2829
Omaha, NE 68103-2378
Omaha, NE 68103-2829
(800) 722-4448
(800) 748-6907
www.PacificLife.com