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Wealth strategies with Roth IRA conversions

Wealth strategies with Roth IRA conversions. We are living longer while “guaranteed” lifetime income sources, such as pensions, decline. The retirement savings challenge. And the responsibility for investment and lifetime income has shifted to the individual. Retirement plans and IRAs.

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Wealth strategies with Roth IRA conversions

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  1. Wealth strategies with Roth IRA conversions

  2. We are living longer while “guaranteed” lifetime income sources, such as pensions, decline. The retirement savings challenge And the responsibility forinvestment and lifetime incomehas shifted to the individual.

  3. Retirementplans and IRAs SocialSecurity Personalsavings Sources of income in retirement

  4. How are these sources taxed? Retirementplans and IRAs SocialSecurity Personalsavings Up to 85% included in taxable income Generally taxedas ordinaryincome Taxed basedon underlying investments

  5. Incomefor expenses Federal income taxes A dollar inside a traditional (pretax)retirement savings account may onlyprovide 60¢ of income in retirement Taxes on traditionalretirement plans

  6. Taxes increase for some taxpayers beginning in 2013

  7. 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)

  8. What is the likelihood of taxes increasing even more? Annual U.S. federal budget surplus/deficit, 2000–2012 ($B) ($) Source: Congressional Budget Office, Monthly Budget Review, September 2012.

  9. The aging of America will further strain the system Total U.S. population age 65+ 41 million 92 million Today 2060 Source: U.S. Census Bureau, Facts for Features, March 2013.

  10. 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

  11. Wealth strategies using Roth IRA conversions

  12. Using the Roth IRA to create atax-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

  13. 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

  14. 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

  15. 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 incomein retirement? • Are you applying for financial aid? • Will a Roth IRA conversion affect Medicare Part B insurance premiums?

  16. 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

  17. A BALANCED APPROACH A WORLD OF INVESTING A COMMITMENT TO EXCELLENCE EO013 280390 3/13 | 17

  18. This information is not meant as tax or legal advice. Please consultyour legal or tax advisor before making any decisions. Putnam Retail Management putnam.com

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