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                                IN 2010

                                Presented By

                          Susan Williams
                   The Trust Company of Knoxville
                        Bradley C. Sagraves
           Woolf, McClane, Bright, Allen & Carpenter, PLLC

                         2010 Singleton B. Wolfe Memorial
                              Federal Tax Conference
                                October 21-22, 2010
                     University of Tennessee Conference Center

I.         Introduction

           A.    Overview

                 1.       The Roth IRA has been a useful retirement planning tool since it was
                          created in 1997. Many people have wanted to access its unique retirement
                          planning benefits, but have been restricted by the contribution and rollover
                          restrictions that were placed on its availability.

                 2.       As a result of legislation passed in 2006, more people are now eligible to
                          access a Roth IRA through a conversion of their existing retirement plan.

                 3.       The main question now isn’t can you convert to a Roth IRA, but should
                          you convert to a Roth IRA?

                 4.       The purpose of this presentation will be to provide you with information to
                          make an informed decision on whether a person should convert to a Roth

II.        Introduction to Roth IRA

           A.    Creation

                 1.       Roth IRAs were established by the Taxpayer Relief Act of 1997. The
                          Roth IRAs were named for its chief legislative sponsor, Senator William
                          Roth of Delaware.

                 2.       Part of the reason for creating Roth IRAs was to increase the savings rate
                          and get more people to save for retirement.

           B.    Terms of the Roth IRA

                 1.       An eligible individual can set up a Roth IRA and contribute to the Roth if
                          the person earns less than $177,000 for those married filing jointly or
                          $120,000 for single filers in 2010. Same limits apply to conversions.

                 2.       2009 Rule – Cannot set up a Roth IRA if your filing status is married
                          filing separately.

                 3.       The maximum contribution in 2010, per person, is either

                          a.     $5,000, or

                          b.     The amount of income earned, if less than $5,000, or

                          c.     $6,000 if the person is over 50 years old.

                 4.       Annual contributions to a Roth IRA are not deductible on your income tax

                5.    Contributions and conversions grow tax-free.

                6.    After the taxpayer has reached 59 ½, and satisfied other applicable
                      requirements, the distributions from the Roth IRA are TAX FREE!!

                7.    What if a person takes a distribution before the person reaches 59 ½ years

                      a.     Generally, distributions are fully taxable and subject to 10%
                             penalty on built-in gains.

                      b.     There are some distributions that qualify for an exception to the
                             penalty and taxation rules, i.e. qualifying first time homebuyer
                             expenses or distributions to an owner that is disabled.

                      c.     Also, the distribution rules state that any distribution from a Roth
                             comes first from contributions to the Roth. If the distribution
                             (including all prior distributions) is less than the amount of all
                             contributions, then there is no tax on the distribution. Treas. Reg.
                             § 1.408A-6 Q&A 8, 10.

                8.    Distributions after Taxpayer reaches 59 ½ years old – Distributions are
                      free from income tax if the distribution is made five years after the initial
                      contribution. (See ordering rules below.)

                9.    The deadline for contributions is the deadline of the income tax return
                      without filing any extensions, which means you can make a contribution
                      through April 15, 2010 and still count it as a 2009 contribution. This
                      becomes important when figuring the 5-year rule below.

                10.   No minimum required distributions (“MRDs”) at any age for the owner.

                11.   After the Roth IRA owner’s death, if the beneficiary is the surviving
                      spouse, the surviving spouse can continue to hold the Roth IRA without
                      taking distributions during the surviving spouse’s lifetime.

                12.   If the beneficiary of the Roth IRA is a non-spouse, then the beneficiary
                      must begin taking MRDs.

           C.   Comparing a Roth IRA to a 401(k)/Ordinary IRA

                1.    401(k)/Ordinary IRAs have tax deductible contributions, but any
                      distributions must be included in income in the year received.

                2.    Contributions grow tax-free until distributed.

                3.    401(k) contribution limit is $16,500 for 2010, with an additional $5,500
                      for employees 50 years of age and older.

                 4.     Traditional IRA contribution limit is the same as the Roth IRA: $5,000; or
                        earned income if less than $5,000; or $6,000 if over 50 years of age

                 5.     Starting at age 70 ½, 401(k)/Ordinary IRA owners must take MRDs.

III.       Conversion Rules for 2010 - Tax Increase Prevention and Reconciliation Act of 2005
           (Public Law 109-222).

           A.    What the law allows

                 1.     Public Law 109-222 removes the income limit for Roth IRA conversions
                        and allows individuals who file married-filing-separately to convert to a
                        Roth IRA.

                 2.     It also provides a default rule for conversions in 2010 that the tax due from
                        the conversion is split over a two year period, starting with the 2011 tax

           B.    Rules on Converting

                 1.     The default rule with any Roth IRA conversion is that the distribution is
                        taxed as if the distribution is an outright distribution to the owner, except
                        that there is no 10% penalty for an early distribution.

                 2.     This requires the owner to pay tax on pre-tax (or deductible) contributions
                        and any earnings.

                 3.     The split reporting for the tax due on the conversion is only available for
                        2010 conversions, not for subsequent years. This is the default rule, and
                        can be changed by electing to report all the income on the 2010 Form

                 4.     You cannot choose which contributions to convert. You must convert a
                        pro-rata amount of your contributions whenever you convert to a Roth

                 5.     This means that you must determine the percentage of contributions in all
                        IRAs that are nondeductible, and use the resulting percentage to determine
                        the amount that is subject to tax upon conversion. This is because the RIS
                        treats all of your IRAs as one IRA.

           C.    Mechanics of Converting

                 1.     In 2010, Owner calls company managing his IRA or 401(k) and asks that
                        the account be converted to a Roth IRA.

                 2.     Under the default rules, the Owner will probably receive a 1099R for the
                        2010 tax year, but should report only half in 2011 and half in 2012.

           D.    Option to Elect to Report and Pay the Tax on Your 2010 Tax Return

                 1.     The two-year rule for the payment of the taxes due on the conversion is
                        the default rule, but it can be elected out of. If you elect out of the two-
                        year rule, then all of the income from the distribution would be taxed to
                        you in 2010, and you would have to pay it by April 15, 2011.

                 2.     Why would anyone elect to pay all the tax in 2011, instead of waiting until
                        2012 and 2013?

                        a.     The effective tax rates are scheduled to increase in 2011, as the
                               provisions of the Economic Growth and Taxpayer Relief
                               Reconciliation Act of 2001 (“EGTRRA”) sunset, and the year
                               2000 tax tables come into effect.

                        b.     Highest tax rate was 39.6% for ordinary income in 2000, as
                               compared to 35% in 2010. (also, 10% tax rate disappears, 28% rate
                               goes to 31% rate, 33% to 36%, and 35% to 39.6%)

                        c.     If the retirement account has a large balance, then it might make
                               sense to pay all the tax in 2011 when the 2010 tax return is due.

                        d.     A good CFP or CPA would tell you whether the time value of
                               money would make up this difference, so that it would be better to
                               hold the money and pay the tax over 2 years. (see Susan Williams)

                 3.     If Congress does not act to change the tax rates, it might make sense for
                        the owner to elect to include the distribution on his tax return for 2010
                        instead of waiting to include it in 2011 and 2012.

IV.        Considerations in Converting to a Roth IRA

           A.    Contributions Rules Stay the Same

                 1.     Adjusted Gross income must be below $177,000 for married filing jointly
                        or $120,000 for single filers. Same as the rules for 2009.

                 2.     The change is the income limit for conversions.

                 3.     The change in the conversion limit allows you to get around the
                        contribution limit. Now, each year you can make a non-deductible
                        contribution to a Traditional IRA, then convert the contribution to a Roth
                        IRA. Thus, anyone can now take advantage of the Roth IRA!

           B.    5 Year Rule for Contributions to a Roth IRA

                 1.     Once an owner reaches the age of 59 ½, he/she can withdraw from the
                        Roth IRA any contributions that were made more than 5 tax years ago.

                2.    The first year counted is the year for which the contribution is made, even
                      if the contribution is made in a different year.

                3.    As a result, contributions made on April 1, 2010, for the 2009 tax year,
                      qualify for a tax free distribution on January 1, 2014.

                4.    Therefore, if you are just starting to make contributions and you are in
                      your 50’s or later, know that you will need to wait past the 59 ½ deadline
                      before you can pull out any contributed amounts tax-free.

           C.   5 Year Rule for Conversions to Roth IRA

                1.    Similar to the 5 year contribution rule, there is a 5-year Conversion rule
                      for withdrawals from the Roth IRA.

                2.    In order for converted amounts to qualify as tax-free distributions, the
                      converted amount must remain in the Roth IRA for 5 years after the
                      conversion was performed.

                3.    This 5-year period includes the year in which the conversion was
                      performed. As a result, if a conversion is made on May 6, 2010, then the
                      5-year period is satisfied on January 1, 2015, as 5 tax years have already
                      passed (2010, 2011, 2012, 2013, and 2014).

                4.    Any additional contributions to the Roth IRA made during the 2010 tax
                      year are subject to this same date.

                5.    Therefore, if you are just now starting a Roth IRA by a conversion and
                      you are in your 50’s or later, remember that you will need to wait 5 years
                      before the converted amount can be withdrawn tax-free.

           D.   Partial Conversions

                1.    You can choose to convert only a portion of your IRA instead of the entire

                2.    You cannot choose to pick the tax-free items versus the non-tax free items.
                      Any conversion is taken as a pro-rata distribution from your IRA, and a
                      portion of each tax-free or non-tax-free contribution is treated as
                      distributed in the conversion.

                3.    This might be an option if you do not want to pay the tax on the entire
                      amount of your IRA, or if you do not have the funds to convert all of the

                4.    This almost might be appropriate if the tax on the whole conversion would
                      place you in a higher tax bracket or subject you to the AMT.

           E.    Ordering Rules for Distributions from a Roth IRA

                 1.     Any distribution from a Roth IRA follows the ordering rules in Treasury
                        Regulation § 1.408A-6. Treasury Regulation § 1.408A-6 states that any
                        distribution from a Roth IRA:

                        a.     Comes first from any contributions to the IRA (remember 5 year

                        b.     Comes second from any conversion contributions, on a FIFO basis
                               (5 year rule), and

                        c.     Comes third from any earnings.

                 2.     Any distribution that comes strictly from properly aged contributions or
                        conversions are not subject to taxes or penalties.

                 3.     To the extent a distribution is treated as made from a particular conversion
                        contribution, it is treated as made first from the portion, if any, that was
                        includible in gross income as a result of the conversion.

V.         Factors to Consider when Deciding Whether to Convert to a Roth IRA

           A.    Age

                 1.     Younger – The younger the person is, the longer they will have to recoup
                        the taxes paid on the conversion. Converting at a younger age also allows
                        more time for the investments to grow tax free and make the conversion

                 2.     Older – The older the person is, the closer to retirement that person is and
                        more likely the person might need a distribution.

                 3.     Will there be expenses that you will need to take distributions for?
                        College? Child’s college? Child’s wedding? Your 2nd Wedding? 3rd
                        Wedding? Or more realistically, what if you or your child loses a job?

                 4.     Does it make sense to pay this tax bill if you are close to retirement and
                        you might need the cash soon?

           B.    Current Tax Bracket vs Tax Bracket at Retirement

                 1.     If you are in the highest tax bracket now, but will be in a lower tax bracket
                        when you retire, it would not make sense in most situations to pay the tax
                        now instead of paying a lower tax later.

                2.    If your tax bracket now will be the same as your tax bracket in retirement,
                      it might be beneficial to convert based on other aspects of Roth (no
                      MRDs, tax free distributions).

                3.    If your tax bracket now is lower than retirement, then it would definitely
                      be beneficial to convert now based on tax considerations. This
                      determination might be based on your assumption that your taxes will go
                      up in the future.

           C.   Are You Trying to Use Your IRA for Something Other than Retirement?

                1.    Is it for spouse, when you die, as a type of insurance?

                2.    Is it for your heirs to be used by them after your death, as a type of

                3.    If the IRA is for you, then the main consideration is whether this makes
                      sense to pay the tax now or pay the tax later.

                4.    If the IRA is for your spouse or your beneficiaries, then it can be useful as
                      an estate planning tool, as discussed below.

           D.   Estate Planning

                1.    A Roth IRA that is held until your death will then make tax-free
                      distributions to your heirs, which can be a great estate planning tool.

                2.    During your life, there are no required minimum distributions from the
                      Roth, so the Roth can continue to grow tax free and be available to your

                3.    Upon your death, your spouse can continue to hold the Roth IRA and
                      MRDs are not required if the beneficiary is your surviving spouse.

                4.    If the beneficiary is someone other than your spouse, then they will have
                      to take MRDs over their lifetime.

                5.    Paying the tax on the conversion removes the tax paid on the conversion
                      from your estate, but the Roth is still included in your gross estate and you
                      have to pay taxes on it when you die.

                6.    Question – If the Roth IRA is an estate planning tool, is it worth having
                      the tax free distributions to your heirs in exchange for paying the tax on
                      the conversion now? This may involve more than just tax considerations.

           E.   What other retirement accounts do you have?

                1.    Are you trying to avoid the MRDs of your current plan?

                 2.    Would you rather keep the money in the retirement accounts for a rainy
                       day rather than draw it out?

                 3.    Do you have other non-taxable accounts that you will receive distributions

           F.    What about MRDs?

                 1.    Will you keep working past 70 ½ ?

                 2.    Do you want to take MRDs while you are still working?

           G.    Additional Income in Year of Conversion.

                 1.    The added income from the conversion distribution will increase your
                       adjusted gross income.

                 2.    This also means that some deductions might change, as the percentage
                       base for certain deductions is now higher.

                 3.    Also, might increase your AMT tax liability.

                 4.    Might place you in a higher tax bracket?

                 5.    Would any of these make you consider converting only a portion of the

                 6.    Tax penalties for insufficient tax withholding?

           H.    Paying the Tax.

                 1.    To be beneficial, any tax on the conversion has to be paid by money
                       outside of the IRA.

                 2.    If the IRA is the only source of the funds, do not convert.

VI.        Should You Convert Your IRA in 2010?

           A.    Above we discussed the different factors to weigh in deciding whether to
                 convert to a Roth IRA. Now, we place each of the factors on a particular side
                 of the equation so you can see which option might make more sense for you.

           B.    Reasons to Convert in 2010.

                 1.    Your income tax rate this year is low and the conversion will not put you
                       in a higher tax bracket or subject you to the AMT.

                 2.    You are young and do not need to take a distribution in the next 5 years.

                3.       You are able to find money to pay the tax on the conversion outside of
                         your IRA or 401(k).

                4.       You believe tax rates will increase in the future.

                5.       You desire to use the Roth IRA as either an insurance substitute or an
                         inheritance for your children.

           C.   Reasons to Not Convert in 2010.

                1.       You are in a high tax bracket now and you expect to pay lower taxes in the

                2.       You do not have the money outside of your current 401(k) or IRA to pay
                         the tax on the distribution.

                3.       You believe that income tax rates will decrease in the future.

                4.       You are too close to retirement.

                5.       Paying the tax would leave you without sufficient liquid capital in the
                         event of an emergency.

                6.       You have other non-taxable retirement accounts.

                7.       You do not plan on working past 70 ½.

           D.   How long does it take for the IRA Conversion to be beneficial?

                1.       Below is a table that looks through different conversions to show when it
                         becomes financially beneficial to convert to a Roth IRA.1

                2.       This is based on “running the numbers” of the conversion, and does not
                         consider other factors, i.e., no minimum required distributions, etc., that
                         the owner might feel is an important factor in converting to a Roth IRA.

                            [the rest of this page intentionally left blank]

 The table was found in Coppage and Baxendale, Roth IRA conversion Rules Shed Income Limit in 2010, 84 Prac.
Tax Strategies 132 (March 2010) (adapted from Coppage and Blum, Breakeven Point Analysis Aids in Evaluating
Roth Conversions, 78 Prac. Tax Strategies 83 (Feb. 2007).

                               Case 1 - Simple Comparison 25%

       Tax Bracket Pre-Retirement                    25%
       Tax Bracket w/ Conversion                     25%
       Tax Bracket Retirement                        25%

       Traditional IRA                                     Roth
                      6%        Acct @ 5% *                                   6%
   1     100,000     106,000         25,000                  100,000         106,000
   2                 112,360         26,250                                  112,360
   3                 119,102         27,563                                  119,102
   4                 126,248         28,941                                  126,248
   5                 133,823         30,388                                  133,823
   6                 141,852         31,907                                  141,852
   7                 150,363         33,502                                  150,363
   8                 159,385         35,178                                  159,385
   9                 168,948         36,936                                  168,948
  10                 179,085         38,783                                  179,085
  11                 189,830         40,722                                  189,830
  12                 201,220         42,758                                  201,220
  13                 213,293         44,896                                  213,293
  14                 226,090         47,141                                  226,090
  15                 239,656         49,498                                  239,656
  16                 254,035         51,973                                  254,035
  17                 269,277         54,572                                  269,277
  18                 285,434         57,300                                  285,434
  19                 302,560         60,165                                  302,560
  20                 320,714         63,174                                  320,714
  21                 339,956         66,332                                  339,956
  22                 360,354         69,649                                  360,354
  23                 381,975         73,132                                  381,975
  24                 404,893         76,788                                  404,893
  25                 429,187         80,627                                  429,187

25% Taxes           (107,297)             -                                        -
                   $ 321,890 $       80,627                             $    429,187

       Lump Sum After-Tax       $   402,518                             $    429,187

*Since there are no taxes currently due on a Traditional IRA, it is assumed that there is
$25,000 that remains invested and is not used to pay the tax due on a Roth conversion.
The investment return on the $25,000 is assumed to be 5% after-tax.

Flaws with this analysis?
5%-6% annual return every year
Taxes aren't usually paid in a lump sum at one point in time
Does client have charitable intent? No taxes if charity is the beneficiary
                                   Case 1 - Simple Comparison 35%

       Tax Bracket Pre-Retirement                     35%
       Tax Bracket w/ Conversion                      35%
       Tax Bracket Retirement                         35%

       Traditional IRA                                      Roth
                          6%       Acct @ 5% *                                6%
   1     100,000         106,000        35,000                100,000        106,000
   2                     112,360        36,750                               112,360
   3                     119,102        38,588                               119,102
   4                     126,248        40,517                               126,248
   5                     133,823        42,543                               133,823
   6                     141,852        44,670                               141,852
   7                     150,363        46,903                               150,363
   8                     159,385        49,249                               159,385
   9                     168,948        51,711                               168,948
  10                     179,085        54,296                               179,085
  11                     189,830        57,011                               189,830
  12                     201,220        59,862                               201,220
  13                     213,293        62,855                               213,293
  14                     226,090        65,998                               226,090
  15                     239,656        69,298                               239,656
  16                     254,035        72,762                               254,035
  17                     269,277        76,401                               269,277
  18                     285,434        80,221                               285,434
  19                     302,560        84,232                               302,560
  20                     320,714        88,443                               320,714
  21                     339,956        92,865                               339,956
  22                     360,354        97,509                               360,354
  23                     381,975      102,384                                381,975
  24                     404,893      107,503                                404,893
  25                     429,187      112,878                                429,187

35% Taxes           (150,215)                -                                     -
                   $ 278,972 $         112,878                           $   429,187

       Lump Sum After-Tax          $   391,850                           $   429,187

*Since there are no taxes currently due on a Traditional IRA, it is assumed that there is
$35,000 that remains invested and is not used to pay the tax due on a Roth conversion.
The investment return on the $35,000 is assumed to be 5% after-tax.

Flaws with this analysis?
5%-6% annual return every year
Taxes aren't usually paid in a lump sum at one point in time
Does client have charitable intent? No taxes if charity is the beneficiary
                                   Real Life

John Doe needs $80,000 year from investments to live on.

Traditional IRA                $ 1,000,000
Roth                           $   100,000

SS                $  20,000                     $   20,000
Trad IRA             80,000                         60,000 ($20,000 Roth)
AGI               $ 100,000                     $   80,000

Deductions        $ (20,000)                    $ (20,000)
Exemptions           (7,300)                       (7,300)

Taxable Income    $   72,700                    $   52,700

Taxes MFJ         $   10,538                    $    7,068

Potential Tax Savings          $        3,471
S&P 500 Index at Inflection Points
Asset Class Returns
Historical Returns by Holding Period
                             Portfolio Weights and Historical Returns by Asset Class

                                                                                                                               (Top) The indexes and weights
              Balanced Portfolio Weights Through Market Turmoil                                                                of starting portfolio is as follows:
                                                                                                                               U.S. stocks: 25% S&P 500, 10%
                             Starting               Market                Market                                Other          Russell 2000. U.S. bonds: 30%
                             Portfolio              Peak                   Low                 Current                         Barclays Capital Aggregate.
              100%                                                                                                             International stocks: 15% MSCI
                               15%                   14%                   14%                  14%                            EAFE and 5% MSCI EMI.
                                                                                                                Int'l Stocks
               80%                                                                                                             Other: 5% CS/Tremont Equity
                               20%                   22%                   15%                  18%                            Market Neutral, 5% NAREIT
                                                                                                                               Equity REIT Index and 5% DJ
               60%                                                                                              U.S. Bonds     UBS Commodity Index. The
                               30%                   28%                   47%                  40%                            market peak and market low are
               40%                                                                                                             based on S&P 500 peak on
                                                                                                                               10/9/07 and S&P 500 low on
                                                                                                                U.S. Stocks    3/9/09. Portfolio assumes no
               20%             35%                   35%
                                                                           24%                  29%                            rebalancing.

                0%                                                                                                             Charts are shown for illustrative
                                                                                                                               purposes only. Past returns are
                              1/1/07                10/9/07               3/9/09               6/30/10                         no guarantee of future results.
                                                                                                                               (Bottom) The indexes used are
              20-year Annualized Returns by Asset Class (1990 – 2009)                                                          as follows: REITS: NAREIT
                                                                                                                               Equity REIT Index, EAFE: MSCI
                                                                                                                               EAFE, Oil: WTI Index, Bonds:
                      9.9%                                                                                                     Barclays Capital U.S. Aggregate
              10%                                                                                                              Index, Homes: median sales
                                                                                                                               price of existing single-family
                                     8.2%                                                                                      homes, Gold: USD/troy oz,
               8%                           7.0%                                                                               Inflation: CPI. Average asset
                                                           6.7%                                                                allocation investor return is
                                                                                                                               based on an analysis by Dalbar
               6%                                                  5.2%                                                        Inc. which utilizes the net of
                                                                                 4.4%                                          aggregate mutual fund sales,
Asset Class

                                                                                                                               redemptions and exchanges
               4%                                                                       3.2%                                   each month as a measure of
                                                                                                                 2.3%          investor behavior.
               2%                                                                                                              All returns are annualized (and
                                                                                                                               total return where applicable)
                                                                                                                               and represent the 20-year
               0%                                                                                                              period ending 12/31/09 to match
                     REITS       S&P 500    Bonds            Oil   Gold          EAFE   Homes       Inflation     Avg.         Dalbar’s most recent analysis.

Life Expectancy
                       Case 2 - Taxes Not Paid Until MRD Taken

     Tax Bracket Pre-Retirement                             25%
     Tax Bracket w/ Conversion                              25%
     Tax Bracket Retirement                                 25%

     Traditional IRA                                               Roth
      $ 100,000                         Investment
         Age                  6%        A/C 5% A/T                                 6%
 1            41 $            106,000   $   25,000                 $ 100,000   $   106,000
 2            42              112,360       26,250                                 112,360
 3            43              119,102       27,563                                 119,102
 4            44              126,248       28,941                                 126,248
 5            45              133,823       30,388                                 133,823
 6            46              141,852       31,907                                 141,852
 7            47              150,363       33,502                                 150,363
 8            48              159,385       35,178                                 159,385
 9            49              168,948       36,936                                 168,948
10            50              179,085       38,783                                 179,085
11            51              189,830       40,722                                 189,830
12            52              201,220       42,758                                 201,220
13            53              213,293       44,896                                 213,293
14            54              226,090       47,141                                 226,090
15            55              239,656       49,498                                 239,656
16            56              254,035       51,973                                 254,035
17            57              269,277       54,572                                 269,277
18            58              285,434       57,300                                 285,434
19            59              302,560       60,165                                 302,560
20            60              320,714       63,174                                 320,714
21            61              339,956       66,332                                 339,956
22            62              360,354       69,649                                 360,354
23            63              381,975       73,132                                 381,975
24            64              404,893       76,788                                 404,893
25            65              429,187       80,627                                 429,187
           Age           Trad IRA       A/T MRDs      A/C 5% A/T               Total Roth
26                66    $ 454,938                     $   84,659               $ 454,938
27                67       482,235                        88,892                  482,235
28                68       511,169                        93,336                  511,169
29                69       541,839                        98,003                  541,839
30                70       554,574           14,831      102,903                  574,349
31                71       566,921           15,695      108,049                  608,810
32                72       578,791           16,609      113,451                  645,339
33                73       590,086           17,575      119,124                  684,059
34                74       600,697           18,595      125,080                  725,103
35                75       610,508           19,673      131,334                  768,609
36                76       619,388           20,813      137,900                  814,725
37                77       627,335           21,912      144,795                  863,609
38                78       634,072           23,177      152,035                  915,425
39                79       639,599           24,387      159,637                  970,351
40                80       643,772           25,652      167,619                1,028,572

     Total A/T MRDs                     $   218,921

     Total IRA, A/T MRD & Inv A/C       $ 1,030,312                            $ 1,028,572
     (Trad IRA still not taxed)

      Problem Now?
     5%-6% annual return every year
      Estate Taxes and Income in Respect of Decedent (IRD)
                 ESTATE AND INCOME

Total Value of IRA includable in Taxable Estate   $ 1,000,000

Gross Federal Estate Tax @ 55%                        (550,000)
State Death Tax @ 10%                                 (100,000)

Total ESTATE Taxes                                $   (650,000)

Total IRA Value                                   $ 1,000,000

Less: IRC 691(c ) Deduction                           (550,000)

Taxable IRA Value                                 $   450,000

Total INCOME Tax at 40%                           $   (180,000)

Total IRA Value                                   $ 1,000,000

Less: Federal Estate Tax                              (550,000)
Less: State Death Tax                                 (100,000)
Less: Income Taxes (IRD)                              (180,000)

Net IRA Value                                     $   170,000

% of IRA Lost to Taxes                                    83%

                                                     Traditional       Roth

Total IRA Balance                                    $ 2,000,000   $ 2,000,000

Less: Income Taxes @ 35% on Roth Conv                          -       (700,000)

IRA Balance Subject to Estate Tax                    $ 2,000,000   $ 1,300,000

Federal Estate Tax @ 55%                             $ 1,100,000   $   715,000

State Death Tax @ 10%                                    200,000       130,000

Total ESTATE Tax                                     $ 1,300,000   $   845,000

Federal Income Tax (35% Roth, 40% IRA)               $   520,000   $   700,000
(based on 2010 for conv. and 2011 for Traditional)
Total Taxes                                          $ 1,820,000   $ 1,545,000
     Tax rate combination                     100%                          50%                           10%

     (conversion tax rate/                 Taxable                        taxable                       taxable
      retirement tax rate)

     ---------------------------   ---------------------------   ---------------------------   ---------------------------

             25/15                         37 years                       9 years                       5 years

             25/28                         16 years                       5 years                       5 years

             28/15                         39 years                      11 years                       5 years

             28/25                         21 years                       5 years                       5 years

             28/31                         17 years                       5 years                       5 years

             33/15                         39 years                      14 years                       5 years

             33/28                         21 years                       5 years                       5 years

             33/36                         16 years                       5 years                       5 years

             35/15                         39 years                      15 years                       5 years

             35/28                         21 years                       5 years                       5 years

             35/31                         19 years                       5 years                       5 years

               35/36                       16 years                       5 years                       5 years

             35/39.6                       15 years                       5 years                       5 years

                 3.     Comments on Table

                        a.     This table presumes that any taxes paid on the distribution are not
                               from the retirement plan being converted. If the funds to pay the
                               tax are taken from the retirement plan, the benefits of the
                               conversion are delayed even more than reported on the table.
                               Usually, a conversion is not beneficial if the owner must use the
                               assets in the IRA to pay the tax on the conversion.

                        b.     The average break even point for a 100% taxable IRA is 21 years
                               or less, and the average break even point for a 50% taxable IRA is
                               5 years or less.

                        c.     Major point of planning is to determine whether the owner will
                               have a high taxable rate when they retire. This is a bit of
                               forecasting, because we do not know where the tax rates are going
                               to go, especially in light of the sunset of the EGTRRA laws in
                               2011. If the owner believes the tax rates will go up, then it would
                               make sense to take the tax hit now instead of waiting until later. If
                               the owner thinks his tax rate will be lower, then the benefit of
                               converting the IRA to a Roth IRA will take longer to materialize.

           E.    Conversion Calculators



VII.       What do you do if you Convert to a Roth IRA, then change your mind?

           A.    Recharacterization

                 1.     Assume you convert to a Roth IRA in 2010, and then your investments
                        lose money. You could end up in the following situation: instead of owing
                        $350k in tax on a $1 million conversion, your investments might have lost
                        $250k, and you now have an IRA worth only $750k and still have to pay
                        tax of $350k.

                 2.     Is there any way to convert back? Yes.

                 3.     Process of reconverting back is called recharacterization. This is allowed
                        by the IRS, subject to certain rules.

                 4.     Must be done by the due date for the return plus any applicable extensions.
                        So, if you convert to a Roth IRA in 2010, then assuming an extension is

                      filed, the deadline to recharacterize the transaction would be October 15,

                5.    Must roll the Roth IRA back into a regular IRA or 401(k).

                6.    Use Form 8606 to recharacterize the transaction. If you do recharacterize,
                      but still want to convert the lower-valued IRA, then you have to wait 30
                      days after the recharacterization or one year after the conversion,
                      whichever is later, in order to convert again.

           B.   Planning Option to Avoid a Recharacterization

                1.    Set up “segregated” Roths in which you put individual investments, i.e.,
                      stocks, bonds, mutual funds, in a different Roth IRA. That way, you can
                      recharacterize only the funds that lose value, and do not have to reconvert

                2.    This helps you prepare for losses, as you only have to reconvert the
                      investments that suffered in the intervening time.

VIII. Final Questions?


Why someone might consider converting?
      1. Lower tax bracket today than in retirement
      2. Negative or low taxable income
            a. Unemployed/underemployed and high deductions
            b.Large charitable gift (to prevent loss of carryforward)
      3. To reduce taxable estate
      4. Hedge against potential increase in tax rates – Tax Diversification
      5. One-time AMT event (at a rate of 26% or 28%) but usually in a higher bracket –
         convert to get the lower AMT rates)

Warnings/Items to Consider:
      1. Asset Mix
             a. Qualified vs. Non-qualified Assets – If limited pre-tax traditional retirement
                wealth and more wealth in after-tax investment account, then it is less
                compelling. May need to generate income in retirement to use deductions.
             b.Liquid vs. illiquid – Be careful of using all of the liquid assets to pay the tax.
             c. Wealth should be diversified just like asset classes.
      2. GUARANTEED current tax rate vs. PROJECTED future tax rate
      3. Roth Analyzers – not all are comprehensive
      4. Increased Medicare Part B Premiums if income increases due to conversion


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