Case Analyzer – Roth IRA Conversion

[Kathleen Reynolds]

#4051

These analyses allow you to compare the results of three options:

• Option 1: Where no conversion is done and the assets remain in a traditional IRA or other non-Roth retirement savings account.
• Option 2: Where the assets are converted or rolled over from a non-Roth retirement account to a Roth IRA and the income tax is paid from non-retirement accounts (other assets).
• Option 3: Where the assets are converted or rolled over from a non-Roth retirement account to a Roth IRA and the income tax is paid from the converted amount (i.e. the Roth IRA).

Step 1: Select the Calculation

Check the “Roth IRA Conversion” or “Roth IRA Conversion with Social Security” option.

Step 2: General Inputs

This screen allows you to provide certain personal information about the client and his spouse, the projected growth rate of the accounts (this looks at both Roth and non-Roth so both can be fairly compared), and the “retirement plan balance” (the amount of funds that the client has available in his non-Roth retirement account). It also allows you to provide information about the required minimum distribution amounts that the client may need to take when he reaches age 72.

• Names: Enter the name of the owner. There is a checkbox if you wish to include the spouse of the owner in the analysis.
• Birth Dates: Enter the birth date of the owner (and the spouse, if appropriate).
• Growth used for All Accounts: Enter the growth rate to be used for all accounts.

Note: If you have entered different rates or custom rates for the growth of the accounts, those rates will be replaced by the rate entered here when you press the Case Analyzer’s Calculate button.

• Retirement Plan Balance: Enter the Balance of the Retirement Plan.
• Spend Minimum Distributions Instead of Reinvesting Them? In order to make a reasonable assessment on the differences between (a) not converting and (b) converting, we need to consider what happens to required minimum distributions (RMD) amounts that are taken from the non-Roth account if no conversion is done. Check this box if your client will need the RMD amounts to cover living expenses. If the client will take the RMD amounts and keep it in a savings account, do not check this box.
• Apply Waiver of 2009 RMDs? H.R. 7327, the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) was signed into law on December 23, 2008, and provided that RMDs for IRAs and defined contribution plans were waived for 2009. As such, it is optional for individuals to take distributions from these retirement accounts. IRS issued Notice 2009-82, explaining that 2009 RMD amounts that were taken from these accounts can be rolled over. Check this box if the client did not take an RMD for 2009. Do not check the box if:
  • The RMD was taken and not rolled over, or
  • The rollover to the Roth is being made from a Defined Benefit plan, as RMDs were not waived for these plans.

If Roth IRA Conversion with Social Security was selected, then there will be additional inputs:

• If your client is receiving income from social security, including it in the analysis will help to determine how it is impacted by the other income received from the retirement account such as required minimum distribution (RMD) amounts.
• Annual Amount: Input the annual amount that the client will receive.
• Annual Increase: Input the rate by which the social security income will increase.
• Receive Social Security From: ____ To: ____: Indicate the period over which the social security income will be received. You can either input this period manually or have the software calculate the duration. To have the software calculate the duration, click on the “calculate” button and the following options will be displayed: Owner’s Lifetime, Until Second Death and Entire Analysis. You can choose the one that applies to your client’s case.
• Spend Social Security Instead of Reinvesting It? If the client will be spending his social security income, check this box. If the social security income will be deposited to a savings account where it would be invested, uncheck the box.

 

Step 3: Beneficiaries

This step allows you to input information about any non-spouse beneficiaries of the client and is important in determining the net distribution amount if distributions are stretched over the life expectancies of these beneficiaries.

• Check the “Include Non-spousal Beneficiaries” if the client has individuals who are named as beneficiaries of the account and are not the spouse of the client.
• Check the “Use Multiple Beneficiaries after the Death of the Owner” if there are more than one non-spouse beneficiaries.
• Check the “Apply Separate Accounts Rule” if there are multiple beneficiaries.
• Input the names of the beneficiaries, the years in which they were born, and the percentage amount they are designated to receive. Ensure that the total amount adds up to 100%.

Step 4: Taxes

In this section, you provide information on the client’s adjusted gross income (AGI), the projected rate of inflation, and income tax. When calculating the client’s income tax, you have two options:

1. choosing to calculate the taxes using the client’s AGI, and
2. using specific tax rates which also allow you to change the client’s amount of tax exemptions and tax filing status, and choose between the marginal rate vs. average tax rate.

• Calculate taxes from an AGI
  If you choose this option, the software calculates the income tax based on the client’s AGI that you input, using tax rates provided by the IRS.
• From Year: ____ To Year: ____: Input the year in which the AGI begins, which is usually the current year, and the year that the AGI ends. If you are unsure of the final year in which the client will receive the income, you can have the software calculate the period by selecting “Calculate” and choosing an option from the drop-down menu. For this example, we assume that the AGI lasts from 2022 to 2081.
• Annual Growth of AGI: Input the growth rate for AGI.
• Check the “Use Inflation Rate for Tax Brackets:” box to use the inflation rate to adjust future AGI tax brackets.
• Use Rates to Calculate Taxes: Using this option allows you to manually input the client’s income tax rates and change the number of exemptions.
• Clicking on the “Calculate” button, allows you to choose the clients Filing Status, Number of Exemptions and choose between the Average Tax Rate and Marginal Tax Rate. This is done for both the Normal Tax Rate and the tax rate During Conversion.
• Inflation Rate: Input the projected inflation rate.
• Check the “Apply Pre-59½ Penalties to Distributions?” input. This will apply the 10% early distribution penalty to any of the conversion amount that is withdrawn, including amounts withdrawn to pay income tax, unless the client is at least age 59½ when the withdrawal occurs. Do not check this box if the client would be eligible for any of the waivers to the early distribution penalty.

Step 5: Conversion and Other Assets

This step allows you to choose the percentage amount of the non-Roth retirement account that you want to include in the conversion or rollover to the Roth, and provide the amount of “other” non-retirement assets used in the analysis. “Other Assets” are used for the purpose of paying income tax due on the conversion.

• Convert 100% of the Retirement Plan: This choice will calculate the conversion based on the entire balance that you input in Step 2, under “balance.” Note: This “balance” will be increased by any projected earnings amount if the conversion is being done in a year other than the first year of the analysis. For instance, if the first year of the analysis is 2009 and the conversion is being done in 2010, then the balance will be increased by earnings accrued for one year. The amount may also increase by one year’s earnings if the transaction is done at the end of the year instead of at the beginning of the year. For this case, it is assumed that it is growth at the rate that you input in step 2.
• Enter custom percentage of the Retirement Plan to Convert: If you want to convert less than 100% of the amount included under “balance” in Step 2, you may input the percentage amount that you want to include in the analysis.
• Year for Conversion: Indicate the year in which the conversion is intended to occur. Bear in mind that individuals are not eligible for a Roth conversion/rollover in 2009 if their modified adjusted gross income is more than $100,000 and/or if their tax filing status is married filing separately. These limitations are repealed for conversions done 01/01/10 and after.
• Calculate value of Other Assets based on Conversion Taxes: When determining the amount of “Other Assets” for paying on the conversion, you have two options.
  • Have the software calculate the amount needed by checking the box.
  • Provide the amount yourself by leaving the box unchecked and provide the reserved dollar amount in the Other Assets Balance input.
• Check “Spread Out Payment of Conversion Tax When Possible (2010).” This rule will take effect only if the conversion year is 2010. If the conversion year is 2010 and the client wants to pay all of the income tax due by the deadline for paying his 2010 income tax, do not check this box.

Step 6: Results

This is the final step in the Roth IRA Conversion Analysis. This provides a description of the scenarios that are included in the analysis.

If You Need to Make Changes

• If you need to change the percentage of conversion amount, go back to step 5 and provide the amount that you want to use in the analysis.
• You can also go back to each step to review your data input by clicking on the “previous” button or by selecting the applicable tab at the top of your screen.

Your Analysis Reports

You have two reports from which to choose, the Short and Full reports.

The Short report includes the following:

• Net Distributions Comparison
• Asset Comparison
• Social Security Analysis (only if applicable)
• Distributions Breakdown

The Full report includes everything that is included in the Short report plus the following:

• Net Distributions
• Inputs Report
• Retirement Plan Analysis
• Retirement Plan Distributions to Heirs
• Roth IRA Analysis
• Roth IRA Distributions to Heirs
• Other Assets Analysis
• Roth IRA Taxes and Penalties

Both options will always be available. As such, if the Short report is selected, the Full report can be chosen later and vice versa. The choice you make here will likely be determined by whether you want a quick snapshot of the analysis or if you want all the information that is included in the full report.

To View Your Reports: Click the “Calculate” button to see your reports.

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