Harry Rubins, Financial Consultant with Foothill Securities and Rubins Financial Strategies spoke to the Society of California Accountants North Bay Chapter 1/11/12. "Opportunities and Pitfalls:IRA, 401k, Roth IRA" for participants and beneficiaries. Please visit http://rubins401k.com/

1. Opportunities & Pitfalls
IRA, 401k & Roth-IRA
for participants and their beneficiaries
Society of California Accountants
North Bay Chapter
January 11, 2012
Member
Harry Rubins, Financial Consultant
Foothill Securities, Inc.
320 10th St., Ste. 304 Member
Santa Rosa, CA 95401
707-542-9449 www.rubins401k.com
hrubins@foothillsecurities.net
Securities & Advisory Services offered thru
Foothill Securities, Inc. FINRA/SIPC
CA Ins Lic 0728447
Ed Slott IRA Advisor Group
is not affiliated with
Foothill Securities, Inc.
For general information only.
Consult current tax code and retirement plan regulations before taking action.

2. Opportunities & Pitfalls
Opportunities
Save for Retirement – tax deductible or tax free
 IRA & Roth
 401k, PS, DB
 401k with 457b can double the contribution
 Tax deferral and time creates income for retirement
Roth-IRA tax free income & no age 70½ RMDs
Delay 401k age 70½ RMDs
if still working and less than 5% owner (current 401k only)
IRD tax deduction where estate paid Fed Estate Tax

3. Opportunities (cont’d)
Special Spousal Benefits
Participant
Spouse is greater than 10 years younger
Smaller RMDs at age 70½ (joint life tables)
Beneficiary-Spouse
 Keep as inherited IRA
--Spouse younger than age 59½ - needs income, no 10% penalty
--Decedent younger than Spouse
--delay age 70½ RMDs until decedent would have been age 70½
 Spouse can transfer inherited IRA to own IRA at any time
& delay RMD to age 70
Many more---

4. Pitfalls
IRA terminated – 100% taxable
Participant
Exceeding the once per year R/O rule
Beneficiary
Non-Spouse 60 day R/O
Not updating beneficiary forms
--Any change in family status
--401k after second marriage
Penalties – 10 & 50%

5. Pitfalls (cont’d)
 If 401k transferred to inherited IRA can’t use
--Qualified Disclaimer
--Roth conversion from IRA (non-spouse)
--NUA 401k company stock (capital gain taxation)
 Failure to set up separate inherited accounts by Dec 31st
 Many problems with trust as beneficiary
 Not taking RMDs
 Many more ------

6. Why Roth-IRA Conversion
in 2012
Before higher tax rates begin in 2013
3.8% Surtax on Investment Income 2013
 IRA distributions and Roth conversions are not subject
to 3.8% surtax.
 These taxable distributions can raise income above threshold limits
subjecting other investment income to the 3.8% tax.
 The 3.8% surtax will hit certain IRA Trusts hard as it kicks in at a
much lower income ($12k in 2013).

7. Roth – IRAs will be
more valuable in 2013 and beyond
 Participant
- No age 70 ½ RMD
- Distributions tax free
 Heirs
- Inherited RMDs tax free – non-spouse
- Distributions tax free
- Avoids high trust tax rates

8. Roth Conversions - 2012
• Now anyone, regardless of income, can do a Roth
conversion
▫ The $100,000 MAGI income limit is permanently
repealed - 2010
▫ Married individuals filing separately can now do a Roth
conversion

9. Roth-IRA - 2012
• There is still an Income Limitation that prevents
▫ High income tax payers &
▫ Married filing separately
• from making annual Roth - IRA contributions

10. Roth-IRA vs IRA?
Traditional IRA Roth IRA
Contributions Tax Deductible No Tax Deduction
Contributions after No Yes
Age 70 ½
If still working
Withdrawals Taxable plus 10% Contributions Earnings
Before Age 59 ½ penalty Tax-free Taxable plus 10%
No penalty penalty
Withdrawals Taxable Contributions Earnings
After Age 59 ½ Tax-free Tax-free*
No penalty No penalty
*Meets 5 year rule
Subject to age 70 ½ RMD Yes No

11. Annual Contributions - 2012
Roth-IRA (same as IRA)
Max Contribution $5,000 Age of 49 or younger
$6,000 Age of 50 or older
Income Limits Phase Out Range (MAGI)
Single $110,000 - $125,000
Married – Joint $173,000 - $183,000
Married – Separate $0 - $10,000
Roth 401(k)/403(b)/457(b)*–
Max Contribution (same as 401(k) $17,000 Age 49 or younger
$22,500 Age 50 or older
No Income Limits
*Roth 457(b) new for 2011 –
with Roth 401(k) can do max in both $34k/$45k

12. Two Types of Roth-IRAs
1. Annual Contributions
▫ Roth-IRA
▫ Roth-401(k)/Roth-403(b)/Roth 457(b) – salary deferral
2. Conversion from IRA, SEP-IRA, Simple-IRA, 401(k)/403(b) to Roth-IRA
Conversion From
Owner IRA Qualified Plan
Original Owner YES YES
Inherited by Spouse YES YES
Inherited by non-spouse NO * YES
*exception to everyone can do a Roth Conversion

13. Roth Conversion Traps
Little known facts -----that may
have unintended consequences
There may be more !

14. New Roth-IRA accounts need
New Beneficiaries
Beneficiaries – VERY IMPORTANT
Estate plan for each retirement account
Requires account owner to complete beneficiary forms
and update as needed
Requires beneficiary to take action by Sept 30th & Dec 31st
in the year following death (Oct 30th for trust by trustee)
To maximize the “Tax Free” benefits of an inherited
Roth-IRA as a designated beneficiary

15. New Roth-IRA accounts need
New Beneficiaries (cont’d)
Not having a designated beneficiary for a Roth-IRA
Even worse than not having one for an IRA
Inheriting IRA without a designated beneficiary
Death before age 70½ RBD* -- 5 year rule
Death after age 70½ RBD
--Use decedent’s remaining single life expectancy
(age 72 = 15.5 yrs & substrate 1 for each yr)
Inheriting Roth-IRA with no designated beneficiary
Roth IRA has no age 70 ½ Required Distribution
- No RBD so only 5 year rule
*Required Beginning Date – April 1st year following year age 70½

16. New Roth-IRA accounts need
New Beneficiaries – (cont’d)
Why it’s important ---
Roth Conversion $100,000 (earning 8%)
Inherited by 10 year old grandchild—not designated beneficiary
Loss of tax free growth and income
After 5 years = $146,932
Not what the parents had in mind
when they converted and paid taxes
When it could have been a Designated beneficiary
72.8 life expectancy = $4.8 million TAX FREE !

17. Beneficiary Default Election
Retirement Plans
What happens when there are no beneficiaries?
Custodians for: IRA, Roth-IRA, SEP-IRA, Simple IRA
Mutual Funds
American -- Spouse, children/grand kids, to the estate
Franklin -- Spouse, to the estate
Vangard -- Spouse, to the estate
Brokerage
Pershing -- Spouse, children per stirpes, to the estate
Schwab -- To the estate
TD Ameritrade -- Spouse, children, to the estate
Qualified Plans -- 401(k), 403(b), Profit Sharing
Plan Document ? ? ?

18. AGE 70 ½ RMD must be taken first
RMDs must be taken before Roth conversion
Converted RMD’s are excess Roth-IRA contributions
- RMD must be removed
- subject to 6% annual excise penalty tax
Converted RMD may qualify as Roth-IRA contributions
-If Roth-IRA owner is still working
-Max $6,000 (age 50)
Don’t forget to take inherited 401(k) RMDs

19. Age 70½ RMD’s with multiple IRAs
and 401(k)s
RMD’s from multiple IRAs can be taken from any
combination (one or all)
RMD’s from multiple 401(k)s must be taken from each one
-403(b) is an exception (one or all)
-Still working and less than 5% owner -- no 401(k)RMD
RMD’s from inherited IRA, 401(k)/403(b)
-Inherited IRA – take from each decedent’s IRA
(one or all same decedent)
-Inherited 401(k) – take from each
decedent’s 401(k) -- inherited 403b is an exception
(one or all same decedent)

20. Non-Spouse Beneficiaries cannot
convert Inherited IRAs
This is an exception to “Everyone” can now do a
Roth Conversion
Non-Spouse beneficiaries cannot convert inherited
IRAs. They can convert inherited 401(k)/403(b)
Convert 401(k) before transferring to an
Inherited IRA
-remember to take inherited 401(k) RMD first

21. The 10% Penalty Trap –
After Roth Conversion
After Roth conversion
10% penalty for withdrawals
Within 5 years for Roth owner under age 59½
Each year’s conversion has its own
5 year rule
After age 59½ - no penalty on
amount withdrawn after conversion

22. Not setting up a new Roth – IRA when
you have an existing Roth-IRA
Most people convert into existing Roth-IRA
Costly problem if you need to recharacterize
Stock A converted into existing Roth-IRA
Stock A $60,000
Existing Roth $100,000 = $160,000 balance
Stock A lost $40,000
Stock A $20,000
Existing Roth $90,000 = $110,000 balance
Recharacterize just stock A?

23. Not setting up a new Roth – IRA when
you have an existing Roth-IRA (cont’d)
Recharacterize just Stock A ($20k)
No – must include net earnings of entire Roth Account
Request $60,000 recharacterization before Oct 15th*
Original conversion amount
Trustee to Trustee transfer – important
Net Income Calculation - $41,250
Stock A $20,000
Plus $21,250 from Roth-IRA
$41,250 Recharacterized back to IRA
Is it worth it ????
Contact Roth-IRA custodian first before
submitting request to recharacterize
*October 15th of year after the conversion

24. Not setting up a new Roth – IRA when
you have an existing Roth-IRA (cont’d)
Solution
Convert stock A into separate New Roth-IRA
Can recharacterize Stock A now worth $20,000 or
Consolidate Roth-IRA accounts after Oct 15* deadline
*October 15th of year after the conversion

25. Partial Conversion of After Tax Money
The Pro-Rata Rule -- Part I
Partial Conversion of $10,000
$10,000 after tax contribution in $100,000 IRA
Can not “cherry pick” and convert only $10,000 after tax money
Pro-Rata Rule -- % after tax/total IRA = 10%
$10,000 Conversion
$1,000 tax free (10%)
$9,000 taxable
$10,000 conversion
Total IRA – include ALL IRAs, SEP-IRAs & SIMPLE IRAs
Total IRAs now = $400,000 % = 2.5%
$10,000 Conversion
$ 250 tax free (2.5%)
$9,750 taxable
$10,000 conversion

26. Partial Conversion of After Tax Money
The Pro-Rata Rule -- Part II
Calculations made on all IRA balances during year
March 9th conversion unknown until Dec 31st using IRS 8606
All rollovers and distributions are included in the
Dec 31st calculation
A $500,000 R/O from 401(k) to IRA during the year –
adds to the problem?
Transferring $90,000 to your current 401(k) before converting
the $10,000 of after tax money – won’t work
It is the December 31st calculation!

27. Annuity Surprise !
Account values haven’t recovered!
Good time to convert?
Variable annuities with Income Benefits
The guaranteed value can be substantially higher
Conversion is calculated using APV*
This higher amount is reported to IRS not the cash value
Call Insurance Company before converting
-clients don’t like surprises
*Actuarial Present Value

28. Don’t let the Little details
“Trap” you
Roth Conversion documents
Failure to check box “No Federal Tax withholding”
Automatic 10% Federal Tax will be withheld plus any State Taxes
Taxes withheld cannot be corrected or recharacterized
Always confirm converted amounts are deposited and make
it into the correct account – “Follow the Money”
60 day R/O – if late all taxable and lost Roth opportunity
may have 10% penalty*
*Under age 59½
Trustee transfers – finding out when doing tax return
may be too late to correct errors

29. Age 70½ Recharacterization Surprise
When Age 70 ½ or older and you recharacterize the year
following the year of the Roth-Conversion
A Required Minimum Distribution (RMD) is due by Dec 31st
How can that be – Roth-IRAs have no RMDs
After recharacterization the funds are treated as if they never left the IRA
RMD is calculated using Dec 31, 2010 Roth-IRA balance
that was recharacterized in 2011
50% penalty if RMD not paid by Dec 31, 2011
Not much time if you recharacterized Oct 15th
If recharacterization is done in same year as conversion – No problem
You took RMD before the conversion

30. Loss of Credits, Exemptions,
Deductions and more Traps
There are many “items” that need to be reviewed with client’s CPA
Financial aid for college student maybe reduced or lost
based on parents’ income.
Call College Financial Aid office and ask if they will exclude
Roth conversion income

31. Loss of Credits, Exemptions, Deductions and
more Traps (cont’d)
Seniors have 2 problems based on their income
For low income:
Social Security may currently be tax free. The conversion may
cause 50 to 85% of their SS income to be taxed
For higher income:
Medicare Part B premiums increase in cost above
Single filer $85,000
Married filer $170,000
At first glance, this may deter some seniors, but the
problem may continue once age 70 ½ RMD’s begin.

32. Loss of Credits, Exemptions, Deductions and
more Traps (cont’d)
Other tax issues with high income tax payers
AMT – loss of personal exemptions and phase out of deductions
Effects tax payers differently based on preference
items and very complex tax calculations
Tax Rate 26%-28%

33. Finding Cash to Pay Taxes
Cash is “king” – low interest Money Market
Loans – another source of cash
- Home equity line of credit
- Cash value life insurance
- 401(k) loan
Capital losses - $3,000 per year
Age 70½ RMDs
Charitable contribution strategy
Donate stocks with unknown cost basis

34. Roth Recharacterization
“The Do-Over”
• Deadline October 15, 2012 for 2011 Roth Conversion
 -even if 2011 tax return was filed
 Must be trustee to trustee transfer
 Transfer back to any IRA
 401(k) → Roth →IRA
 Treated as if funds never left IRA

35. Roth Recharacterization
“The Do-Over”
When can Account be reconverted back to Roth?
Must wait until later of the calendar year after the conversion
or more than 30 days after the recharacterization.
Roth Roth
Conversion Do-Over Conversion
2011 2012 31 days
2011 2011 2012

36. Roth IRA and Conversion Benefits
Tax Free Income -- You, Spouse & Grandkids
No required Age 70½ distribution – you are in control!
Make Roth-IRA contribution after Age 70½ (if still working)
Distributions won’t increase tax on Social Security, Medicare
premiums, AGI that affect AMT or 3.8% surtax in 2013
Huge Estate Planning Benefits
Beneficiary – RMD tax free income for life (non-spouse)
Best asset for trusts – avoids high trust taxes
35% Fed tax for trust income above $11,650 (2012)
Remove uncertainty and worry of future higher tax rates

37. Naming a Trust as Beneficiary
of IRA/401k is easy
Making it work is NOT!!
 Will custodian/Plan accept Trust?
 Is Trust listed as beneficiary on each account?
 Trust document specifically drafted for IRA/401k?
 Trust meets 4 requirements to qualify as “stretch IRA”
1. Valid under state law
2. All Trust beneficiaries are persons and identifiable
3. Irrevocable upon death
4. By October 30th year following death, custodian/plan received Trust
documents sent by Trustee.
 All beneficiaries will use oldest beneficiary’s life expectancy for RMDs.

38. Naming a Trust as Beneficiary (cont’d)
 Decedent’s IRA/401k successfully transferred to a properly
titled inherited IRA – not to the Trust
 RMD’s are paid out of the inherited IRA to the Trust for distribution
 Avoid having IRA Trust pay estate debts and expenses as trust
may be ineligible for “stretch IRA”
 Is the right type of Trust named?
-Conduit (pass through) Trust
-Discretionary (accumulation) Trust
 Who are the trust beneficiaries?
-Conduit trust only includes primary beneficiary
-Discretionary trust includes both primary & remainder beneficiaries

39. Naming a Trust as Beneficiary (cont’d)
 Definition of trust income is important to avoid Uniform Principal &
Income Act that defines RMDs (90% principal & 10% income) as
only 10% of RMD is distributed.
 Is trustee a family member or bank and understands their fiduciary
obligations and who to call for guidance for all the many complex
trust issues?
 If Special Needs Trust or control for many years is not needed
consider a custodial beneficiary.
Sally Jones custodian FBO Mark Smith UTMA/CA to age 25.

40. Qualified Disclaimers
Section 2518
 Allows for post death flexibility to change estate plan
 Disclaimer is written document prepared by attorney and
received by custodian/plan within 9 months of date of death
 Primary beneficiary can disclaim any or all of inherited
IRA/401(k) to named contingent beneficiaries
 Individuals making disclaimer must not have accepted or
transferred any of the inherited IRA/401(k) (Exception
decedent’s RMD)

41. Road Map for
Beneficiaries Inheriting
401(k), IRA & Roth-IRA
Don’t Touch Inherited Accounts Until
You Get Help!

42. What Beneficiaries Need to Do
Ask – Procedures to inherit account & if Roth IRA meets 5 Year Rule
Name – New Beneficiaries - Very Important!
Take – Decedent’s remaining RMD if age 70½ or older
Ask if 401k has Company Stock, Roth 401k or after tax contributions;
what is procedure for Non-Spouse Beneficiary transfers & conversions to
Roth-IRA?
Ask if Federal Estate Taxes were paid
Transfer to properly titled inherited account (no 60 day R/O)
 Mary Smith deceased (DOD 11/4/10) FBO Jane Smith Beneficiary

43. Important Deadlines
 December 31st year of death – Decedent’s RMD if age 70½ or older
 9 Months after death – Qualified Disclaimer & Fed Estate Taxes
deadlines
 Year Following Death
--September 30th – Qualify for stretch IRA & cash out charitable bequests
--October 30th – Trust documents received by IRA custodian/Plan
--December 31st – Separate accounts for multiple beneficiaries
Complete company stock transfer within calendar year
Transfer out of 401k and complete Roth conversion
Start Inherited RMD (non-spouse)
Note: Spouse Beneficiary has special benefits – don’t lose them!

44. Road Map for
Spouse Beneficiary Inheriting
401(k), IRA & Roth-IRA
Spouse Beneficiary has special benefits –
don’t lost them!

45. Spouse Beneficiary Special Benefits
Spouse can transfer to own IRA – “Fresh Start”
--After qualified disclaimers and 401k company stock transfers
--Can transfer at anytime so can keep as inherited IRA when income is
needed (no 10% penalty)until spouse is age 59 ½.
Delay RMD Distributions
--For own IRA until spouse is age 70½
--For inherited IRAs*, until decedent would have been age 70½
*Only if spouse was sole beneficiary
Recalculate Life Expectancy–For account registered as inherited IRA *
--Spouse can recalculate life expectancy after 1st year so age 70 ½ RMDs
are smaller and last longer than for a non-spouse
* only if spouse was sole beneficiary
If all this seems complicated – it is!
This is not the time to “do it yourself”

46. IRA, 401(k) Roth IRA
for participants & their beneficiaries
Take advantage of the
Opportunities
and avoid the pitfalls