Roth IRA Conversion Evaluator®: Frequently Asked Questions



Roth IRA Conversion Evaluator®: Frequently Asked Questions -- Version 2.0

Download of Version 2.0

Question: Are users required to download Version 2.0?

Answer: Users will be prompted to download Version 2.0. On June 1, 2010, the update prompt will change from non-required to required. Users will not be able to run the Evaluator until they perform the update.

Functionality

Question: What new functionality features have been addressed/added in Version 2.0?

Answer:

• Added input field for value of non-deductible IRA (i.e., basis).

• Added input fields for ages of spouse and oldest and youngest non-spouse beneficiaries.

• Added input fields for assumed age at death for IRA owner and spouse.

• Added input fields for balance, yield rate, and asset turnover ratio of tax-exempt investment account.

• Provided choice of “basic” or “detailed” analysis of IRA owner’s future income, cash flow, and tax situation.

• Added check box to choose if the taxable investment account should be used first to meet the IRA owner’s after-tax cash flow needs.

• Added input field for state estate tax rate.

• Added ability to transfer information concerning the amount of any Roth IRA conversions entered on the Assumptions tab to the Tax Rate Evaluator tab (see “Populate with Values from Assumptions Tab” button on the Tax Rate Evaluator.

• Added ability to calculate the incremental effective income tax rate applicable to a given conversion option or options based on information input directly by the user or that carried over from the Assumptions tab (see “Calculate Incremental Effective Tax Rates” button on the Tax Rate Evaluator).

• Added ability to transfer information concerning the amount of any Roth IRA conversions and the incremental effective income tax rate applicable to that conversion from the Tax Rate Evaluator tab to the Assumptions tab (see “Copy Roth IRS Conversion Amounts and Incremental Effective Tax Rates to Assumptions Tab” button on the Tax Rate Evaluator).

• Added the ability to save, print, and export information from the Tax Rate Evaluator tab.

• Added the ability to include a “Disclaimer” or other language, up to 1,000 characters in length, to the foot of the Report pages (see Preferences).

Question: How do you account for the impact of state taxes on the Roth IRA conversion?

Answer: To take into account the impact of state taxes on the conversion, the user will need to add the appropriate percentage to that assumed for federal taxes. In other words, if the otherwise assumed federal rate is 35 percent, and the state rate would be 5 percent, the user should input 40 percent as the applicable rate.

Terminology

Question: What is meant by Annual Asset Turnover?

Answer: The Asset Turnover Ratio relates to the portion of the investment account that is going to be sold off each year.

Question: In the Tax Rate Evaluator tab, what is meant by the “effective income tax rate?”

Answer: The effective income tax rate is the total tax liability divided by gross income, expressed as a percentage.

Question: In the Tax Rate Evaluator tab, what is meant by the “incremental effective income tax rate?”

Answer: The incremental effective income tax rate measures the tax impact of a Roth IRA conversion. This is computed by subtracting the amount of tax if no conversion is made (Option 1) from the amount of tax resulting from a conversion (Option 2 through 6) and dividing the resulting figure into the amount of the conversion. So, if the difference in taxes resulting from a conversion is $30,000 and the amount of the conversion is $100,000, the incremental effective income tax rate on that conversion is 30 percent.

Question: What is meant by Net-to-Family?

Answer: The Net-to-Family amount is derived from a “tax affecting” calculation that assumes liquidation of the accounts at a particular point in time based on assumptions pertaining to the future income tax rates of the beneficiaries (built-in-income tax on traditional IRA) that the user has made on the Assumptions tab.

For further information on the Net-to-Family calculation, users should consult the document “Understanding the Present Value of Future IRA Distributions” found on IntelliConnect (Document Path: Financial and Estate Planning - Roth IRA Conversion Expert™ - Professional Practice Management – Understanding the Present Value of Future IRA Distributions).

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Question: What is the significance of the variance and step analyses?

Answer: The variance and step analysis features in the Summary tab allow the user a point of comparison, based on either a dollar amount or a percentage, to compare the Net-to-Family results between (1) the selected Roth conversion options (Options 2 through 6) and the “do-nothing option” (Option 1) (variance) and (2) between the various (up to five) Roth conversion options (step) at the 10-, 20-, 30-, 40-, or 50-year time points to see when a particular Roth conversion option can produce a positive or negative result.

Question: What is a “stretch” IRA?

Answer: A stretch IRA is a tax planning technique in which the IRA owner can stretch out the tax-free benefits of a Roth IRA by naming beneficiaries of the IRA who are younger than the IRA owner (typically his or her child). The named or designated beneficiary of the inherited IRA can stretch out distributions over his or her (presumably longer) life expectancy, if the distributions begin on or before the end of the calendar year immediately following the calendar year in which the IRA owner dies. This allows the funds to remain in the IRA and, thus, remain in a tax-free environment (tax-deferred in the case of a traditional IRA) for a longer time.

Assumptions

Question: What effect on the output will putting an amount in the Real Estate field of the assumptions screen have on the output?

Answer: Real estate, and any growth from it, will be reflected specifically on the Assets tab. It will, in turn, be part of the IRA owner's gross estate, which impacts the Net-to-Family figure that appears in the charts and the summary.

Question: Does the program assume a “draw-down” date for distributions to begin from the Roth IRA?

Answer: There is no assumed or selectable "drawn down date" for the Roth. The Evaluator generally assumes that required minimum distributions (RMDs) from the traditional IRA will begin in the year the IRA owner turns 70. It is possible to force distributions from the Roth by creating a situation in which the after-tax cash needs exceed the annual income and the outside investment account is insufficient to meet these needs. However, this would be counterintuitive to the idea of trying to shield the Roth from distributions for as long as possible.

Question: Why are there only 2 beneficiaries listed on the Assumptions tab?

Answer: The benefits of a stretch IRA can be illustrated by showing distributions made to the oldest and youngest beneficiary.

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