Roth IRA

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Roth IRA
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Module Objectives

• 1997 Taxpayer Relief Act
• Review Traditional IRA
• Roth IRA
• Farmers Annuity Overview

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The Taxpayer Relief Act of 1997
The Taxpayer Relief Act of 1997 is an extensive
piece of Federal legislation consisting of 17
different titles and approximately 1,000
pages. This training is a not intended to be
legal or tax advice and reflects our current
understanding of this new law and is for
informational purposes only. Each taxpayer
should consult his or her own tax advisor as to
the effect of any particular transaction.
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The Taxpayer Relief Act of 1997
The Taxpayer Relief Act of 1997 (TRA 97) is the
largest tax cut since 1981. The new rules
provide many tax benefits for people who want to
put away money for their childs education, for
the purchase of a home and for their retirement.
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The Taxpayer Relief Act of 1997

• Some principle provisions of the law include
• A 500 per child tax credit,
• Educational tax incentives,
• Enhancements to IRA programs including new
  tax-favored savings programs and broader
  eligibility,
• Lower capital gains rates, and
• Lower estate and gift taxes.

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The Taxpayer Relief Act of 1997
For Parents
TRA 97 focused on giving relief to families with
preschool and school age children. The middle
class tax cut includes a 500 per-child tax
credit and incentives for college education.
This represents the largest portion of the tax
relief provided by TRA 97 in the first five
years.
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The Taxpayer Relief Act of 1997
For Retirement Savers

• TRA 97 will allow more flexibility and allow
  more people to access to IRA tax advantages. The
  key changes include
• Tax penalty-free withdrawal from IRAs for
  qualified higher education expenses and for
  first-time homeowners.
• Extension of tax deductible IRAs to people with
  higher income levels.
• Creation of the Roth IRA to provide earnings
  potentially free of Federal income tax.

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The Taxpayer Relief Act of 1997
Traditional IRA Enhancements

• TRA 97 allows more people to qualify for
  deductible IRA contributions and allows money to
  be withdrawn penalty free if used for college
  expenses or first homes.
• Withdrawals from IRAs are taxable in the year
  withdrawn. Withdrawals are subject to a 10
  penalty-tax unless withdrawn
• after age 59 1/2, or for one of the reasons
  listed above.

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The Taxpayer Relief Act of 1997
The New Roth IRA

• The Roth IRA can accumulate tax-deferred and can
  be distributed income tax free! These features
  distinguish the Roth from the Traditional IRA
• Tax-free distribution of earnings
• No tax deduction for contributions to the account
• Distribution only required at death
• Qualified distributions are not included in
  income
• Contributions can be made beyond age 70 1/2
• Distribution is not required at 70 1/2

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The Taxpayer Relief Act of 1997
The New Roth IRA
Tax-free and penalty-free qualified distribution
is possible five years after the first year in
which contributions are made, if withdrawn after
age 59 1/2, because of death or disability, or
for the purchase of a first home.
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The Taxpayer Relief Act of 1997
The New Roth IRA
Roth IRAs feature Broader Eligibility. There is
no age limit for making contributions. The IRA
purchaser must have earned income equal to the
amount of your contribution up to 2,000 annually
for an individual or 4,000 combined for spouses.
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The Taxpayer Relief Act of 1997
The New Roth IRA
There are different limits on contributions to
Roth IRAs. If their Adjusted Gross Income (AGI)
exceeds 150,000 and they file jointly (95,000
for single filers) the amount they may contribute
is gradually reduced. The combined total of IRA
and Roth IRA accounts cannot exceed the maximum
annual contribution of 2,000 per individual.
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The Taxpayer Relief Act of 1997
The New Roth IRA
TRA 97 allows money to be rolled over from
Traditional to Roth IRAs. This money will be
rolled over without the 10 penalty however, the
IRS will treat this as a taxable event.
Should you convert?
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The Taxpayer Relief Act of 1997
For Homeowners
First time homeowners can make tax favored
withdrawals ( subject to a 10,000 limit) from
their IRAs for their down payment. In addition,
TRA 97 will relieve many people who sell their
principle residence of capital-gains taxes
(profits) as much as 500,000 for married couples
filing jointly and 250,000 for single
individuals. This exclusion can be used every two
years.
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The Taxpayer Relief Act of 1997
For Savers and Investors
TRA 97 reduces the maximum tax rate on the net
individual capital gains from 28 to 20 and from
15 to 10 for sales or exchanges of qualified
capital assets after May 1997. The law has also
decreased the holding period required for
long-term capital gain treatment from 18 to 12
months 1 day.
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The Taxpayer Relief Act of 1997
Estate and Gift Tax Considerations
The individual exemptions for the unified credit
for estate and gift taxes will gradually increase
from 600,000 to 1 Million by the year 2006.
The gradual phase in of higher tax exemptions
will require a careful review of wills, trust and
gift giving strategies. (Lets review a
comparison between the Traditional IRA and the
new Roth IRA.)
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TRA 97 Review

• 1. What are the 5 main provisions of the Tax
  Payer Relief Act of 1997?
• A 500 per child tax credit,
• Educational tax incentives,
• Enhancements to IRA programs including new
  tax-favored savings programs and broader
  eligibility,
• Lower capital gains rates, and
• Lower estate and gift taxes.

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TRA 97 Review

• 2. TRA 97 will allow more flexibility and allow
  more people to access to IRA tax advantages.
  What are 3 key changes to the new IRAs?
• Tax penalty-free withdrawal from IRAs for
  qualified higher education expenses and for
  first-time homeowners.
• Extension of tax deductible IRAs to people with
  higher income levels.
• Creation of the Roth IRA to provide earnings
  potentially free of Federal income tax.

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TRA 97 Review

• 3. What features distinguish the Roth from the
  Traditional IRA?
• Tax-free distribution of earnings
• No tax deduction for contributions to the account
• Distribution only required at death
• Qualified distributions are not included in
  income
• Contributions can be made beyond age 70 1/2
• Distribution is not required at 70 1/2

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Farmers Annuity Plans

More time than money? A Farmers annuity may be
right for you!
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Farmers Annuity Plans
An annuity is a legal binding contract that
encourages individuals to save a portion of
income or compensation for retirement. It
guarantees to pay an income for a specified
period of time or for a persons entire life. An
annuity is one of the last remaining
tax-advantaged vehicles available to accumulate
money for the future. It can be used to
supplement your pension or Social Security or to
fund your I.R.A.
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Farmers Annuity Plans
A deferred annuity is very similar to a bank CD.
Like a CD, the consumers principle is safe and a
return on the money is guaranteed. The life of
an annuity has two phases, accumulation and
payout. Annuities offer advantages in both
phases.
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Farmers Annuity Plans

• In the accumulation phase
• Principal grows and compounds inside an annuity
  free from federal income tax. As a result, funds
  accumulate faster and larger than a CD where
  interest compounded is taxed as ordinary income
  every year.
• Both CDs and annuities carry penalties for early
  withdrawals, however the surrender charge for an
  annuity decreases to zero after a few years.
  Every time CD funds are rolled over, a new
  penalty period begins.

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Farmers Annuity Plans

• In the payout (or Annuitization) phase
• Annuities guarantee a payout stream and offer a
  variety of payout options, including lifetime
  income.
• Although deferred annuities accumulate money
  free from current income tax, they do not
  eliminate the tax liability on interest earnings.
  They do, however allow the annuity owner to pay
  the taxes at a later date when tax costs could be
  minimized. Annuitization permits the annuitant
  to spread the tax liability over the number of
  years the income is to be received.

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Farmers Annuity Plans

• In the payout (or Annuitization) phase...
• Unlike an IRA or other retirement accounts, there
  is no requirement to begin distributions at age
  70 1/2.
• For Estate planning purposes, an annuity bypasses
  probate when left to a designated beneficiary. A
  spousal beneficiary can maintain the tax-deferred
  status for up to the lifetime of the beneficiary.

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Comparing a Farmers Annuity to a CD

• A Farmers Annuity can provide you with
• An optional, flexible retirement program
• A secure cash accumulation plan
• Competitive interest earnings
• Tax savings
• A death benefit for your beneficiary.
• Certificates of Deposits can be easily rolled
  into a Farmers Annuity at maturity.

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Comparing a Farmers Annuity to a CD

• For Retirement
• A Farmers Annuity can be used to establish a
  retirement plan if you wish.. including an IRA
  option.
• It will enjoy competitive, tax-deferred interest
  earnings.
• You can select guaranteed retirement income
  optionsor a lump sum payment.
• Your beneficiary will receive the entire annuity
  fund if you die before retirement.
• You decide when and how much to pay into and
  withdraw from your annuity.
• If you choose an IRA, your contributions may be
  income tax deductible.

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Comparing a Farmers Annuity to a CD

• For Cash Accumulation
• At your option, a Farmers Annuity can be used as
  a secure cash accumulation plan.
• Payments and withdrawals are flexible.
• Interest earnings are competitive, and tax
  deferred.
• There is a guaranteed minimum interest rate.
• Your cash accumulation plan can readily be
  converted to a retirement program, at your option.

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Comparing a Farmers Annuity to a CD
Lets compare with a CD. Assume a 10,000
deposit earning 8 interest and youre in a 28
tax bracket CD ANNUITY DEPOSIT 10
,000 10,000 INTEREST 800
800 INCOME TAX -224
-0 NET YEAR-END BALANCE 10,576 10,800 In
effect, your 8 certificate has been reduced to a
net of 5.76. In 10 years, your original 10K CD
would be worth 18,344 and your Annuity would
have a balance of 21,589.
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Farmers Equity Indexed Annuity
(FEIA)
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Equity Indexed Annuity
Are you looking for ways to maximize your
retirement income while protecting your
principal? To accomplish this , many people
diversify their retirement portfolios. Such
portfolios typically include not only stocks and
bonds, but also safer instruments such as CDs,
Treasury Bills and fixed annuities, which provide
a stable return. Farmers Equity Indexed Annuity
(FEIA) can be a part of a plan to help you take
control of your financial future by providing a
potential for higher long-term growth and protect
your principal from undue risk.
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Equity Indexed Annuity

• This annuity links interest earnings to increases
  in a leading U.S. stock market indicator, the
  Standard Poors 500 Composite Stock Price Index
  while providing the safety of a traditional
  guaranteed minimum return.
• SAFETY Guaranteed return of at least 110 of
  your original principal when held with no
  withdrawals for a full seven-year term.
• TAX ADVANTAGE Interest earnings not taxed until
  withdrawn, which allows for faster accumulation.
  If held until retirement, you may be in a more
  favorable tax bracket.

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Equity Indexed Annuity
When you purchase a FEIA, you receive interest
linked to the change in the SP 500. The
beginning Index value is set at the start of a
seven-year term. The ending index value is based
on the average of SP Index values at the end of
four quarterly intervals preceding the end of the
term. The percentage change in the SP Index
value is then multiplied by a participation rate
to determine the amount of interest to be
credited to your annuity. You must hold the
annuity for a full 7 years to realize this
increase in your policy value.
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Equity Indexed Annuity

• Why use the SP 500?
• It is a widely recognized performance benchmark
  for U.S. stock market activity.
• It is a U.S. Dept of Commerce leading economic
  indicator.
• The SP 500 does not contain the 500 largest
  stocks, but the stocks considered are generally
  leaders within their industry group.
• Important industry groups are identified and
  allocated a representative sample of stock. The
  four major groups are industrials, utilities,
  financial and transportation.
• It includes stocks from the NYSE, the American
  Stock Exchange and the NASDAQ.

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Equity Indexed Annuity
PARTICIPATION RATE This rate is set at the
time of issue (60 to over 100). Without
exception, the issue date will be the first
business day of the month following receipt of
the application and funds. This rate is
guaranteed not to change during the term. No
matter what happens to the SP Index, your
annuity has a guaranteed minimum value. The value
at any time is 90 percent of your initial premium
(less withdrawals) accumulated at 3 percent
annual interest. WITHDRAWALS You may make
partial withdrawals after the first policy year
(minimum 500, limited to one per year with
balance not below 5,000). You may surrender the
policy for its guaranteed minimum value however,
a IRS penalty of 10 will apply for withdrawals
prior to age 59 1/2.
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Equity Indexed Annuity
How the Interest Earnings are Calculated A x B
x C A Premium less withdrawals B The
percentage change in Index Value Avg. Index
Value ( last 4 quarters of term) - Issue Date
Index Value
Issue Date Index Value C The Participation
Rate Or, if the SP 500 declines, Farmers
protects your principle if held for the full 7
year term. If less than 7 years, (premium x .90)
3 interest
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Equity Indexed Annuity
Lets look at an example 100,000 in premium
0 withdrawals (End Term IV - Issue Date
IV)/Issue Date IV (430.15591.75603.05620.85)22
45.8 / 4 102.16 Participation Rate
80 (100,000) x (102.16) x (80) 81,728 index
increase Value at end of term 181,720
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Equity Indexed Annuity
Hypothetical Accumulation of Equity Indexed
Annuity (Based on 80 participation rate)
12/31/80 - 12/31/87 1981 - 1988 1982
- 1989 1983 - 1990 1984 -
1991 1985 - 1992 1986 -
1993 1987 - 1994 1988 -
1995 AVERAGE
91.57 96.58 107.06 81.79 105.52 77.64 70.93
66.67 81.73 86.61
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Equity Indexed Annuity

• Start with some general characteristics such as a
  commitment to long-term obligations and a
  financial objective of growth and safety rather
  than liquidity.
• ARE YOU?
• Non-risk taker
• Inflation Fighter
• Profit Taker
• Conservative
• Retirees or Job Changer
• Retirement Planner
• Without time or interest to follow the market
  daily

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Annuity Distribution
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Annuity Distribution
LIFE ONLY Provides for an income during the
lifetime of the annuitant only. The contract
terminates with the last regular payment prior to
the death of the annuitant. This option provides
the largest income payable (if the ann.
lives). LIFE INCOME WITH PERIOD CERTAIN
Provides guaranteed monthly payments for the
lifetime of the annuitant. Should annuitant die
prior to the end of the guaranteed period,
payments to the beneficiary will be made 1. Any
guaranteed annuity payments remaining will be
continued to the end of the guaranteed
period. 2. If the beneficiary dies while
receiving such payments, the remaining payments
will be payable to the beneficiarys estate.
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Annuity Distribution
JOINT AND SURVIVOR Provides for an income
during the lifetime of two persons. If this
option is desired, an additional election must be
made prior to the annuity commencement date to
determine the amount of the annuity that will
continue during the lifetime of the
survivor. JOINT AND FULL The annuitants will
receive a lifetime income. Upon the death of
either, the surviving annuitant will continue to
receive a lifetime income with no reduction in
the amount. JOINT AND HALF Same as Joint and
Full however, the survivor will only receive
half of the amount which was being received after
death. Although an annuity option may be changed
prior to commencement date, it cannot be changed
after the annuity payments start.
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Annuity Application
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Quote of the Day..

• The way to stop financial joyriding is to
• arrest the chauffeur, not the automobile.
• Woodrow Wilson