An Opportunity to Fund Retirement with a Roth IRA

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Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state.

Please note that this presentation has been designed to provide general information. Neither Pacific Life nor its representatives offer legal or tax advice. Clients should consult their attorneys and tax advisers as to the applicability of this information to their specific circumstances and for complete up-to-date information concerning federal and state tax law.

[Name of Financial Professional] and [Company] are not affiliated with Pacific Life or its affiliated companies.

Agenda

Funding PlanningDistributions

Established 1/1/98 Governed by IRA rules, except:

– No deductible contributions– Tax-free qualified distributions – Owner has no required distributions

Roth IRAs

Funding

Contributions Conversions

Rollovers from Employer Plans

Rollovers from Roth 401(k)/403(b)

FOUR WAYS

$5,500 (or $6,500 if 50 or older by end of year) Two requirements

– Earned income at least equal to amount contributed – Below modified adjusted gross income (MAGI) thresholds

Contributions for 2016

MAGI Phase-Out Ranges

$117,000 – $132,000$184,000 – $194,000

Married Filing Jointly Single

What Is MAGI for Roth IRA?

Adjusted Gross

Income (From IRS Form

1040 Series)

•Roth Conversion Amounts

•Roth Rollovers from Employer Plans

Certain Deductions

& Exclusions For example:

•Traditional IRA•Qualified Bond Interest

Rollover of assets from a traditional IRA,SEP-IRA or SIMPLE IRA to a Roth IRA– Two-year period must be met if converting a SIMPLE IRA

IRA owner pays taxes on pretax dollars Additional 10% federal tax does not apply

Conversions

Conversion Process

2. Direct rollover• 1099R reporting• No 60-day rule

1. Redesignation• 1099R reporting

3. Indirect rollover• 1099R reporting• 60-day rule applies• No 12-month restriction

All Conversions in 2010 and Onward

Convert traditional IRA to Roth IRA

IRA Roth IRA

No MAGI limitsAnyone can convert regardless of income level

American Taxpayer Relief Act of 2012 Makes permanent for 2013 and beyond the lower

Bush-era income-tax rates (for most individuals) Top income-tax rate 39.6%

Tax Changes for Top Income Earners

Year Single Married Filing Jointly

2013 $400,000 $450,000

2014 $406,750 $457,600

2015 $413,200 $464,850

2016 $415,050 $466,950

Using assets outside of the IRA to pay tax:– Reduces taxable estate– Maximizes long-term tax deferral

Using IRA assets to pay tax may:– Subject some assets to income taxation– Incur an additional 10% federal tax

Conversion Caution

Converting IRAs After Age 70½

Required minimum distribution (RMD) amounts cannot be converted or rolled to a Roth IRA

IRA 2. Roth IRA

1. Distribute RMD amount from IRA

2. Convert balance to Roth IRA

1. RMD

Beginning 1/1/08Two sets of rules:1. Conversion rules2. Rollover rules of the plan from

which rollover occurred

Converting from an Employer Plan

IRS Notice 2014-54 Description: The IRS issued notice 2014-54 that addresses

the question “If my 401(k) has both pre-tax money and post-tax money, can I just take the post-tax money and convert to a Roth IRA tax-free?”

Impacted Areas: Qualified Retirement Plans, IRAs, and Roth IRAs

Changes: Clarifies the IRS’s prior position of applying the pro-rata rule

Effective Date: January 1, 2015

Converting from an Employer Plan

IRS Notice 2014-54 Details: Permits participants to direct the pre-tax and

post-tax when disbursements are made to multiple destinations (e.g., to an IRA and Roth IRA) and not require application of the pro-rata rule

Converting from an Employer Plan

Converting from an Employer Plan

Examples:Pre-IRS Notice 2014-54 Post-IRS Notice 2014-54• $100,000 401(k) Plan

• $80,000 pre-tax• $20,000 post-tax

• Receives pro-rata treatment when converting to Roth IRA• If you convert $20,000 into a

Roth IRA, then $16,000 would be subject to tax

• $100,000 401(k) Plan• $80,000 pre-tax• $20,000 post-tax

• Can pick which bucket of assets (pre-tax or post-tax) to convert/distribute• If you convert $20,000 into a Roth

IRA, then you can choose that all $20,000 come from the post-tax bucket and process a tax-free conversion

Converting inherited accounts Applies only to eligible rollover distributions from

employer plans May be rolled to an inherited Roth IRA Distributions must be taken from a Roth IRA Does it make sense to convert?

Who Let the Roth Out?

Section 691(c) deduction Itemized deduction for estate taxes paid Conversion causes you to pay income taxes sooner,

BUT also accelerates use of this deduction, potentially reducing tax bill in half

Are You Looking to Accelerate a Deduction?

According to the American Taxpayer Relief Act of 2012, the federal estate, gift, and generation-skipping transfer (GST) tax exemption amounts are all $5,000,000 (indexed for inflation effective for tax years after 2011); the maximum estate, gift, and GST tax rates are 40%. The exemption amount for 2016 is $5,450,000.

Recharacterization– By tax return due date,

including extensions (October 15)

Reconversion (later of)Doing over the do-over

– In year following year of conversion, or– 30 days after recharacterization

Conversion Do-Overs

Do-Over Timeline

Scenario Conversion Recharacterization Reconversion

1 4/1/15 8/1/15 1/1/16

2 4/1/15 12/25/15 1/24/16

3 4/1/15 4/15/16 5/15/16

Established 1/1/06 No MAGI limits for contributions Required distributions Tricky rollover rules

Roth 401(k) and 403(b)

Qualified Nonqualified Required (for beneficiaries)

Roth IRA Distributions

Two requirements:1. Five years since you established a Roth IRA2. Distribution is made for one of the following reasons:

– Age 59½ or older– Disability– Death of owner– First-time home buyer

Qualified (Tax-Free) Distributions

If you take a distribution but fail to meet requirements for a qualified distribution, then the distribution is made in the following order: Regular contributions Conversion and rollover contributions

– Additional 10% federal tax if within five years Earnings

– Taxes and 10% if no exception

Nonqualified Distributions

New Roth IRA, then new five-year period Existing Roth IRA, then rollover tracks Roth IRA

five-year period

Tricky Rollover Rules

Roth401(k)/403(b)

Roth IRA

Tricky Rollover Rules

Qualified Distribution

Rollover amount treated as basis in

Roth IRA

Nonqualified Distribution

Rollover amount divided into basis and earnings in

Roth IRA

Amount includes $65,000 after-tax contributions and $35,000 earningsQualified distribution

– $100,000 included as Roth IRA basis

Nonqualified distribution– Basis and earnings track to the Roth IRA

DRAC Rollover Example

You May Wish to Get Started

In anticipation of a DRAC rollover, establish a Roth IRA now with either: Contributory Roth IRA Nondeductible IRA that is then converted to Roth IRA

– BUT beware of the aggregation rule

Required Distributions at Death

Death before required beginning date (RBD) rules– Designated beneficiary (DB)▪ May use five-year rule or life expectancy

– No DB▪ Must use five-year rule

Roth IRA owner dies before end of five-year period beginning with: First taxable year for which a contribution was made Year of conversion contribution from traditional IRA

or rollover

Nonqualified Death Distributions

Spousal rollover– Earlier of spouse’s or decedent’s five-year holding period

All others– Decedent’s five-year holding period

Qualified Death Distributions

Designated beneficiary (DB)– Spouse– Non-spousal individual– Qualifying trusts

Non-DB—estates, charities, etc.

Who’s Your Beneficiary?

Lump sum Five-year rule Inherited Roth IRA

– Annuitization– Spouse’s recalculated life expectancy ▪ Delayed until owner would have reached age 70½

Rollover

Spouse

Lump sum Five-year rule Inherited Roth IRA

– Annuitization– Life expectancy of beneficiary

Non-Spousal Individual

Valid under state law Irrevocable at death Identifiable beneficiaries Trust documentation by 10/31 of the year following

the year of death

Qualifying Trusts and Designated Beneficiaries (DBs)

Lump sum Five-year rule Trust-owned inherited Roth IRA

– Life expectancy of oldest trust beneficiary

Qualifying Trusts

Non-Designated Beneficiaries

Lump Sum Five-Year Payout

Important Dates for the Year AFTER Death

9/30 12/31

DB Determination

Separate Accounts

10/31

Trust Document

Case Study$750,000 Roth IRA

75-year-old owner dies having named two beneficiaries

Age 25 Begins

Distributions

Granddaughter

Age 50 Begins

Distributions

Son

Separate accounts established by 12/31 of the year following the year of the owner’s death

Son has 34.2 years during which to take distributions Granddaughter has 58.2 years during which to take

distributions

Opportunity for Separate Accounts

Disclaimers Son executes a qualified disclaimer His sons, ages 22 and 20, may inherit his interest Separate accounts established by 12/31 deadline 22-year-old son’s distribution period is 61.1 years 20-year-old son’s distribution period is 63 years

Thanks, but No Thanks

Beginning in 2013, the Health Care Reform Act created a new 3.8% federal tax on net investment income

3.8% federal tax will apply to the LESSER of:1. Net investment income2. The excess of MAGI thresholds–$200,000 for single

taxpayers; $250,000 for married taxpayers filing a joint tax return

Managing the 3.8% Net Investment Income Tax (NIIT)

Potential for earnings without tax No required lifetime distributions Not included in definition of income

for taxation of Social Security benefits Management of NIIT

Roth IRA Advantages

No deduction for contributions Pay tax on conversions

Roth IRA Disadvantages

Before moving assets from qualified plan to a Roth IRA consider: Investment options (may vary) Fees and expenses (may vary) Services offered (may differ) Loan access (Roth IRA does not allow Loans) Creditor protection (may differ)

Additional Considerations

Do the Math

Conversion calculators Tools to help analyze a Roth IRA conversionAssumptions include: When distributions will be taken What tax rates will be at the time of distributions Earnings during the interim

Analysis is required, because everyone’s situation is different

Possible Opportunities

You don’t need your traditional IRA for income and wish to leave it to someone

You need your IRA to fund a trust You are willing to pay income tax on conversion to

reduce your estate (and thus your estate tax) You have charitable deduction carryovers, investment

tax credits, etc., that will offset income on conversion

In Summary

Better understanding of funding Roth IRAs Roth conversions Distributions and beneficiary options Decisions should be reviewed with your tax and legal

advisors before making any changes

This material is not intended to be used, nor can it be used by any taxpayer, for the purpose of avoiding U.S. federal, state, or local tax penalties. This material is written to support the promotion or marketing of the transaction(s) or matter(s) addressed by this material. Pacific Life, its affiliates, their distributors, and respective representatives do not provide tax, accounting, or legal advice. Any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor or attorney.

Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity Company. Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the products it issues.

Pacific Life Insurance CompanyP.O. Box 2378

Omaha, NE 68103-2378(800) 722-4448

In New York, Pacific Life & Annuity CompanyP.O. Box 2829

Omaha, NE 68103-2829(800) 748-6907

www.PacificLife.com