Roth IRA 1032020 1 Module Objectives 1997 Taxpayer

Roth IRA 10/3/2020 1

Module Objectives • • 1997 Taxpayer Relief Act Review Traditional IRA Roth IRA Farmers Annuity Overview 10/3/2020 2

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. 10/3/2020 3

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 child’s education, for the purchase of a home and for their retirement. 10/3/2020 4

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 taxfavored savings programs and broader eligibility, • Lower capital gains rates, and • Lower estate and gift taxes. 10/3/2020 5

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. 10/3/2020 6

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 IRA’s 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. 10/3/2020 7

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IRA Enhancements TRA ‘ 97 allows more people to qualify for deductible IRA contributions and allows money to be withdrawn penalty free if used for college expenses or first homes. Withdrawals from IRAs are taxable in the year withdrawn. Withdrawals are subject to a 10% penaltytax unless withdrawn… • after age 59 1/2, or for one of the reasons listed above. 10/3/2020 8

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: 4 Tax-free distribution of earnings 4 No tax deduction for contributions to the account 4 Distribution only required at death 4 Qualified distributions are not included in income 4 Contributions can be made beyond age 70 1/2 4 Distribution is not required at 70 1/2 10/3/2020 9

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. 10/3/2020 10

The Taxpayer Relief Act of 1997 The New 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. 10/3/2020 11

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. 10/3/2020 12

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? 10/3/2020 13

The Taxpayer Relief Act of 1997 For Homeowners First time homeowners can make tax favored withdrawals ( subject to a $10, 000 limit) from their IRA’s 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. 10/3/2020 14

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. 10/3/2020 15

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. (Let’s review a comparison between the Traditional IRA and the new Roth IRA. ) 10/3/2020 16

10/3/2020 17

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 taxfavored savings programs and broader eligibility, • Lower capital gains rates, and • Lower estate and gift taxes. 10/3/2020 18

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 IRA’s? • Tax penalty-free withdrawal from IRA’s 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. 10/3/2020 19

TRA ‘ 97 Review 3. What features distinguish the Roth from the Traditional IRA? 4 Tax-free distribution of earnings 4 No tax deduction for contributions to the account 4 Distribution only required at death 4 Qualified distributions are not included in income 4 Contributions can be made beyond age 70 1/2 4 Distribution is not required at 70 1/2 10/3/2020 20

Farmers Annuity Plans More time than money? A Farmers annuity may be right for you! 10/3/2020 21

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 person’s 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. 10/3/2020 22

Farmers Annuity Plans A deferred annuity is very similar to a bank CD. Like a CD, the consumer’s 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. 10/3/2020 23

Farmers Annuity Plans In the accumulation phase: q q 10/3/2020 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 CD’s 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. 24

Farmers Annuity Plans In the payout (or Annuitization) phase: Annuities guarantee a payout stream and offer a variety of payout options, including lifetime income. q 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. q 10/3/2020 25

Farmers Annuity Plans In the payout (or Annuitization) phase. . . q q 10/3/2020 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. 26

Comparing a Farmers Annuity to a CD A Farmers Annuity can provide you with: m An optional, flexible retirement program m A secure cash accumulation plan m Competitive interest earnings m Tax savings m A death benefit for your beneficiary. Certificates of Deposits can be easily rolled into a Farmers Annuity at maturity. 10/3/2020 27

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. n Payments and withdrawals are flexible. n Interest earnings are competitive, and tax deferred. n There is a guaranteed minimum interest rate. n Your cash accumulation plan can readily be converted to a retirement program, at your option. 10/3/2020 29

Comparing a Farmers Annuity to a CD Let’s compare with a CD. Assume a $10, 000 deposit earning 8% interest and you’re in a 28% tax bracket: CD ANNUITY DEPOSIT: INTEREST: INCOME TAX: NET YEAR-END BALANCE: $10, 000 +800 -224 $10, 576 $10, 000 +800 -0 $10, 800 In effect, your 8% certificate has been reduced to a net of 5. 76%. In 10 years, your original $10 K CD would be worth $18, 344 and your Annuity would have a balance of $21, 589. 10/3/2020 30

Farmers Equity Indexed Annuity (FEIA) 10/3/2020 31

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 CD’s, 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. 10/3/2020 32

Equity Indexed Annuity This annuity links interest earnings to increases in a leading U. S. stock market indicator, the Standard & Poor’s 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. 10/3/2020 33

Equity Indexed Annuity When you purchase a FEIA, you receive interest linked to the change in the S&P 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 S&P Index values at the end of four quarterly intervals preceding the end of the term. The percentage change in the S&P 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. 10/3/2020 34

Equity Indexed Annuity Why use the S&P 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 S&P 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. 10/3/2020 35

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 S&P 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. 10/3/2020 36

Equity Indexed Annuity How the Interest Earnings are Calculated: Ax. Bx. C A = Premium less withdrawals B = The percentage change in Index Value = Avg. Index Value ( last 4 quarters of term) - Issue Date Index Value C = The Participation Rate Or, if the S&P 500 declines, Farmers protects your principle if held for the full 7 year term. If less than 7 years, (premium x. 90) + 3% interest 10/3/2020 37

Equity Indexed Annuity Let’s look at an example: $100, 000 in premium; $0 withdrawals (End Term IV - Issue Date IV)/Issue Date IV (430. 15+591. 75+603. 05+620. 85)=2245. 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 10/3/2020 38

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: 10/3/2020 91. 57% 96. 58% 107. 06% 81. 79% 105. 52% 77. 64% 70. 93% 66. 67% 81. 73% 86. 61% 39

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 10/3/2020 40

Annuity Distribution 10/3/2020 41

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 beneficiary’s estate. 10/3/2020 42

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. 10/3/2020 43

Annuity Application 10/3/2020 44

10/3/2020 45

Quote of the Day. . “The way to stop financial joyriding is to arrest the chauffeur, not the automobile. ” Woodrow Wilson 10/3/2020 46