ALR832 Rollover Strategies and IRA Distribution Rules ALR832PPT

Agenda  Retirement plan distribution options  Rollovers  IRA distribution planning ­Section 72(t) of the Internal Revenue Code (also known as “SEPP”) ­Required minimum distribution (RMD) ­IRAs with payments extended over more than one life  IRA bankruptcy protection

Retirement Plan Distribution Options  Leave funds in current plan  Rollover funds to new employer’s retirement plan  Withdraw funds in cash (see SPD)  Roll over funds to Rollover IRA  Convert the funds into a Roth IRA

What are Eligible Rollover Distributions?  Any distribution from a qualified retirement plan to an employee  Exceptions (not all listed here) ­Periodic payments over life expectancy or for a period of 10 years or more ­RMD ­Hardship distributions

Taxes on Eligible Rollover Distributions  Mandatory 20% federal income tax withholding for eligible rollover distributions unless directly rolled over to: ­A traditional or Roth IRA ­An employer retirement plan that accepts direct rollovers ­Converted to a Roth IRA  Federal and state income taxes apply at owner’s current tax rate  Plus 10% federal tax penalty for distributions before age 59 1 / 2 (Unless converted to a Roth IRA)  Several exceptions to 10% penalty exist

 Avoids current income taxes, penalties, and mandatory 20% federal income tax withholding that applies if you withdraw the funds directly.  Funds have the potential to grow tax deferred  Ability to roll over your funds at a later date  Investment choices are limited to the employer’s plan selections  Maintaining multiple retirement accounts can be complicated and time consuming  Plan expenses may be deducted from the account Leaving Funds in the Current Plan ProsCons

 Avoids current income taxes, penalties, and mandatory 20% federal income tax withholding that applies if you withdraw the funds directly.  Funds have the potential to grow tax deferred  Retirement money is in one place and easier to track  Investment choices are limited to the new employer’s plan selections  Plan may prohibit or limit in-service withdrawals  Plan expenses may be deducted from the account Direct Rollover to a New Employer’s Plan ProsCons

 Immediate, unrestricted use of the money  May be eligible for special tax treatment Consult your tax advisor  Money generally subject to ordinary income tax and future growth is not tax-deferred  Mandatory 20% federal income tax withholding  May be subject to an additional 10% federal tax penalty on early withdrawals  You have only 60 days to roll the distribution to an employer retirement plan or an IRA Withdrawing Funds in Cash ProsCons

 Avoids current income taxes, penalties, and mandatory 20% federal withholding that applies on cash withdrawals. Funds have the potential to grow tax deferred  Typically broadens investment choices  Maximize flexibility: move Rollover IRA money into another employer’s plan or convert to a Roth IRA at a future date (certain restrictions may apply)  Loans are not available from an IRA  You may have to pay annual IRA fees  IRA assets are not protected from creditors to the same extent as funds in a qualified employer plan Direct Rollover to a Traditional IRA Offers continued tax-deferral with flexibility and consolidation ProsCons

 Funds have the potential to grow tax-deferred  Distributions are generally income tax free  No required distributions for account owner or spouse  Typically broadens investment choices  Income taxes are due on converted amount in current year  Loans are not available from a Roth IRA  You may have to pay annual Roth IRA fees  Funds not protected from creditors in Roth IRAs to same extent as in qualified employer retirement plans Direct Rollover to a Roth IRA ProsCons

Types of Rollovers  Direct: easiest and most advantageous ­Check made payable directly to new employer or Rollover IRA ­No mandatory 20% federal income tax withholding or additional 10% federal income tax penalty  Indirect: riskier and more complicated ­Distribution check made payable to participant, who must roll over funds within 60 days or face taxes and penalties ­Mandatory 20% federal income tax withholding by former employer ­Portions not rolled over maybe subject to 10% federal income tax penalty

IRA Distribution Planning Premature Distribution Penalty  10% federal tax penalty generally applies to distributions received before age 59 1 / 2  Exceptions ­death, disability ­Substantially Equal Periodic Payments (SEPP) ­higher education expenses ­1 st time homebuyer

Three Distribution Planning Opportunities  Internal Revenue Code Section 72(t) exception for SEPPs ­Avoid the early withdrawal penalty ­Facilitate early retirement  Required minimum distributions (RMDs)  IRAs designed to pay out to beneficiaries ­Maximize the life of your IRA ­Helpful tool in estate planning

SEPP: Withdrawals Free from Penalty Tax Before age 59 1 / 2  Establish a series of “substantially equal periodic payments”  Here are the rules ­Payment schedule must be established for life or life expectancy and cannot be modified until after five years or the taxpayer has reached age 59 1 / 2, whichever is later ­Amount is generally determined by one of three calculation methods ­You don’t have to lump all your IRAs together. You can consider each one separately, offering flexibility in distribution amounts

SEPP: Life Expectancy Method  Payments are calculated by dividing IRA balance on 12/31 of previous year by IRS life expectancy factor  Generally results in the smallest payments  Amount will fluctuate each year depending on account value  Example ­50-year-old individual ­$500,000 in IRA (as of 12/31 of the previous year) ­Single life expectancy factor* = 46.5 years (IRS tables) ­$500,000/46.5 = $10,752 first year distribution * Uniform Life Expectancy Table, IRS Revenue Ruling , Appendix A. Example is hypothetical and for illustrative purposes only. It is not intended to represent any particular investment or predict future results.

SEPP: Amortization Method  Payments calculated by amortizing account balance based on life expectancy using ­Interest rate not more than 120% of federal mid-term rate  Payments generally higher than Life Expectancy Method  Example ­50-year-old individual ­$500,000 in IRA ­Amortization factor* (Using a 4% interest rate per IRS) ­Fixed annual distribution of $27,082 * IRS Revenue Ruling Example is hypothetical and for illustrative purposes only. It is not intended to represent any particular investment or predict future results.

SEPP: Annuity Method  Payments generally higher than Life Expectancy Method  First payment is calculated by dividing IRA balance by an “annuity factor” based on ­Life expectancy factor based on mortality table Revenue Ruling , Appendix B ­Interest rate not to exceed 120% of federal mid-term rate  Payments are fixed  Example ­50-year-old individual ­$500,000 in IRA ­Using a 4% interest rate per IRS (based on mid term AFR*) ­Annual distribution of $26,886 * IRS Revenue Ruling Example is hypothetical and for illustrative purposes only. It is not intended to represent any particular investment or predict future results.

SEPP: IRS Rules Offer Flexibility  You may convert your payment calculation method ­One-time irrevocable change from fixed “annuity”/“amortization” to “life expectancy” payment methods ­Variable method based on your IRA value on the date you choose between December 31 of the previous year and date of new calculation method  Life expectancy tables ­Individuals can use IRS life expectancy tables  SEPPs limit IRA contributions and transfers  Interest rates now defined

Required Minimum Distributions  Uniform Lifetime Table ­Applies to all IRA owners, regardless of whom they have named beneficiaries ­One exception: if spouse is named as sole beneficiary and is 10 years younger than owner  Must begin taking distributions from your IRA by April 1 of the year after you turn age 70 1 / 2  Amount is generally based on year-end IRA balance, divided by a “Uniform Lifetime Table” factor provided by IRS * Example is hypothetical and for illustrative purposes only. It is not intended to represent any particular investment or predict future results.

Example IRA Owner = Jack Jones Beneficiaries = Spouse (Age 71) and 2 Children Jack’s Current Age = 74 IRA Account Value on 12/31/2014 = $500,000 Distribution Period = 23.8 (Uniform Lifetime Table for Age 74) 2015 RMD Amount = $21,008 ($500,000 / 23.8) Required Minimum Distributions

IRA owner dies Before 70 1 / 2 After 70 1 / 2 Distribution Options for Beneficiaries Spouse Beneficiary Non-spouse Beneficiary Non-individual (e.g., estate or charity)  Rollover  Postpone RMDs until owner would have reached age 70½  Take withdrawals based on beneficiary’s life expectancy, recalculated each year while alive  Five year rule  Take withdrawals based on beneficiary's life or life expectancy, non-recalculated  Five year rule  Continue withdrawals based on the remaining life expectancy of the IRA owner  Five-year rule  Rollover  Continue withdrawals based on beneficiary’s life expectancy, recalculated each year while alive Continue withdrawals based on the beneficiary's life expectancy or the deceased owner's remaining life expectancy, non-recalculated  Continue withdrawals based on remaining life expectancy of the IRA owner, non-recalculated

Frank and his IRAs (hypothetical illustration)  IRAs designed to pay out over your and your beneficiary’s combined lives are designed for investors who will not need the money in the account for their own retirement needs.  The results shown are not indicative of any specific investment product and are designed for illustration purposes only.  The time periods chosen for the illustration are based on life expectancy tables.  Various factors such as the impact of inflation, possible changes to tax laws and other risks should be considered in your investment decision. Example is hypothetical and for illustrative purposes only. It is not intended to represent any particular investment or predict future results.

Frank and his IRAs (hypothetical illustration) Example  Frank is 70 years old and must start taking RMDs.  He has three IRAs, all with different beneficiaries ­ IRA #1: $800,000 Primary beneficiary — Wife Contingent beneficiary — Daughter ­ IRA #2: $50,000 Primary beneficiary — Church ­ IRA #3: $150,000 Primary beneficiary — Sister

Frank and his IRAs (hypothetical illustration)  If Frank dies at age 74, what are the options for his beneficiaries under the distribution rules? Beneficiary  IRA #1Wife, age 63  IRA #2Church  IRA #3Sister, age 58

Options for Frank’s Beneficiaries IRA #1: Wife  Disclaims IRA ­ Daughter becomes entitled to IRA as contingent beneficiary ­ Retitle ownership to reflect beneficiary status. Continue distributions based on daughter’s own life expectancy as of the year after Frank dies ­ Based on her age in year after Frank’s death = 40.7 ­ Life expectancy reduced by 1 each year OR  Wife rolls over remaining balance of IRA into account in her name. RMDs stop because she is under age 70 1 / 2  Leave in Frank’s name (beneficiary IRA) and continue distributions based on her life expectancy

The Younger the Beneficiary, the Greater the Stretch  Frank’s daughter, Sarah, is age 43 in year after Frank dies  She receives his $400,000 IRA via disclaimer and starts RMDs ­Life expectancy factor first year: 40.7  If IRA earns 5% annually and Sarah takes minimum required withdrawals for next 25 years ­She will receive $469,062 (pre-tax) ­There will still be more than $497,632 left in the IRA!  How many more years of tax-deferred growth are left?

Options for Frank’s Beneficiaries  IRA #2: Charity ­IRA distributed in a lump sum or over 14.1 years (Frank’s remaining life expectancy based on his age in year of death)  IRA #3: Sister ­Retitle to reflect beneficiary’s status (beneficiary IRA) and continue distributions based on her life expectancy. (Based on her age in year after Frank’s death, age 59. L.E. factor = 26.1), non-recalculated

IRAs for Generations—Tax Deferral Extended for Everyone!  Benefits ­Allows IRA funds to continue to grow tax deferred after the original owner dies, via Non-spousal continuation Spousal continuation ­Helps avoid large, lump-sum taxable distributions ­Estate-planning benefits

The “Separate” IRA  IRA owner dies with three beneficiaries named  Beneficiaries can separate their shares into “decedent” IRAs and take distributions based on their individual ages IRA Son 38.8 yrs Daughter 48.5 yrs Grandchild 77.7 yrs Life expectancy: Age In Beneficiary Following Year  Son45  Daughter35  Grandchild5

IRAs and Bankruptcy  401(k) plans and other Qualified Plans ­Fully exempt from bankruptcy and other creditors by ERISA  IRAs ­Bankruptcy Act (Bankruptcy Abuse Prevention and Consumer Protection Act of 2005) Fully exempts IRAs from bankruptcy, up to a cap of $1 million

Conclusion This information is provided for general consumer educational purposes and is not intended to provide legal, tax or investment advice. Life Insurance offered through Allstate Life Insurance Company, Northbrook, IL; Allstate Assurance Company, Northbrook, IL; Lincoln Benefit Life Company, Lincoln, NE and American Heritage Life Insurance Company, Jacksonville, FL. In New York, life insurance offered through Allstate Life Insurance Company of New York, Hauppauge, NY. Securities offered by Personal Financial Representatives through Allstate Financial Services, LLC (LSA Securities in LA and PA). Registered Broker-Dealer. Member FINRA, SIPC. Main O ffi ce: 2920 South 84th Street, Lincoln, NE (877) Check the background of this firm on FINRA's BrokerCheck website ALR832PPT (03/16)