Distributions From Retirement Plans

An Opportunity When working with a client who is retiring, he/she may seek advice on what to do with the money in his/her retirement plan. Next to an individual’s home, a qualified retirement plan may be your client’s largest asset. As an adviser, you need to know all the options available to your client, so you can help them make an informed decision. If you take good care of your client, they may refer you to other client’s in a similar situation.

Not Eligible for Rollover As you work with your client on the best options available to them, note: The following distributions are not available for rollover: Benefit payments made over a lifetime Periodic payments made for a period of 10 years or more Required Minimum Distributions Hardship Withdrawals

Agenda Distribution Option – Leave with Employer Distribution Option – Lump Sum Distribution Option - Partial Rollover Distribution Option – 60 Day Rollover Distribution Option – Direct Transfer Understanding Net Unrealized Appreciation Know Your Source of Funds Other Retirement Considerations

Leave in Employer Plan Advantages: Money stays in familiar investment choices Money remains tax deferred – No tax impact If age 55 and separated from service, can access without 10% penalty In general plan assets are protected from creditors May have lower fees and expenses

Leave in Employer Plan Disadvantages Can no longer contribute to plan Plan services and access may be limited May no longer be able to take loans from the plan May offer limited or less attractive investment options May have limited distribution options

Leave in Employer Plan Important Considerations If your client is looking for income, the plan may offer a higher payout rate. Make sure you know the fees and expenses in the plan as they may be lower than an option outside the plan. If your client has employer stock in the plan, you might consider keeping the stock at the plan to distribute in kind and take advantage of Net Unrealized Appreciation More on NUA later…

Take a Lump Sum Advantages Your client gets their money and can spend it any way they like If born before January 1, 1936 , your client may be able to take advantage of 10 year forward averaging Any Employer Stock in the plan could be eligible for Net Unrealized Appreciation treatment

Take a Lump Sum Disadvantages Your client will not get all their money Automatically 20% of the distribution is retained by the employer as an advance of actual taxes to be paid At tax time, any additional taxes must be paid on the taxable portion of the distribution The amount of the distribution may lift your client into a higher tax bracket You client may have spent their distribution and may not have the money to pay the taxes In addition to taxes, if your client is under age 59 ½ or less than age 55 when separating from service, (or another 72(t) exception applies) there is an additional 10% penalty assessed on the taxable portion of the distribution Your client loses the advantage of tax deferral on the money

Take a Lump Sum Important Considerations Clients are truly unaware of the impact taxes can have on a lump sum distribution In most cases, the money went into the plan pre-tax and therefore is completely taxable

Take a Lump Sum The Math Distribution Amount: $100,000 Tax Bracket: 33% No 72(t) Exceptions Apply Amount of Distribution: $100,000 Minus: $20,000 20% Federal Tax Withholding Additional Taxes Due: $13,000 10% Penalty: $10,000 If no 72(t) exception applies Balance: $67,000

72(t) Created the 10% penalty for distributions from qualified retirement plans Tax is in addition to Federal Income Taxes on the taxable portion of the distribution Exceptions: Attainment of Age 59 ½ Death Disability as defined by Sec 72(m)7 (Social Security Definition) Distributions to unemployed individuals for health insurance premiums Higher education expenses First time home purchase Distributions to individuals called to active duty

72(t) Annuitization Amortization RMD Exceptions (cont.) Part of a series of substantially periodic payments Annuitization Amortization RMD Any changes or modifications prior to age 59 1 2 or 5 years – whichever is greater will lead to retroactive application of tax plus interest Made after attainment of age 55 and separation of service To pay deductible medical expenses in excess of 7.5% modified AGI Payments made to alternate payees under a QDRO

Partial Rollover Take Some, Move Some Advantages: Provides planning flexibility Can leave some money with plan if plan allows Can take some money if needed Can rollover to 2 different plans Can take some money and rollover some money Provides money if needed Allows taking advantage of NUA if Employer Stock is in the Plan All monies must be distributed from the plan Some money can stay tax deferred

Partial Rollover Take Some, Move Some Disadvantages: Any money distributed will have 20% withheld May have additional Federal taxes imposed May be subject to 10% penalty Distributed money will lose tax deferral Plan may not allow for partial transactions Plan services may be limited

Understanding NUA NUA – Net Unrealized Appreciation is a little known distribution strategy when a plan has an employer stock component It can be especially attractive when the stock has greatly appreciated The distribution of the employer stock (only the stock) has the opportunity of receiving favorable tax treatment The stock must be distributed in kind from the plan The entire value of the plan must be distributed within 1 year The distribution must occur due to Separation of Service, Death, Disability or Attainment of Age 59 ½.

NUA The stock must be distributed in kind At distribution, ordinary income is paid on the cost basis of the stock Cost basis is what was paid for the stock when acquired into the plan There is no 20% holding on the stock portion of the distribution When the stock is ultimately liquidated, the appreciation in the stock over the cost basis at the time of distribution from the plan is taxed at long term capital gains rates, and the balance is taxed at either long or short term capital gains rates depending on the holding period after distribution from the plan This method could generate less in taxes than if the stock was rolled to an IRA

NUA Example Comparing NUA Versus IRA Rollover Assumptions: Client Age: 60 Tax Bracket: 28% Cost Basis of Employer Stock: $50,000 Value at Plan Distribution: $250,000 Value at Liquidation $300,000 Additional Holding Period: 2 Years   NUA IRA Cost Basis: $50,000 $0 Ordinary Income on Cost Basis: $14,000 N/A Taxes at Ultimate Liquidation: $37,500 $84,000 Total Taxes Paid: $51,500

NUA More to Know If your client were to die prior to liquidating the stock, their heirs get a step up in basis that eliminates the capital gains on any appreciation from the date of distribution from the plan and date of death. There would still be long term gains on the appreciation from cost basis to date of distribution from the plan Since the stock has been distributed from a qualified environment, it is not subject to Required Minimum Distributions

60 Day Rollover In a 60 day rollover scenario, an individual can take money out of a plan and can within 60 days roll into an IRA. However, they must roll the money into an IRA within 60 days. If they miss the 60 day deadline, the money cannot be rolled over and it is completely taxable to the extent that the money is includible in income. Even it is the client’s intention to rollover the money within 60 days, 20% will be withheld from the distribution If the client wants to make themselves whole, they must make up the 20% out of their own pocket, and roll that into the new plan within 60 days. They will then file to get their withholding back. If they cannot make up the 20% withholding to rollover, that money becomes it’s own taxable distribution.

60 Day Rollover Example 60 Day Rollover Direct Transfer $200,000   60 Day Rollover Direct Transfer $200,000 20% Withholding $40,000 28% on withholding $11,200 10% Penalty $4,000 Taxes Paid: $15,200  $0 Distribution Balance: $24,800 Amount Rolled Over $160,000 Assumptions: Rollover Amount: $200,000 Client Age: 50 Tax Bracket: 28% Client Cannot Make Up 20% Withholding

Direct Transfer Your client may have the opportunity to roll their distribution into another employer retirement plan. Check to see if the plan accepts rollover Remains tax deferred Avoids taxation May be eligible for plan loans Generally plan assets are protected from creditors May have lower fees May not have to begin RMDs at 70 ½ if still working Gain age 55 and separated from service feature May have limited investment features May have less distribution flexibility

Know Your Source of Funds To best serve your client, it is important to make sure they know all their alternatives. When discussing the alternatives, it is important that you can compare any recommended options to their current source of funds. Make Sure You Understand: Investment Options Any special plan features Administrative Fees Any plan costs paid by the employer

Direct Transfer to an IRA Advantages Your Client’s Money Continues to Grow Tax Deferred Transfer Avoids Taxes IRA May Offer More Investment Options Generally protected from creditors (Varies by state)

Direct Transfer to an IRA Disadvantages IRAs do not allow loans Fees and expenses may be higher in an IRA than in a qualified plan Generally must wait to age 59 ½ for penalty free withdrawals RMDs must begin at age 70 1 2

Direct Transfer $200,000 Plan Assets $200,000 IRA Example: Assumption $200,000 to Transfer $200,000 Plan Assets $200,000 IRA

Retirement Plan Distributions Other Considerations Life Insurance Health Insurance Life Stage – Long Term Care?

Make A Difference! This will probably be the biggest financial decision your client will make in the year Mistakes are costly! They will turn to you - the expert to help them navigate the decision tree Educate and Guide them

You make a difference in your clients’ lives! Thank You! You make a difference in your clients’ lives!