1. Distributions From Retirement Plans

2. 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.

3. 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

4. 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

5. 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

6. 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

7. 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…

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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 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

14. 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

15. 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

16. 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.

17. 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

18. 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

19. 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

20. 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.

21. 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

22. 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

23. 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

24. 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)

25. 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

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

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

28. 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

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