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The Retirement Minefield An overview of the most common IRA mistakes – and how to avoid them. AMTRMPP0712 Brought to you by Transamerica’s Advanced Market.

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Presentation on theme: "The Retirement Minefield An overview of the most common IRA mistakes – and how to avoid them. AMTRMPP0712 Brought to you by Transamerica’s Advanced Market."— Presentation transcript:

1 The Retirement Minefield An overview of the most common IRA mistakes – and how to avoid them. AMTRMPP0712 Brought to you by Transamerica’s Advanced Market team

2 Disclosure slide 2 Transamerica Resources, Inc. is an AEGON company and is affiliated with various companies which include, but are not limited to, insurance companies and broker-dealers. Transamerica Resources, Inc. does not offer insurance products or securities. This material is provided for informational purposes only and should not be construed as insurance, securities, ERISA, tax or investment advice. Although care has been taken in preparing this material and presenting it accurately, Transamerica Resources, Inc. disclaims any express or implied warranty as to the accuracy of any material contained herein and any liability with respect to it. interested parties must consult and rely solely upon their own independent advisors regarding their particular situation and the concepts presented here. Securities may lose value and are not insured by the FDIC or any federal government agency. May lose value. Not a deposit or guaranteed by any bank, bank affiliate or credit union.

3 Retirement Planning How things have changed! Between 1982 and 2009, the number of defined benefit (DB) plans decreased 73% (from 174,998 plans to 47,137) 1 By 2009, 93% of employer sponsored retirement plans were defined contribution (DC) plans 1 46% of plan participants expect their DC plan to be their most important source of retirement income 2 Social Security is projected to pay full benefits until When it comes to retirement – It’s up to you! ¹ Employee Benefits Security Administration “Private Pension Plan Bulletin Historical Tables and Graphs” 2 Blackrock “Shifting Focus: From Retirement Savings to Retirement Income” 3 Social Security Administration. “Social Security Board of Trustees: Projected Trust Fund Exhaustion Three Years Sooner Than Last Year.” 3

4 Retirement Planning Managing Risks – things we can’t control Inflation – erodes the value of savings and purchasing power Market volatility – unpredictable returns Longevity – outliving your assets Catastrophic events – a significant impact to your income or savings Legislative changes – Social Security, Medicare, taxes Avoiding Mistakes – things we can control Emotional errors – making investment decisions based on emotion Failure to plan properly – relying on “rules of thumb” IRS taxes and penalties – unnecessarily erodes the value of retirement savings 4

5 IRA Planning Avoiding IRA Mistakes – things we can control Failure to plan properly – overlooking personal circumstances IRS taxes and penalties – unnecessarily erodes the value of retirement savings 5 Neither Transamerica nor any of its financial professionals provide tax or legal advice. You may want to talk to a tax/legal advisor before making your final purchase decision.

6 Broken Window: Rollover Horror Stories - By making trustee-to-trustee transfers, one can avoid triggering the 60-day requirement - Ed Slott, July 17,2011 Survivors’ Biggest Mistakes - Widows and Widowers often lose money needlessly; the IRA Rollover penalty - Kelly Greene, Wall Street Journal, November 12, 2011 Distribution Nightmare - Make this mistake with an IRA and there’s no second chance. - Gregory Bresiger, Financial Advisor magazine, March 2007 The Retirement Minefield – IRAs IRA Rules Get Trickier - Uncle Sam is cracking down on common retirement account errors - Kelly Greene, Wall Street Journal, June 23,

7 The IRA “Rule Book” More than 100 pages Updated annually Transfers Age 70 ½ Rule Partial Rollovers Penalties Inherited IRAs Conversions Spousal IRA Age 59 ½ Rule Required Beginning Date Early Distributions Form 8606 Form 5329 Form Day Period for Rollovers 20% Withholding 10% Additional Tax 2-Year Rule Beneficiaries The Retirement Minefield – IRAs 7

8 IRA Rollovers Pros, cons and what’s right for you Withdrawing Income Understanding the taxes, penalties, and deadlines Beneficiary Planning Important considerations for you and your beneficiaries We’ll address common mistakes that people make in each of these areas 8

9 What is a Rollover? A “Rollover” is the transfer of retirement assets from one retirement plan to another retirement plan To transfer money from an employer sponsored retirement plan (e.g. 401(k) plan) to an IRA, you must be eligible to withdraw assets from the employer sponsored plan 1 -Triggering events You can rollover or transfer assets in your own IRA to another IRA at any time without requiring a triggering event* 9 IRA Rollovers 1 401(k)(2)(B); 403(b)(11) *Only one IRA rollover per 12 months is permitted.

10 When can you elect a rollover to an IRA? Triggering events for employer sponsored plans 1 : Separation of Service - You no longer work for the employer - You may not have to wait! 72% of employer sponsored plans allow you to roll over your 401(k) assets while you’re still employed 2 - Request your employer’s Summary Plan Description for additional information Attainment of Age 59 ½ - May be required for “in-service” rollovers Disability - You must qualify as disabled Death -This applies to your beneficiary(s) You can rollover or transfer assets in your own IRA to another IRA at any time without requiring a triggering event* 1 Treas. Reg (b), 1.403(b)-6 2 Plan Sponsor Council of America, 54th Annual Survey of Profit Sharing and 401(k) plans, 2010 plan year. 10 IRA Rollovers *Only one IRA rollover per 12 months is permitted.

11 Why an IRA Rollover Might be Right for You You have more than one retirement account Consolidation of accounts can be easier than managing multiple accounts Your plan has limited investment options You can expand your investment options to include alternative investments or annuities Your plan does not offer a retirement income program IRAs can provide guaranteed lifetime income, bond laddering and bucketing options Your plan has limited beneficiary planning options IRAs can offer customized, pre-selected or “stretch” beneficiary options You may need or want to access your retirement assets prior to 59 ½ IRAs offer additional exceptions to the 10% additional federal tax for health insurance premiums if unemployed, qualified higher education expenses, and first time home buyers¹ ¹IRC Section 72(t) 11 IRA Rollovers Consolidation does not guarantee a profit or guard against a loss. All guarantees are backed by the claims-paying ability of the issuing insurance company.

12 Common Mistakes People Make Electing an Indirect Rollover instead of a Direct Rollover Overlooking personal circumstances before rolling money over to an IRA Paying the 10% additional federal tax on pre-59 ½ withdrawals Failure to manage required minimum distributions at age 70 ½ Overlooking death benefit distribution options They don’t seek professional guidance 12 IRA Rollovers

13 Ensure You do it the Right Way Rollover (Indirect Rollover) The distribution is made payable to you in cash You have 60 days to contribute the proceeds to another retirement plan or IRA Direct Rollover/Transfer The distribution is made directly to your new retirement plan or IRA Employer sponsored retirement plans are required to offer this option¹ ¹ IRC Sec. 401(a)(31), 403(b)(10), 457(d)(1)(C) 13 IRA Rollovers

14 $100,000 $80,000 in cash $80,000 to IRA $20, (k) Plan IRS YOU Indirect Rollover $20, Day Time Limit² $20,000 20% Mandatory Withholding¹ $80,000 $80,000 Rolled Over, $20,000 Taxable Distribution STEP 3 $20,000 Tax Refund 14 IRA STEP 1 STEP 2 IRA - + ¹ IRC Sec. 3405(c)(1) ² IRC Sec. 402(c)(3); Treas. Reg.1.402(c)-2, A-11 IRA Rollovers

15 Deadline 60 day time limit¹ Qualified Plan to IRA 20% mandatory withholding² Amount withheld must be added to avoid taxable distribution and potential 10% additional tax IRA to IRA Only one tax-free rollover during one-year period is permitted, applicable to both IRAs.³ Ensure you do it the Right Way – Important differences Indirect Rollover ¹ IRC Sec. 402 (c)(3) ² IRC Sec. 3405(c)(1) ³ IRC Sec. 408(d)(3)(b) Direct Rollover 15 IRA Rollovers

16 20% $20,000 IRS YOU $100,000 IRA $100,000 Direct, No 60 Day Time Limit Direct Rollover 401(k) Plan 20% $20,000 No Make-Up No Withholding No Waiting for Tax Refund 16 IRA Rollovers

17 Deadline 60 day time limit¹ No 60-day time limit Qualified Plan to IRA 20% mandatory withholding² Amount withheld must be added to avoid taxable distribution and potential 10% additional tax No withholding Fewer tax concerns IRA to IRA Only one tax-free rollover during one-year period is permitted, applicable to both IRAs.³ No once per year limit Ensure you do it the Right Way – Important differences Indirect Rollover ¹ IRC Sec. 402 (c)(3) ² IRC Sec. 3405(c) ³ IRC Sec. 408(d)(3)(b) Direct Rollover 17 IRA Rollovers

18 Common Mistakes People Make Electing an Indirect Rollover instead of a Direct Rollover Overlooking personal circumstances before rolling money over to an IRA Paying the 10% additional federal tax on pre-59 ½ withdrawals Failure to manage required minimum distributions at age 70 ½ Overlooking death benefit distribution options They don’t seek professional guidance 18 IRA Rollovers

19 Is an IRA Rollover Right for You, Right Now? Will you need a loan? Your employer sponsored retirement plan may have a loan feature 1 Loans are not permitted from IRAs 2 Do you have employer securities in your retirement plan? A special tax treatment can be applied if employer securities are distributed as part of a lump sum distribution from a qualified plan 3 The net unrealized appreciation (NUA) amount may be treated as long-term capital gain 4 Were the plan assets awarded via a divorce? There is an exception to the 10% additional federal tax for an ex-spouse who received qualified plan assets as an alternate payee under a Qualified Domestic Relations Order (QDRO) 5 Are you concerned about bankruptcy or being sued? Employer sponsored plans may offer greater creditor protection – check with your attorney 6 ¹IRC Sec. 72(p)(2) 2 IRC Sec. 4975(c)(1)(B); 408(e)(2)(A). 3 IRC Sec. 402(e)(4)(B) 4 Treas. Reg (a)-1(b)(1)(i). 19 IRA Rollovers 5 IRC Sec. 72(t)(2)(c) 6 TRA ‘86 Sec 1122(h)

20 Is an IRA Rollover Right for You, Right Now? Do you have a SIMPLE plan? Assets rolled over from a SIMPLE plan to an IRA within the first two years of plan participation may be subject to a 25% additional federal tax¹ Is your employer a city or state government? 457 plans are generally 2 not subject to the 10% additional federal tax on pre-59 ½ withdrawals 3 Did you separate from service at or after age 55? There is an exception to the 10% additional federal tax for distributions from a qualified plan for employees who separate from service during or after the year in which they attain age 55 4 Do you plan on working past age 70? If you continue to work past 70 ½ you may be eligible to defer RMD’s on qualified plan assets attributable to the current employer’s plan 5 ¹ IRC Sec. 72(t)(6) ² Exception distributions attributable to rollovers from certain types of qualified plans. 3 IRC Sec. 72(t)(9) 4 IRC Sec 72(t)(2)(A)(v); 72(t)(3) 5 IRC Sec. 402(a)(9)(c) 20 IRA Rollovers

21 IRA Withdrawals – Important Milestones The timing of withdrawals from IRAs is important Withdrawals prior to 59 ½ may be subject to an additional 10% tax¹ Failure to take a minimum amount after 70 ½ might result in a 50% tax² AGE Attainment of age 59 ½, no 10% additional federal tax penalty¹ 10% additional federal tax penalty may apply¹ Required Minimum Distributions begin at age 70 ½² 59 ½ - 70 ½ no restrictions, no requirements ¹ 72(t)(1) and 72(t)(2)(A)(i) ² IRC Sec. 4974(a) 21 IRA Withdrawals

22 Common Mistakes People Make Electing an Indirect Rollover instead of a Direct Rollover Overlooking personal circumstances before rolling money over to an IRA Paying the 10% additional federal tax on pre-59 ½ withdrawals Failure to manage required minimum distributions at age 70 ½ Overlooking death benefit distribution options They don’t seek professional guidance 22 IRA Withdrawals

23 AGE Attainment of age 59 ½ exception to 10% additional federal tax penalty IRA exceptions to 10% additional federal tax penalty² - Higher education expenses - First time home buyer - Health insurance premiums if unemployed Qualified plan exceptions to 10% additional federal tax penalty³ - Divorce (QDRO) - Separate from service at or after age 55 General exceptions to 10% additional federal tax penalty for withdrawals prior to 59 ½¹ - Death - Disability - Medical expenses > 7.5% of AGI - Substantially equal periodic payments Withdrawals made prior to 59 ½ 23 ¹ IRC Sec. 72(t)(2)(A) ² IRC Sec. 72(t)(2)(D)(E)(F) ³ IRC Sec. 72(t)(3); 72(t)(2)(A)(v); 72(t)(2)(C) IRA Withdrawals

24 Pre-59 ½ Withdrawals The SEPP Exception to the 10% Additional Federal Tax¹ The one exception that is available to anyone at any age CAUTION! – The terms can be onerous The amount that can be withdrawn is limited and must be determined by using one of three IRS approved calculation methods¹ Payments must continue for at least 5 years and the employee must have attained 59 1/2 when the payments cease, if later² No “material modifications” should be made² Failure to abide by the rules could result in retroactive taxes, interest and penalties Seek professional guidance! ¹ IRC Sec. 72(t)(2)(A)(iv); Rev. Ruling ² IRC Sec. 72(t)(4)(A); Rev. Ruling IRA Withdrawals

25 Common Mistakes People Make Electing an Indirect Rollover instead of a Direct Rollover Overlooking personal circumstances before rolling money over to an IRA Paying the 10% additional federal tax on pre-59 ½ withdrawals Failure to manage required minimum distributions at age 70 ½ Overlooking death benefit distribution options They don’t seek professional guidance 25 IRA Withdrawals

26 1/1/12 70 ½ AGE DATE1/1/134/1/1312/31/13 The year you turn 70 ½ is the first “distribution year” for IRA required minimum distributions (RMD) 4/1 of the year following the first “distribution year” is the “required beginning date” An RMD for the next distribution year, and each year thereafter, must be taken by 12/31 of that year The RMD for the first “distribution year” can be deferred until 4/1 of the following year If the first RMD is deferred until the following year (e.g., April 1 st ), two RMDs must be taken in that tax year The RMD for the first “distribution year” can be taken that year RMD Timeline 8/1/12 26 Source: IRS Publication 590, 2011 IRA Withdrawals

27 Required Minimum Distributions (RMDs) Planning Considerations A 50% tax applies to amounts that should have been withdrawn! 1 Automate your RMD payments - Ensures you won’t miss a payment - The percentage that needs to be withdrawn increases each year Eliminate your RMD - Consider a taxable “Roth IRA conversion” Plan for your RMD - If you don’t need it, how will you reinvest it? - Buy life insurance with it - Gift it to a loved one or trust - Donate the RMD you receive to a charity - Understand how it fits into your retirement income and estate plan 27 IRA Withdrawals 1 IRC Sec. 4974(a)

28 Common Mistakes People Make Electing an Indirect Rollover instead of a Direct Rollover Overlooking personal circumstances before rolling money over to an IRA Paying the 10% additional federal tax on pre-59 ½ withdrawals Failure to manage required minimum distributions at age 70 ½ Overlooking death benefit distribution options They don’t seek professional guidance 28 Beneficiary Planning

29 IRA Death Benefit Distribution Options Lump sum All out in five years Annuitization* Maintain or rollover to own IRA – spouses only Stretch * Annuitization may be an option provided on annuity contracts Source: IRS Publication 590, Beneficiary Planning

30 $100,000 $20,000 $100,000 $20,000 $100,000 Lump Sum All out in 5 years $75,000 $25,000 x 25% Tax Bracket * IRS $15,000$5,000 Comparing Death Benefit Options 30 x 25% Tax Bracket * IRS Inherited IRA * 25% tax bracket is hypothetical, your effective tax rate may be different Beneficiary Planning

31 There is another way! Stretch Required Minimum Distributions for beneficiaries Non-spouse designated beneficiaries can elect a trustee-to-trustee transfer to a properly titled “inherited” or “beneficiary” IRA¹ A spouse designated beneficiary may also elect the inherited or beneficiary IRA option 2 Distributions are based on a life expectancy calculation Allows beneficiary to maintain tax deferral of inherited IRA and control the taxation of distributions, to the extent permitted by law Source: IRS Publication 590, 2011 ¹ IRC Sec 402(c)(11) 2 Notice Beneficiary Planning

32 $100,000 ÷ 30.5 = Non-spouse Beneficiary: AGE 54 IRS Table I: Single Life Table Divisor = 30.5 (Year 1) Stretch Death Benefit Option $3, x 25% Tax Bracket * $2,459$820 IRS Inherited IRA Divisor reduced by 1 each year (e.g. 30.5, 29.5, 28.5, etc.) Can always take a lump sum Allows beneficiary to maintain tax deferral of inherited IRA and control the taxation of distributions, to the extent permitted by law Source: IRS Publication 590, 2011 * 25% tax bracket is hypothetical, your effective tax rate may be different Beneficiary Planning

33 Who are your Beneficiaries? Spouse Beneficiaries Can elect to roll an inherited IRA into their own IRA¹ Can elect to treat it as an inherited IRA 2 Can disclaim the IRA via a qualified disclaimer and have it pass to a contingent beneficiary Non-spouse Beneficiaries Cannot elect to roll inherited IRA assets into their own IRA Can elect to treat it as an inherited IRA Can disclaim the IRA via a qualified disclaimer and have it pass to a contingent beneficiary Seek professional guidance! Source: IRS Publication 590, 2011 ¹ Treas. Reg , A-5. 2 Notice Beneficiary Planning 33

34 Common Mistakes People Make Electing an Indirect Rollover instead of a Direct Rollover Overlooking personal circumstances before rolling money over to an IRA Paying the 10% additional federal tax on pre-59 ½ withdrawals Failure to manage required minimum distributions at age 70 ½ Overlooking death benefit distribution options They don’t seek professional guidance 34

35 Working with a Professional IRA planning – avoiding mistakes What are your personal circumstances? What are your personal needs? What are your personal concerns? What I would like you to do: Complete the IRA Rollover questionnaire Obtain a copy of your employer’s summary plan description Gather your beneficiary information Schedule an appointment, so we can start planning today 35

36 Thank You for Attending! Questions? 36


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