Presentation on theme: "The Retirement Minefield"— Presentation transcript:
1 The Retirement Minefield An overview of the most common IRA mistakes – and how to avoid them.Good morning/afternoon/eveningMy name is ___________________________and I am a _______________________ with (firm/broker dealer) and I would like to thank you all for coming today.For many years, the topic of “retirement planning” focused on how to save for retirement. Many people believed that if they followed the general “rules of thumb” about saving for retirement such as saving a certain percentage, choosing the proper investments and estimating their expenses, they could look forward to a retirement at or about age 65 right?For the most part, that worked pretty well. But things have certainly changed haven’t they? The recession and financial turmoil caused many individuals to alter their retirement plans, and unfortunately, risk and uncertainty will likely continue.But for people at or near retirement, there are additional challenges that have to be addressed. The concept of “retirement planning” for retirees shifts from saving for retirement to making sure your retirement savings lasts as long as you do – and hopefully having something left over for the kids or grandkids. Retirement income or distribution planning suddenly becomes a very unique situation based on personal circumstances, expectations and desires.The general media has done a pretty good job of trying to simplify retirement planning; but because retirement income/distribution planning is personal and unique, there are very few “rules of thumb” that apply to everyone. In fact, following “general advice” can be problematic.The purpose of today’s presentation is to demonstrate how complex the retirement planning process can be, the importance of personal circumstances, and how avoiding mistakes can be just as important as managing risk in retirement.So let’s get started.Brought to you by Transamerica’s Advanced Market teamAMTRMPP0712
2 Disclosure slideTransamerica 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.Before we get started, I need to share some important information from our attorneys.Read Slide
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)1By 2009, 93% of employer sponsored retirement plans were defined contribution (DC) plans146% of plan participants expect their DC plan to be their most important source of retirement income2Social Security is projected to pay full benefits until 20333When it comes to retirement – It’s up to you!The retirement of the baby boomers is likely to look very different than their parent’s retirement. Over the last 30 years the way Americans have saved for retirement has fundamentally changed. The defined benefit pension plan, which is a stream of lifetime income provided by an employer to retirees, has largely vanished.Between 1982 and 2009, the number of defined benefit plans has deceased by nearly 75%.The defined contribution plan, which is an account funded by both the employer and employee that the employee will draw from in retirement, has largely replaced the defined benefit plan. By 2009, 93% of retirement plans were defined contribution plans.Today, 46% of plan participants expect their defined contribution plans to be their most important source of retirement income.And while the responsibility of providing income in retirement has steadily shifted from the employer to the employee, the traditional source of retirement income for many Americans, Social Security, is having some challenges of it’s own. In fact Social Security is currently projecting the payment of full benefits only through 2036.So the bottom line is that when it comes to paying for retirement, generally speaking, 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.”
4 Retirement Planning Managing Risks – things we can’t control Inflation – erodes the value of savings and purchasing powerMarket volatility – unpredictable returnsLongevity – outliving your assetsCatastrophic events – a significant impact to your income or savingsLegislative changes – Social Security, Medicare, taxesAvoiding Mistakes – things we can controlEmotional errors – making investment decisions based on emotionFailure to plan properly – relying on “rules of thumb”IRS taxes and penalties – unnecessarily erodes the value of retirement savingsSo, how prepared are you to take on the challenge of providing for your retirement. Not that long ago I can remember reading articles with titles like “How to retire early”, or “How to retire rich” accompanied by pictures of boats, beaches and vineyards right? The media tends to make retirement seem pretty easy, but more and more people are starting to discover that it can be a minefield of risks and potential mistakes.The reality is that, now more than ever, we have to manage many risks that are simply out of our control such as:(Read “Managing Risks” bullets)But while many risks are out of our control there are still a lot of things we can control. Avoiding mistakes is something we can control and in some cases it may be more important than managing what we can’t control. Examples include:(Read “Avoiding Mistakes” bullets)
5 IRA Planning Avoiding IRA Mistakes – things we can control Failure to plan properly – overlooking personal circumstancesIRS taxes and penalties – unnecessarily erodes the value of retirement savingsWith all of the risks and challenges facing today’s retirees, avoiding mistakes needs to be the cornerstone of any financial plan.IRA’s constitute 26.5% of all retirement holdings in the U.S.¹ and are owned by more than 11 million people¹. As baby boomers retire, more and more money will be rolled over into IRAs. Because of the role IRAs will continue to play in retirement planning I think it’s important to focus on IRA planning and avoiding IRA mistakes. Today, I’m going to show you how a failure to plan properly with your IRAs can adversely impact your retirement plan and potentially result in unnecessary taxes and penalties, which is why we refer to it as the “Retirement Minefield”¹ How much do people really have in IRAs; Financial Advisor News, June 6, 2012Neither 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 The Retirement Minefield – IRAs Broken Window: Rollover Horror Stories - By making trustee-to-trustee transfers, one can avoid triggering the 60-day requirement - Ed Slott, July 17,2011Survivors’ Biggest Mistakes - Widows and Widowers often lose money needlessly; the IRA Rollover penalty - Kelly Greene, Wall Street Journal, November 12, 2011Distribution Nightmare - Make this mistake with an IRA and there’s no second chance Gregory Bresiger, Financial Advisor magazine, March 2007I think the term “Retirement Minefield” is a good one because there are many stories about individuals “blowing up” their IRAs and retirement plans because they didn’t understand the rules.(Read Bullets)IRA Rules Get Trickier - Uncle Sam is cracking down on common retirement account errors - Kelly Greene, Wall Street Journal, June 23, 2012
7 The Retirement Minefield – IRAs The IRA “Rule Book”More than 100 pagesUpdated annuallyPenaltiesTransfersAge 59 ½ RuleForm 860610% Additional TaxConversions60-Day Period for RolloversBeneficiariesPartial RolloversAnd to be quite honest, it’s not surprising.IRS Publication 590, the IRA “rule book,” is over 100 pages long, it’s updated annually, and let’s be honest – it’s not fun to read.But the information it contains can be critically important because the rules impact almost every transaction you’ll make with your IRAs.Early DistributionsForm 1040Inherited IRAsSpousal IRAAge 70 ½ Rule2-Year Rule20% WithholdingRequired Beginning DateForm 5329
8 The Retirement Minefield – IRAs IRA RolloversPros, cons and what’s right for youWithdrawing IncomeUnderstanding the taxes, penalties, and deadlinesBeneficiary PlanningImportant considerations for you and your beneficiariesTo give you a sense of how important the IRA rules can be to your overall retirement plan, today’s presentation willfocus on three important topics.(Read Slide)In addition, I’ll share with you some of the most common mistakes people make in each of these areas.We’ll address common mistakes that people make in each of these areas
9 IRA Rollovers What is a Rollover? A “Rollover” is the transfer of retirement assets from one retirement plan to another retirement planTo 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 plan1- Triggering eventsYou can rollover or transfer assets in your own IRA to another IRA at any time without requiring a triggering event*To start things off, let’s briefly review what a rollover is:(Read Slide)*Only one IRA rollover per 12 months is permitted.1401(k)(2)(B); 403(b)(11)
10 When can you elect a rollover to an IRA? IRA RolloversWhen can you elect a rollover to an IRA?Triggering events for employer sponsored plans1:Separation of Service- You no longer work for the employerYou may not have to wait! 72% of employer sponsored plans allow you to roll over your (k) assets while you’re still employed2Request your employer’s Summary Plan Description for additional informationAttainment of Age 59 ½- May be required for “in-service” rolloversDisability- You must qualify as disabledDeathThis 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*As I mentioned, in order to transfer assets from an employer sponsored retirement plan to an IRA you have to be able to withdraw the assets from the plan. In order to be eligible for a withdrawal you have to meet what is referred to as a “triggering event”.(Read triggering event bullet)You may be able to rollover from your employer sponsored plan while you are still employed. This capability is called an in-service non-hardship withdrawal.Each employer sponsored plan is different. To fully understand your options under the plan it is essential to know your options. If you participate in an employer sponsored plan request a copy of the Summary Plan Description and keep a copy for reference. This document describes the plan and spells out your rights under the plan. A copy of the Summary Plan Description can be obtained through your plan administrator.Unlike your employer sponsored plan, you can rollover your IRA to another IRA at any time without requiring a triggering event.*Only one IRA rollover per 12 months is permitted.1 Treas. Reg (b), 1.403(b)-62 Plan Sponsor Council of America, 54th Annual Survey of Profit Sharing and 401(k) plans, 2010 plan year.
11 Why an IRA Rollover Might be Right for You IRA RolloversWhy an IRA Rollover Might be Right for YouYou have more than one retirement accountConsolidation of accounts can be easier than managing multiple accountsYour plan has limited investment optionsYou can expand your investment options to include alternative investments or annuitiesYour plan does not offer a retirement income programIRAs can provide guaranteed lifetime income, bond laddering and bucketing optionsYour plan has limited beneficiary planning optionsIRAs can offer customized, pre-selected or “stretch” beneficiary optionsYou may need or want to access your retirement assets prior to 59 ½IRAs offer additional exceptions to the 10% additional federal tax for health insurance premiums if unemployed, qualified higher education expenses, and first time home buyers¹Once you’re eligible to withdraw money from your employers plan and roll it over it’s important to consider why a rollover might be right for you. Some of the reasons people roll their money over include the following:(Read Slide)One of the more compelling reasons, particularly for individuals approaching retirement is an expansion of their income distribution options. Depending on the employer’s plan, distribution options may be very limited. Alternative distribution options or strategies can help you implement a plan that will work in your personal situation.Exceptions to the 10% additional tax on withdrawals made prior to 59 ½ can also be important if you need to tap into your retirement savings early.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.¹IRC Section 72(t)
12 Common Mistakes People Make IRA RolloversCommon Mistakes People MakeElecting an Indirect Rollover instead of a Direct RolloverOverlooking personal circumstances before rolling money over to an IRAPaying the 10% additional federal tax on pre-59 ½ withdrawalsFailure to manage required minimum distributions at age 70 ½Overlooking death benefit distribution optionsThey don’t seek professional guidanceIf you decide that a rollover to an IRA is what’s best for you. You want to make sure you do it right.One of the most common mistakes that people make is electing an indirect rollover instead of a direct rollover.
13 Ensure You do it the Right Way IRA RolloversEnsure You do it the Right WayRollover (Indirect Rollover)The distribution is made payable to you in cashYou have 60 days to contribute the proceeds to another retirement plan or IRADirect Rollover/TransferThe distribution is made directly to your new retirement plan or IRAEmployer sponsored retirement plans are required to offer this option¹First I’ll give you a brief explanation of the two different methods and then walk you through them.(Read Slide)¹ IRC Sec. 401(a)(31), 403(b)(10), 457(d)(1)(C)
14 $20,000 Taxable Distribution IRA RolloversIndirect Rollover401(k) Plan$100,00020% MandatoryWithholding¹IRS-$80,000 in cash$20,000$20,000STEP 1IRA60 Day Time Limit²This graphic will illustrates the challenges of an indirect rollover.We start with $100,000 in your 401(k) plan(click)In Step 1 of an indirect rollover you will receive a check for 80% of your 401(k) balance because your plan administrator is required to withhold 20% of the amount you withdraw and send it to the IRS.In Step 2, you have 60 days from the date the money was withdrawn from your 401(k) to deposit it into your IRA or other retirement plan. If you stop here you may have a tax problem, because the IRS will consider 80% or $80,000 to be rolled over and tax deferred, but they will consider the 20% or $20,000 in our example as a taxable distribution subject to taxation and possibly subject to an additional 10% federal tax if you are under 59 ½ .To avoid that from happening, in Step 3 you would have to come up with the 20% or $20,000 out of pocket and add it to your IRA or other retirement plan so that a total of 100% or $100,000 in our example was both withdrawn and deposited into the IRA or other retirement plan.If you complete all three steps, you will be entitled to a tax refund of the 20% or $20,000 in our example that was withheld.Simple right? So, lets review.$80,000 to IRATax RefundSTEP 2$80,000 Rolled Over,$20,000 Taxable DistributionIRAYOU$80,000+$20,000$20,000STEP 3¹ IRC Sec. 3405(c)(1)² IRC Sec. 402(c)(3); Treas. Reg.1.402(c)-2, A-11
15 Ensure you do it the Right Way – Important differences IRA RolloversEnsure you do it the Right Way – Important differencesDeadline60 day time limit¹Qualified Plan to IRA20% mandatory withholding²Amount withheld must be added to avoid taxable distribution and potential 10% additional taxIRA to IRAOnly one tax-free rollover during one-year period is permitted, applicable to both IRAs.³Indirect RolloverDirect RolloverIf you elect an Indirect Rollover, the following rules apply.(Read Slide)Fortunately, there is a better way. A Direct Rollover.¹ IRC Sec. 402 (c)(3)² IRC Sec. 3405(c)(1)³ IRC Sec. 408(d)(3)(b)
16 No Waiting for Tax Refund IRA RolloversDirect Rollover401(k) PlanIRS$100,00020%$20,000No WithholdingDirect,No 60 Day Time LimitNo Waiting for Tax RefundThis graphic will illustrates how a Direct Rollover works.We start with $100,000 in your 401(k) plan(click)In one step the entire $100,000 or 100% of your 401(k) is directly transferred to your IRA or other retirement plan.By electing a direct rollover there is no mandatory withholdingNo 60 day time limit to worry aboutNo out-of-pocket make-upAnd no waiting for a tax refundIRAYOU$100,00020%$20,000No Make-Up
17 Ensure you do it the Right Way – Important differences IRA RolloversEnsure you do it the Right Way – Important differencesDeadline60 day time limit¹No 60-day time limitQualified Plan to IRA20% mandatory withholding²Amount withheld must be added to avoid taxable distribution and potential 10% additional taxNo withholdingFewer tax concernsIRA to IRAOnly one tax-free rollover during one-year period is permitted, applicable to both IRAs.³No once per year limitIndirect RolloverDirect RolloverAs you can see, anyone who wants to maintain the tax-deferred status of retirement assets is generally better off electing a direct rollover. Qualified retirement plans are required to provide this option.Ensuring the transaction is processed properly by all three parties involved (the old plan, the new IRA provider, and you) is critically important. Believe me, there are a lot of examples where one of the parties misunderstood the transaction and either sent the wrong paperwork or processed it improperly. One mistake can void the benefit of the entire transaction.¹ IRC Sec. 402 (c)(3)² IRC Sec. 3405(c)³ IRC Sec. 408(d)(3)(b)
18 Common Mistakes People Make IRA RolloversCommon Mistakes People MakeElecting an Indirect Rollover instead of a Direct RolloverOverlooking personal circumstances before rolling money over to an IRAPaying the 10% additional federal tax on pre-59 ½ withdrawalsFailure to manage required minimum distributions at age 70 ½Overlooking death benefit distribution optionsThey don’t seek professional guidanceNow that we know the best way to roll money over to an IRA, I would like to back track just a bit.For many individuals, a rollover out of an employer sponsored retirement plan makes sense for many of the reasons I stated earlier. In fact, you may have gotten the impression from friends, family or the media that it’s the best thing to do, or something that you should do when you leave your former employer. For most people it probably makes sense but for others, a rollover to an IRA may not make sense right away.There are circumstances where staying in your employer sponsored plan may be more appropriate for your retirement plan or personal circumstances. Our next mistake is overlooking your personal circumstances before you rollover to an IRA.
19 Is an IRA Rollover Right for You, Right Now? IRA RolloversIs an IRA Rollover Right for You, Right Now?Will you need a loan?Your employer sponsored retirement plan may have a loan feature1Loans are not permitted from IRAs2Do 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 plan3The net unrealized appreciation (NUA) amount may be treated as long-term capital gain4Were 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)5Are you concerned about bankruptcy or being sued?Employer sponsored plans may offer greater creditor protection – check with your attorney6Here are several considerations you will want to review to decide if an IRA rollover is right for you, right now.(Read Slide)¹IRC Sec. 72(p)(2)2IRC Sec. 4975(c)(1)(B); 408(e)(2)(A).3IRC Sec. 402(e)(4)(B)4Treas. Reg (a)-1(b)(1)(i).5IRC Sec. 72(t)(2)(c)6TRA ‘86 Sec 1122(h)
20 Is an IRA Rollover Right for You, Right Now? IRA RolloversIs 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 tax¹Is your employer a city or state government?457 plans are generally2 not subject to the 10% additional federal tax on pre-59 ½ withdrawals3Did 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 554Do 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 plan5(Read Slide)As I mentioned earlier in the presentation, personal circumstances are an important part of the retirement planning process. While there are many benefits to rolling assets to an IRA from an employer sponsored plan, it’s important to review your personal circumstances to make sure it’s in your best interest at the time. These last two considerations, based on age, leads us to the next topic of discussion, IRA Withdrawals.¹ IRC Sec. 72(t)(6)² Exception distributions attributable to rollovers from certain types of qualified plans.3IRC Sec. 72(t)(9)4 IRC Sec 72(t)(2)(A)(v); 72(t)(3)5 IRC Sec. 402(a)(9)(c)
21 IRA Withdrawals – Important Milestones The timing of withdrawals from IRAs is importantWithdrawals prior to 59 ½ may be subject to an additional 10% tax¹Failure to take a minimum amount after 70 ½ might result in a 50% tax²59 ½ - 70 ½no restrictions, no requirements10% additional federal tax penalty may apply¹When it comes to IRA withdrawals there are some important milestones to consider.(click)If you take money out of your IRA prior to 59 ½ you may be subject to a 10% additional taxOnce you reach age 59 ½ you can access the money in your IRA with no additional tax penalty.However, if you leave the money in your IRA, the IRS forces you to begin required minimum distributions once you turn 70 ½The time between age 59 ½ and 70 ½, there are no restrictions and no penalties.The first required minimum distribution must be taken by April 1st of the calendar year following the year you turn 70 1/2 or you could be subject to a 50% tax on the undistributed portion of the required minimum distribution.So let’s take a look at how the timing of IRA withdrawals can impact you’re retirement plan and how certain mistakes can be avoided.AGE20304050607080Attainment of age 59 ½, no 10% additional federal tax penalty¹Required Minimum Distributionsbegin at age 70 ½²¹ 72(t)(1) and 72(t)(2)(A)(i)² IRC Sec. 4974(a)
22 Common Mistakes People Make IRA WithdrawalsCommon Mistakes People MakeElecting an Indirect Rollover instead of a Direct RolloverOverlooking personal circumstances before rolling money over to an IRAPaying the 10% additional federal tax on pre-59 ½ withdrawalsFailure to manage required minimum distributions at age 70 ½Overlooking death benefit distribution optionsThey don’t seek professional guidanceA common mistake people make is paying the 10% additional federal tax on pre-59 ½ withdrawals.While it may be unavoidable, it is important to consider the exceptions to the 10% additional federal tax on early withdrawals. Again, personal circumstances play an important role.
23 Attainment of age 59 ½ exception to 10% additional federal tax penalty IRA WithdrawalsWithdrawals made prior to 59 ½General exceptions to 10% additional federal tax penalty for withdrawals prior to 59 ½¹DeathDisabilityMedical expenses > 7.5% of AGISubstantially equal periodic paymentsAttainment of age 59 ½ exception to 10% additional federal tax penaltyAGE20304050607080For withdrawals made prior to 59 ½ ,(click)There are some general exceptions that apply to both employer sponsored retirement plans and IRAs(read contents of first box)We’ll discuss substantially equal periodic payments in a momentIRAs have several additional exceptions to the 10% additional federal tax(read contents of second box)And qualified plans have two exceptions that are unique to employer sponsored retirement plans.(read contents of third box)Once you reach age 59 ½ you have crossed the threshold for the 10% additional tax and are exempt going forward.We covered some of these issues earlier in the presentation, which illustrates the importance of personal circumstances but I would like to spend some additional time on the one exception that applies to everyone.IRA exceptions to 10% additional federal tax penalty²Higher education expensesFirst time home buyerHealth insurance premiums if unemployedQualified plan exceptions to 10% additional federal tax penalty³Divorce (QDRO)Separate from service at or after age 55¹ 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)
24 IRA Withdrawals Pre-59 ½ Withdrawals The SEPP Exception to the 10% Additional Federal Tax¹The one exception that is available to anyone at any ageCAUTION! – The terms can be onerousThe amount that can be withdrawn is limited and must be determined by using one of three IRS approved calculation methods¹Payments must continue for at least 5 years and the employee must have attained 59 1/2 when the payments cease, if later²No “material modifications” should be made²Failure to abide by the rules could result in retroactive taxes, interest and penaltiesThe one exception that applies to everyone, yet few people seem to know about, is the substantially equal periodic payments exception. But it’s not a magic bullet. In fact, this exception has a lot of terms and conditions associated with it.Read SlideThis can be an important planning tool for certain individuals but it’s not right for everyone. Therefore I would encourage you to seek professional guidance from a knowledgeable professional before diving in.Now let’s turn our attention to waiting too long to take money out of your IRAs.Seek professional guidance!¹ IRC Sec. 72(t)(2)(A)(iv); Rev. Ruling² IRC Sec. 72(t)(4)(A); Rev. Ruling
25 Common Mistakes People Make IRA WithdrawalsCommon Mistakes People MakeElecting an Indirect Rollover instead of a Direct RolloverOverlooking personal circumstances before rolling money over to an IRAPaying the 10% additional federal tax on pre-59 ½ withdrawalsFailure to manage required minimum distributions at age 70 ½Overlooking death benefit distribution optionsThey don’t seek professional guidanceAnother common mistake I see when it comes to IRA withdrawals is failing to manage required minimum distributions.
26 The RMD for the first “distribution year” can be taken that year IRA WithdrawalsRMD TimelineAn RMD for the next distribution year, and each year thereafter, must be taken by 12/31 of that yearThe 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”DATE1/1/128/1/121/1/134/1/1312/31/13AGEI’m going to use another timeline to illustrate how required minimum distributions work.(click)As I mentioned earlier, the IRS doesn’t let you leave all of your money in your IRAs indefinitely, in fact they require minimum distributions once you turn 70 ½. The year in which you turn 70 ½ is referred to as your first distribution year. In this example, Your required distribution is based on your 12/31 balance of the prior year divided by your life expectancy, which can be found in IRS publication For the sake of today’s discussion I just want to illustrate how complex this requirement can potentially be.The RMD for the first distribution year can be taken in that year but;The required beginning date for your first distribution is actually April 1st of the following year.In other words, the IRS gives you a bit of break on taking your first distribution because you can defer the distribution for your first distribution year until April 1 of the following year. But there is a catch.They only give you a break on the first year. After that you must take the distribution for each distribution year by 12/31 of that year. So…If you defer your first year’s distribution to April 1 of the following year, you will have to take another required distribution by 12/31 of that year which may result in two taxable distributions in one year. Therefore, it may not be beneficial for certain individuals to defer their first RMD. An important consideration that is often overlooked!70 ½The RMD for the first “distribution year” can be deferred until 4/1 of the following yearThe RMD for the first “distribution year” can be taken that yearIf the first RMD is deferred until the following year (e.g., April 1st), two RMDs must be taken in that tax yearSource: IRS Publication 590, 2011
27 Required Minimum Distributions (RMDs) IRA WithdrawalsRequired Minimum Distributions (RMDs)Planning ConsiderationsA 50% tax applies to amounts that should have been withdrawn!1Automate your RMD payments- Ensures you won’t miss a payment- The percentage that needs to be withdrawn increases each yearEliminate 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 planBecause a missed RMD payment can be subject to an additional 50% tax, you don’t want to mess this up!Some of the things you might want to consider, whether you want the RMD or not include the following.(Read Slide)Once again, you can see what an important role personal circumstances play in the retirement planning process. Which brings us to our last section where we’ll discuss the importance of beneficiary planning.1IRC Sec. 4974(a)
28 Common Mistakes People Make Beneficiary PlanningCommon Mistakes People MakeElecting an Indirect Rollover instead of a Direct RolloverOverlooking personal circumstances before rolling money over to an IRAPaying the 10% additional federal tax on pre-59 ½ withdrawalsFailure to manage required minimum distributions at age 70 ½Overlooking death benefit distribution optionsThey don’t seek professional guidanceAnother common mistake I see people make is to overlook the death benefit options they have available.
29 Beneficiary Planning Beneficiary Planning IRA Death Benefit Distribution OptionsLump sumAll out in five yearsAnnuitization*Maintain or rollover to own IRA – spouses onlyStretchIn many cases, beneficiary planning is an afterthought. But if you plan on leaving assets to your spouse or to family members this is an issue I encourage you to address immediately.Unfortunately, many individuals are unaware of the death benefit distribution options that are available from their IRA and, more importantly, the tax ramifications of certain options. It is also important to recognize that the distribution options available may be limited for certain types of beneficiaries.Read Slide* Annuitization may be an option provided on annuity contractsSource: IRS Publication 590, 2011
30 Comparing Death Benefit Options Beneficiary PlanningComparing Death Benefit OptionsInherited IRALump Sum$100,000$100,000x 25% Tax Bracket*$75,000$25,000IRSInherited IRAAll out in 5 years$100,000Two of the more common death benefit options that beneficiaries elect are the lump sum and out-in-five options because they want access to the assets immediately. Let me take a moment to walk through how these options work and the tax implications.We start with a inherited IRA which has been passed to the beneficiary.(click)If the beneficiary elects a lump sum withdrawal, the entire amount will be subject to taxation, assuming all contributions were tax deferred and made to a Traditional IRA. In this case we assume a tax bracket of 25%. Please note that a different tax rate may apply to your situation. You should also keep in mind that your beneficiaries may be subject to the applicable state tax rates.As a result, the beneficiary in our example keeps $75,000 and pays $25,000 to the IRS in taxes.The second option is the “all-out-in-five options.Using this option, the beneficiary can spread the tax liability of $25,000 out over 5 years,which may be more advantageous from a tax perspective.But there may be a better way for some one concerned with the tax implications of an inherited IRA.$20,000$20,000$20,000$20,000$20,000x 25% Tax Bracket*$15,000$5,000IRS* 25% tax bracket is hypothetical, your effective tax rate may be different
31 Beneficiary Planning There is another way! Stretch Required Minimum Distributions for beneficiariesNon-spouse designated beneficiaries can elect a trustee-to-trustee transfer to a properly titled “inherited” or “beneficiary” IRA¹A spouse designated beneficiary may also elect the inherited or beneficiary IRA option2Distributions are based on a life expectancy calculationAllows beneficiary to maintain tax deferral of inherited IRA and control the taxation of distributions, to the extent permitted by lawAnother way to distribute an inherited IRA is to take advantage of the “stretch” distribution option.(Read Slide)I’ll illustrate this for you.Source: IRS Publication 590, 2011¹ IRC Sec 402(c)(11)2Notice
32 Non-spouse Beneficiary: AGE 54 IRS Table I: Single Life Table Beneficiary PlanningStretch Death Benefit OptionNon-spouse Beneficiary: AGE 54IRS Table I: Single Life TableDivisor = 30.5(Year 1)Inherited IRA$100,000$3,279÷ =x 25% Tax Bracket*$2,459$820IRSAgain we start with $100,000 in an inherited IRA.(click)Under the “stretch” guidelines, the IRS allows the inherited IRA to be distributed under required minimum distribution rules for beneficiaries. Even beneficiaries can’t let an inherited IRA grow tax deferred forever.So, in accordance with IRS Table I: Single Life Expectancy in IRS publication 590, our hypothetical 54 year old beneficiary has a divisor of 30.5.We divide the $100,000 inherited IRA by 30.5 to determine the minimum amount the beneficiary has to distribute which is $3,279, a lot less than $100,000 or $20,000.Applying the same hypothetical tax bracket, our beneficiary only has to pay a tax of $850.This calculation continues each year with the divisor reduced by 1(Read remaining bullets)Please note that this is a simplified example. A number of factors may affect the calculation including whether the beneficiary was a spouse, whether the plan participant had reached his or her required beginning date, whether the plan participant was older than the designated beneficiary, whether the beneficiary is an individual or non-natural person.Divisor reduced by 1 each year (e.g. 30.5, 29.5, 28.5, etc.)Can always take a lump sumAllows beneficiary to maintain tax deferral of inherited IRA and control the taxation of distributions, to the extent permitted by lawSource: IRS Publication 590, 2011* 25% tax bracket is hypothetical, your effective tax rate may be different
33 Who are your Beneficiaries? Beneficiary PlanningWho are your Beneficiaries?Spouse BeneficiariesCan elect to roll an inherited IRA into their own IRA¹Can elect to treat it as an inherited IRA2Can disclaim the IRA via a qualified disclaimer and have it pass to a contingent beneficiaryNon-spouse BeneficiariesCannot elect to roll inherited IRA assets into their own IRACan elect to treat it as an inherited IRACan disclaim the IRA via a qualified disclaimer and have it pass to a contingent beneficiaryIt is also worth noting that depending upon who the beneficiaries are, the options they have available can differ considerably. In particular, there are significant differences between the options spouse have vs. non-spouses.(Read Slide)The nuances of these differences is beyond the scope of our presentation today, but I encourage you to seek professional guidance from a knowledgeable professional who can review your beneficiary designations and make a recommendations as to what the best options may be.Which brings me to our last mistake….Seek professional guidance!Source: IRS Publication 590, 2011¹ Treas. Reg , A-5.2 Notice
34 Common Mistakes People Make Electing an Indirect Rollover instead of a Direct RolloverOverlooking personal circumstances before rolling money over to an IRAPaying the 10% additional federal tax on pre-59 ½ withdrawalsFailure to manage required minimum distributions at age 70 ½Overlooking death benefit distribution optionsThey don’t seek professional guidanceA common mistake that people make, all too often, is that they don’t seek professional guidance.The media has a tendency to make the retirement planning process seem simple, but in reality it is very personal and can be relatively complex, which I hope I successfully demonstrated today.
35 Working with a Professional IRA planning – avoiding mistakesWhat 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 questionnaireObtain a copy of your employer’s summary plan descriptionGather your beneficiary informationSchedule an appointment, so we can start planning todayIn our time together, I had the opportunity to demonstrate the personal nature and complexity of just one part of the retirement planning process, IRAs. And I hope it will help you avoid many of the mistakes I have seen people make.Before you engage in any IRA transaction, the most important thing is to avoid making a mistake and you can that by asking yourself three questions. From there you can apply the rules.(Read first set of bullets)As I mentioned in the beginning, there are some risks in retirement planning that we can’t avoid and therefore, we have to manage those risks. But mistakes can be avoided through proper planning, a review of your personal circumstances, and working with a knowledgeable professional.I have set aside time to meet with each of you and if you are interested, what I would like you do is:(Read second set of bullets)
36 Thank You for Attending! Questions? Thank you for attending today’s presentation. I would be happy to answer any questions you may have.