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1 SARGENT & LUNDY SAVINGS INVESTMENT PLAN ROTH CONVERSION OPTION (Non S&L Employees) January 2013.

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Presentation on theme: "1 SARGENT & LUNDY SAVINGS INVESTMENT PLAN ROTH CONVERSION OPTION (Non S&L Employees) January 2013."— Presentation transcript:

1 1 SARGENT & LUNDY SAVINGS INVESTMENT PLAN ROTH CONVERSION OPTION (Non S&L Employees) January 2013

2 2 SIP History 1977Voluntary Employee Contribution Plan (VECP) started at S&L (after-tax contributions only) 1981Renamed Savings Investment Plan, employer match added (k) pretax contributions added 1986Tax Reform Act of 1986 (Created after-tax Pre-87 and Post-86 sources, changed withdrawal rules) 1987Loan program added 2000Changed record keeping from in-house to Fidelity, added daily accounting & processing 2001Economic Growth & Tax Relief Reconciliation Act (Added catch-up contribution for employees age 50 and older, and rollovers from other 401(k) plans) 2003Employer Non-Matching Contribution added 2006Roth 401(k) added 2007Pension Protection Act (Allowed SIP to IRA rollovers for non-spouse beneficiaries, direct rollover to Roth IRA for those eligible) 2009Addition of lower cost share class investments, such as Fidelity “K” shares 2010Expanded eligibility for rollovers to Roth IRA (January), allowed Roth In-Plan Conversion (December), (Income eligibility removed for rollover to Roth IRA) 2013American Taxpayer Relief Act of 2012 allows all types of money to be converted to Roth within the plan, even if the amount is not otherwise eligible for a non-hardship distribution.

3 3 Sources of Money Assets in the Savings Investment Plan are classified as different “Sources.” Rules for contributions, taxes, and distributions vary by the Source designation: Pretax 401(k) Employer Match Contribution Employer Non-matching Contribution Post-86 SIP After-tax Pre-87 SIP After-tax Employee Pretax Catch-up Rollover (from a pretax IRA or another qualified plan) After-tax Rollover Roth 401(k) Roth Catch-up Roth Rollover Roth In-Plan Conversion 401(k) to Roth Conversion (not yet available)* Employer Roth Conversion (not yet available)* A list of Sources in your account can be found under the Summary “Sources” tab. *These sources have not yet been created, pending further implementation guidance from the IRS. It is anticipated that amounts converted as a result of the new rules (pretax 401(k), employer matching and non-matching contributions) will retain the payment restrictions of the source from which they came.

4 4 Roth 401(k) Only available through employer-sponsored plans, but not all plans Contributions and earnings withdrawn proportionally for IRS-approved hardship only (if <59-1/2) Earnings can be withdrawn tax free if “qualified”, five years after the first deposit ONLY if: You are at least age 59-1/2 Payment is made to a beneficiary after your death You are disabled A withdrawal meeting the above criteria is considered to be “qualified”. Can be rolled into a Roth IRA or employer-sponsored retirement plan (but not all plans) No hardship requirement for withdrawals if not a current S&L employee.

5 5 Roth IRA Only available through banks and financial institutions (SIP is not an IRA). Eligibility rules (2013): Single or Head of HouseholdWages <$112,000 Married Filing JointlyWages <$178,000 Married Filing SeparatelyWages $10,000 or less Contribution limits (2013) - $5,500 ($6,500 if age 50 or over by year end) Contributions are separate from, and in addition to, any Roth 401(k) contributions Your contributions can be withdrawn at any time, for any reason Earnings can be withdrawn tax free if “qualified”, five years after the first deposit ONLY if: You are at least age 59-1/2 Payment is made to a beneficiary after your death You are disabled Money is used for a qualified first-time home purchase Withdrawals from a Roth IRA that was created from a converted traditional pretax IRA are more complicated (see your IRA provider) Can accept rollovers from a Roth 401(k), but cannot be rolled into an employer-sponsored retirement plan

6 6 Benefits of Roth 401(k) & Roth IRA Earnings grow tax free, not taxed upon withdrawal if “qualified” Roth IRAs are exempt from minimum distribution requirements (MRD) at age 70-1/2. However, SIP Roth sources are included in the Plan’s MRD calculations & distributions. May be passed to heirs tax free, both SIP Roth and Roth IRAs It could be more advantageous to pay taxes now on the Roth 401(k) contributions; tax rates may be lower now than in the future, even at retirement If withdrawn during retirement, not considered as income when calculating Social Security eligibility Eligible employees are determined by the employer-sponsored plan for Roth 401(k) contributions; Roth IRA eligibility is determined by wages

7 7 After-tax Contribution Sources Pre-87 refers to after-tax contributions made prior to January 1, Post-86 refers to after-tax contributions made after December 31, Money in the after-tax sources (Pre-87 and Post-86) can be withdrawn for any reason. All earnings, including capital gains and dividends from mutual fund investments, are reinvested and not considered taxable until withdrawn at a future date. Accumulated earnings are tax-deferred, not reported as income until withdrawn.

8 8 Withdrawals From After-tax Sources Withdrawals from the Pre-87 source come from employee contributions first. Those contributions are tax free at the time of withdrawal. Withdrawals from the Post-86 source must be taken proportionally between tax free employee contributions and taxable earnings. For example:$4,000 Contributions (80% of source) 1,000 Earnings (20% of source) $5,000 Total Based on the example above, 80 cents of every dollar withdrawn would come from the after-tax contributions and 20 cents would come from the earnings. Withdrawals from the Post-86 source will include earnings in the Pre-87 source (if applicable) when calculating the proportion between contributions and earnings You have the option of taking the earnings as additional income. Fidelity is required to withhold 20% for federal tax; the 10% penalty (if applicable) will be included on your federal tax return for that year. OR, you can defer taxes on the taxable earnings. Fidelity would issue two distributions: one to you for the after-tax contributions, and a second check for the taxable earnings which can be payable to an IRA rollover. This would be a pretax (traditional) IRA at a bank or financial institution of your choice. The rollover check would be mailed to your home (if not a Fidelity IRA) payable to the bank/financial institution.

9 9 Withdrawal of Employer Sources You may request a withdrawal from the employer contribution sources at any time, for any reason. If not rolled over into a IRA or another qualified employer-sponsored plan, the withdrawal will be subject to federal and state taxes (depending on the state). A 10% federal early withdrawal penalty may apply for those under age 59-1/2 (unless withdrawn at time employment ended if between age 55 and 59-1/2). At the time of distribution, 20% will be withheld for federal tax.

10 10 Withdrawals From 401(k) & Roth 401(k) You may request a withdrawal from the 401(k) and Roth 401(k) (and catch-up) sources at any time, for any reason. If not rolled over into a IRA or another qualified employer-sponsored plan, a pretax 401(k) withdrawal will be subject to federal and state taxes (depending on the state). A 10% federal early withdrawal penalty may apply for those under age 59-1/2 (unless withdrawn at time employment ended if between age 55 and 59-1/2). At the time of distribution, 20% will be withheld for federal tax. If not rolled over into a Roth IRA or another qualified employer- sponsored plan, the earnings on a Roth 401(k) withdrawal may be subject to federal and state taxes (depending on the state) if not “qualified” (see Page 4). A 10% federal early withdrawal penalty may apply for those under age 59-1/2 (unless withdrawn at time employment ended if between age 55 and 59-1/2). At the time of distribution, 20% will be withheld for federal tax.

11 11 Rollovers to a Roth IRA Since January 2010, all participants have the option of rolling non-Roth plan assets into a Roth IRA (outside the plan). There is no limit on the amount you can rollover into an IRA; a rollover is not considered a contribution (which is limited to a specific dollar amount, if eligible). When selecting which of the following options is best for you, consider the amount of earnings that would be taxable income and any amount you want to remain in the Plan for a future withdrawal. Pretax money rolled into a traditional IRA can subsequently be rolled back into the Plan. A Roth IRA rollover distribution is requested through Kathy Davis, NOT Fidelity. A rollover of after-tax money from the Plan can be done two ways: 1. Split the rollover between two types of IRAs. The after-tax contributions can be directed to a Roth IRA, with the associated taxable earnings on those contributions directed to a pretax traditional IRA. This would defer the taxes on those pretax earnings until a later date. 2. Roll over the after-tax contributions and associated taxable earnings to a Roth IRA. By paying taxes now on those pretax earnings, they will grow tax-free.

12 12 Roth Conversions Became available through the Small Business Jobs Act of 2010, and expanded by the American Taxpayer Relief Act of 2012 (January 2013) Money sources may be converted to Roth without leaving the Plan or selling investments. Converted pretax amounts are considered taxable income, but 10% penalty does not apply. Federal tax is not withheld from any converted pretax amount. Converted pretax amounts are taxed as income in the year of conversion. There is no minimum or maximum amount for conversion, nor are you required to convert an entire money source. Smaller amounts may be converted each year. The 5-year period needed for a qualified distribution starts with the year of conversion. Conversion forms are available from Kathy Davis, and returned to her for processing. “Unqualified” earnings withdrawn will be subject to federal and state taxes (depending on the state). A 10% federal early withdrawal penalty may apply for those under age 59-1/2. At the time of distribution, 20% of any taxable portion will be withheld for federal tax. In addition to the qualified distribution rule, there is also a 5-year recapture rule. Regardless of age, a withdrawal during the first 5 years after conversion would be subject to a 10% penalty (the entire amount, not just the earnings).

13 13 Roth Conversion-Eligible Sources The following money sources are eligible for Roth conversion: Pretax 401(k) Employer Match Contribution Employer Non-matching Contribution Post-86 SIP After-tax Pre-87 SIP After-tax Employee Pretax Catch-up Rollover (from a pretax IRA or another qualified plan) After-tax Rollover

14 14 ROTH IN-PLAN CONVERSION Money converted from pretax sources will be considered as income in the year of conversion, but not subject to the 10% early withdrawal penalty. Pre-87 SIP after-tax contributions may be converted without converting the pretax accumulated earnings on those contributions. Post-86 SIP after-tax contributions and accumulated earnings are converted proportionally, with the converted earnings being taxable income for that year. If you have Pre-87 and Post-86 SIP accounts, the taxable portion of the conversion will include any earnings in the Pre-87 SIP source. Any “unqualified” earnings withdrawn will be subject to federal and state taxes (depending on the state) unless rolled over into a Roth IRA. A 10% federal early withdrawal penalty may apply for those under age 59-1/2. At the time of distribution, 20% of any taxable portion will be withheld for federal tax. In addition to the qualified distribution rule, there is also a 5-year recapture rule. Regardless of age, a withdrawal during the first 5 years after conversion would be subject to a 10% penalty. Note: each conversion starts a new 5-year period, effective January 1 of the year converted. The tax implications for withdrawals from any of the Roth Conversion sources are extremely complex. You are strongly encouraged to consult with a financial planner and/or tax advisor before requesting withdrawals from any type of Roth conversion.

15 15 Rollovers into SIP All plan participants (except non-spouse beneficiaries) may rollover money into the plan from the following types of accounts: * Other qualified retirement plans * Pretax IRAs (but not from a Roth IRA) Rollovers are maintained in separate sources, depending upon money type (see Page 3), and retain their original tax characteristics. A rollover is not considered an employee contribution and there is no limit to the amount eligible for rollover. Rollover checks should be payable to FIIOC and given to Kathy Davis for deposit, along with an Incoming Rollover Form (available from K. Davis).

16 16 S&L Contact Information Sargent & Lundy:Kathy Davis, Plan Administrator Phone: Fax: Lotus Notes SIP Discussion Group Website * all SIP newsletters, since 1996 * Rates of Return, updated monthly * Deadlines of payroll changes * Plan announcements & related articles * Summary Plan Description * Plan Documents * Fidelity Excessive Trading Policy


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