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The Retirement Minefield

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1 The Retirement Minefield
An overview of the most common IRA mistakes – and how to avoid them. Good morning/afternoon/evening My 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 Markets team Variable Annuities issued by Transamerica Life Insurance Company in Cedar Rapids, Iowa, and Transamerica Financial Life Insurance Company in Harrison, New York (Transamerica). Annuities are underwritten and distributed by Transamerica Capital, Inc. Transamerica Financial Life Insurance Company is licensed in New York. AMTRMPP0113

2 Disclosure slide Before investing, consider a variable annuity’s investment objectives, risks, charges and expenses. Call for a contract and fund prospectus containing this and other information. Please read it carefully. 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)1 By 2009, 93% of employer sponsored retirement plans were defined contribution (DC) plans1 46% of plan participants expect their DC plan to be their most important source of retirement income2 Social Security is projected to pay full benefits until 20333 When 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 2033. 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 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 So, 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 circumstances IRS taxes and penalties – unnecessarily erodes the value of retirement savings With 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, 2012 Neither Transamerica nor any of its financial professionals provide tax or legal advice. You should consult a qualified tax advisor for questions regarding your particular situation.

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 17,2011 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 I 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 pages Updated annually Penalties Transfers Age 59 ½ Rule Form 8606 10% Additional Tax Conversions 60-Day Period for Rollovers Beneficiaries Partial Rollovers And 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 Distributions Form 1040 Inherited IRAs Spousal IRA Age 70 ½ Rule 2-Year Rule 20% Withholding Required Beginning Date Form 5329

8 The Retirement Minefield – IRAs
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 To give you a sense of how important the IRA rules can be to your overall retirement plan, today’s presentation will focus 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 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 plan1 - Triggering events You 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) Rollovers and transfers may be subject to differences in features and expenses. Indirect transfers may be subject to taxation and penalties. Consult your tax advisor regarding your situation. *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 Rollovers When can you elect a rollover to an IRA? Triggering events for employer sponsored plans1: 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 (k) assets while you’re still employed2 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* 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. Regs (b), 1.401(a)-14, 1.403(b)-6 2 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 Rollovers 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 Once 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) Now, you’re probably familiar with one or more of these reasons for doing a rollover. They are frequently touted by the media and many financial services companies, but let’s hold up here for a minute. There are some personal considerations that are often overlooked. In fact, this is one of the most significant mistakes people make. There is no additional tax-deferral benefit derived from placing IRA or other tax-qualified funds into an annuity. Features other than tax-deferral should be considered in the purchase of a qualified annuity. Withdrawals of taxable amounts are subject to ordinary income tax and, if taken prior to age 59½ a 10% additional federal tax may apply. 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 Rollovers Common Mistakes People Make Overlooking personal circumstances before rolling money over to an IRA Electing an Indirect Rollover instead of a Direct Rollover 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 For many individuals, a rollover out of an employer sponsored retirement plan makes sense for many of the reasons I stated. 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. The first mistake that many people make is overlooking their personal circumstances before electing a rollover to an IRA.

13 Is an IRA Rollover Right for You, Right Now?
IRA Rollovers Is an IRA Rollover Right for You, Right Now? Will you need a loan? Your employer sponsored retirement plan may have a loan feature1 Loans are not permitted from IRAs2 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 553 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 plan4 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 Here are several of the most common reasons I come across when working with my clients of why an IRA rollover may not be right for them right away. (Read Slide) Now these considerations may or may not apply to you but I hope you see why personal circumstances play such an important role in the rollover process. It’s not as “simple and easy” a decision as it is sometimes made out to be. But if and when you’re ready to do an IRA Rollover, the next thing you want to ensure is that you do it right. Which leads us to the next mistake many people often make. ¹IRC Sec. 72(p)(2) 2IRC Sec. 4975(c)(1)(B); 408(e)(2)(A). 3 IRC Sec 72(t)(2)(A)(v); 72(t)(3) 4 IRC Sec. 401(a)(9)© 5IRC Sec. 72(t)(2)(c)

14 Common Mistakes People Make
IRA Rollovers Common Mistakes People Make Overlooking personal circumstances before rolling money over to an IRA Electing an Indirect Rollover instead of a Direct Rollover 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 If 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. Rollovers and transfers may be subject to differences in features and expenses. Indirect transfers may be subject to taxation and penalties. Consult your tax advisor regarding your situation.

15 Ensure You do it the Right Way
IRA Rollovers 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 First 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)

16 $20,000 Taxable Distribution
IRA Rollovers Indirect Rollover 401(k) Plan $100,000 20% Mandatory Withholding¹ IRS - $80,000 in cash $20,000 $20,000 STEP 1 IRA 60 Day Time Limit² $80,000 to IRA This 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. Tax Refund STEP 2 $80,000 Rolled Over, $20,000 Taxable Distribution IRA YOU $80,000 + $20,000 $20,000 STEP 3 ¹ IRC Sec. 3405(c)(1) ² IRC Sec. 402(c)(3); Treas. Reg.1.402(c)-2, A-11 This hypothetical illustration is not indicative of any specific investment and does not reflect the impact of fees or expenses. The chart is shown for illustrative purposes only.

17 Ensure you do it the Right Way – Important differences
IRA Rollovers Ensure you do it the Right Way – Important differences 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 Indirect Rollover Direct Rollover If 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)

18 No Waiting for Tax Refund
IRA Rollovers Direct Rollover 401(k) Plan IRS $100,000 20% $20,000 No Withholding Direct, No 60 Day Time Limit No Waiting for Tax Refund This 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 withholding No 60 day time limit to worry about No out-of-pocket make-up And no waiting for a tax refund IRA YOU $100,000 20% $20,000 No Make-Up This is a hypothetical illustration and is for illustrative purposes only.

19 Ensure you do it the Right Way – Important differences
IRA Rollovers Ensure you do it the Right Way – Important differences 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 Indirect Rollover Direct Rollover As 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. So as you can see, an IRA rollover can be a little more complicated than you may have thought. But I can help you with this first step of transferring your retirement assets into an IRA. But once your assets have been properly rolled over to an IRA, there are additional rules we have to be aware of when you decide you may want to withdraw money from your IRA, so let’s move on to those rules. ¹ IRC Sec. 402 (c)(3) ² IRC Sec. 3405(c) ³ IRC Sec. 408(d)(3)(B)

20 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 59 ½ - 70 ½ no restrictions, no requirements 10% additional federal tax penalty may apply¹ When 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 tax Once 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 ½ The 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. AGE 20 30 40 50 60 70 80 Attainment of age 59 ½, no 10% additional federal tax penalty¹ Required Minimum Distributions begin at age 70 ½² ¹ 72(t)(1) and 72(t)(2)(A)(i) ² IRC Sec. 4974(a)

21 Common Mistakes People Make
IRA Withdrawals 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 A 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.

22 Attainment of age 59 ½ exception to 10% additional federal tax penalty
IRA Withdrawals Withdrawals made prior to 59 ½ 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 Attainment of age 59 ½ exception to 10% additional federal tax penalty AGE 20 30 40 50 60 70 80 For 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 moment IRAs 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 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 ¹ IRC Sec. 72(t)(2)(A)(i) ² IRC Sections 72(t)(2)(D), (E), and (F) ³ IRC Sec. 72(t)(3); 72(t)(2)(A)(v); 72(t)(2)(C)

23 IRA Withdrawals 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 Failure to abide by the rules could result in retroactive taxes, interest and penalties The 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 Slide This 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. Ruling ² IRC Sec. 72(t)(4)(A); Rev. Ruling

24 Common Mistakes People Make
IRA Withdrawals 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 Another common mistake I see when it comes to IRA withdrawals is failing to manage required minimum distributions.

25 The RMD for the first “distribution year” can be taken that year
IRA Withdrawals RMD Timeline An RMD for the next distribution year, and each year thereafter, must be taken by 12/31 of that year 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” DATE 1/1/12 8/1/12 1/1/13 4/1/13 12/31/13 AGE 70 ½ I’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! The RMD for the first “distribution year” can be deferred until 4/1 of the following year The RMD for the first “distribution year” can be taken that year If the first RMD is deferred until the following year (e.g., April 1st), two RMDs must be taken in that tax year Source: IRS Publication 590, 2012

26 Required Minimum Distributions (RMDs)
IRA Withdrawals 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 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 Because 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)

27 Common Mistakes People Make
Beneficiary Planning 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 Another common mistake I see people make is to overlook the death benefit options they have available.

28 Beneficiary Planning Beneficiary Planning
IRA Death Benefit Distribution Options Lump sum All out in five years Annuitization* Maintain or rollover to own IRA – spouses only Stretch In 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 contracts Source: IRS Publication 590, 2012

29 Comparing Death Benefit Options
Beneficiary Planning Comparing Death Benefit Options Inherited IRA Lump Sum $100,000 $100,000 x 25% Tax Bracket* $75,000 $25,000 IRS Inherited IRA All out in 5 years $100,000 $20,000 $20,000 $20,000 $20,000 $20,000 Two 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. x 25% Tax Bracket* $15,000 $5,000 IRS * 25% tax bracket is hypothetical, your effective tax rate may be different This hypothetical illustration is not indicative of any specific investment and does not reflect the impact of any fees or expenses. The chart is shown for illustrative purposes only.

30 Beneficiary Planning There is another way! Stretch
Allows beneficiary to maintain tax deferral of inherited IRA and control the taxation of distributions, to the extent permitted by law To take advantage of this option it must be elected by 12/31 of the year following the death of the original IRA owner. Another 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, 2012

31 Non-spouse Beneficiary: AGE 54 IRS Table I: Single Life Table
Beneficiary Planning Stretch Death Benefit Option Non-spouse Beneficiary: AGE 54 IRS Table I: Single Life Table Divisor = 30.5 (Year 1) Inherited IRA $100,000 $3,279 ÷ = x 25% Tax Bracket* $2,459 $820 IRS Again 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 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, 2012 This is a hypothetical illustration and is for illustrative purposes only. * 25% tax bracket is hypothetical, your effective tax rate may be different

32 Who are your Beneficiaries?
Beneficiary Planning 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 IRA2 Non-spouse Beneficiaries Cannot elect to roll inherited IRA assets into their own IRA Can elect to treat it as an inherited IRA It 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 spouses 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, 2012 ¹ Treas. Reg , A-5. 2 Notice

33 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 A 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.

34 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 In 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 do 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 over the next two weeks and if you are interested, what I would like you do is: (Read second set of bullets)

35 Thank You for Attending! Questions?
Thank you for attending today’s presentation. I would be happy to answer any questions you may have.

36 The Retirement Minefield
An overview of the most common IRA mistakes – and how to avoid them. Good morning/afternoon/evening My 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 Markets team AMTRMPP0113


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