1 © 2007 ME™ - Your Money Education Resource™ See page 127  Defined Benefit: monthly check for remainder of life Even better if it: increases each year  Defined Contribution: withdraw account balance during retirement Sustainable withdrawal rate: 4 – 5%  Investment risk  Life Expectancy risk  Can outlive money… Defined Benefit vs. Defined Contribution Pension Plans

2 © 2007 ME™ - Your Money Education Resource™ Defined Benefit Pension Plan  Disappearing 112,208 plans in 1985 Less than 30,000 plans in 2005  Life Expectancy Risk  Falling Investment Returns

3 © 2007 ME™ - Your Money Education Resource™ Plan Limitations on Benefits and Contributions  Defined Benefit Plan Annual Benefits Lesser of  $195,000 for 2010  100% of the average of the employee’s three highest consecutive years salary

4 © 2007 ME™ - Your Money Education Resource™ Plan Limitations on Benefits and Contributions (2 of 3)  Defined Contribution Plans Maximum contribution for the year  Lesser of: 100% of an employee’s compensation, or $49,000 for 2010 Limit consists of  Employer Contributions, and  Employee Contributions, and Elective deferral contributions  Limited to $16,500 for 2010 per year. Additional $5,000 for 2010 for age 50 and older.

5 © 2007 ME™ - Your Money Education Resource™ Distributions: Pension Plan/Normal Retirement Age  Joint and Survivor Annuity after retirement Annuity for participant and spouse  Spouse: 50% - 100% of joint annuity Continues even if remarry  Automatic for defined benefit plans  Elect out Increase monthly payments Spouse must sign waiver When should this be done?

6 © 2007 ME™ - Your Money Education Resource™ Distributions:Pension Plan/Normal Retirement Age  Rollovers to IRA or other qualified plan Tax-free if within 60 days of distribution  Subject to withholding tax of 20% Direct rollovers: trustee to trustee  No withholding  Lump sum distribution Present value of future benefits When would you take this?  Life expectancy  Interest rates: now use corporate bond rates

7 © 2007 ME™ - Your Money Education Resource™ Distributions Prior to 59½  Subject to a 10% early withdrawal penalty unless on account of an exception:  Death,  Disability, Strict definition of disability (similar to Social Security)  Separation from Service after the participant attains age 55  Qualified Domestic Relations Order.

8 © 2007 ME™ - Your Money Education Resource™ Distributions Prior to 59½  Subject to a 10% early withdrawal penalty unless on account of an exception:  Substantially equal periodic payments after separation from service RMD amount  Start small; get bigger Fixed periodic amount over life expectancy Payments must continue for later of 5 years or until 59 1/2  Medical expenses in excess of 7.5% of the participants AGI, or Don’t want this…crummy insurance

9 © 2007 ME™ - Your Money Education Resource™ Minimum Distributions  First minimum distribution must begin by April 1 of the year following the year in which the participant attains the age of 70 ½. Exception:  A participant who is still employed by the plan sponsor may delay the first minimum distribution until April 1 of the year after the participant terminates employment (a >5% owner cannot use the exception).

10 © 2007 ME™ - Your Money Education Resource™ Minimum Distributions  All other minimum distributions (after first year) must occur by December 31 of the year. Tax equal to 50% of RMD if not taken No RMD required in 2009  Does not apply to Roth 401(k); Roth IRA  Must take RMD from all qualified plans IRAs: take one RMD for all IRAs

11 © 2007 ME™ - Your Money Education Resource™ Calculating the Required Minimum Distribution Required Minimum Distribution = Fair Market Value of Participant’s Account at December 31 of the preceding plan year* Distribution period determined based on participant’s age at December 31 of the distribution year.  Generally divide by factor starts at 27.4 for age for age 71 Factor continues to decline When will account be liquidated?

12 © 2007 ME™ - Your Money Education Resource™ Distribution Period  Participant receiving payments Single Spouse isn’t trophy  Use Uniform Lifetime Table: page 324. Trophy spouse (> 10 years younger)  Use Joint Life Table on pages Greatly reduces RMD

13 © 2007 ME™ - Your Money Education Resource™ IRAs – Contribution Limit  Traditional and Roth  Generally, Lesser of  $5,000 ($6,000 for age 50 and over ) or  Individual’s earned income.  Subject to limitations based on income  Can divide contribution between a Roth/traditional IRA  Attainment of age 70½ can no longer make traditional IRA contributions. Can contribute to Roth IRA.

14 © 2007 ME™ - Your Money Education Resource™ IRA Investment Options  Permitted: Cash Stocks Bonds Options (Often limited by custodians) U.S. Gold, Silver, and Platinum Coins Real estate  Not Permitted: Life Insurance Collectibles: beer cans; art, etc. Other Coins

15 © 2007 ME™ - Your Money Education Resource™ Annuities  Partially tax-free return of adjusted basis.  Partially ordinary income: Determined by inclusion/exclusion ratio