Roth After-Tax Features
A New Way to Save
for Your Future
For the following employees: Eligible active
salaried and non-union, non-exempt employees,
and executives participating in the Kaiser
Permanente Tax Sheltered Annuity Plan (TSA);
and eligible active non-physician executives,
non-physician senior leaders, podiatrists, salaried
employees and non-union, non-exempt employees
participating in the Southern California Permanente
Medical Group Tax Savings Retirement Plan (TSR)
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You Have a New Way
to Save for Your Future!
TABLE OF CONTENTS
4 Introducing the Roth After-Tax Features
At Kaiser Foundation Hospitals and Kaiser Foundation Health
Plan, Inc. (KFH/KFHP) and the Southern California Permanente
Medical Group (SCPMG), referred to collectively as Kaiser
Permanente in this communication, we believe that financial
wellness is an important part of your total health. To that end,
we offer tools and programs that can support your financial
goals now and in retirement.
The KFH/KFHP- and SCPMG-sponsored retirement savings plans
can play a key role in your pursuit of financial wellness. While
these plans have always been powerful savings tools, we are
pleased to announce that you now have a new way to contribute
and potentially save on taxes with the Roth features in the Kaiser
Permanente Tax Sheltered Annuity Plan (TSA) and SCPMG Tax
Savings Retirement Plan (TSR). (In this communication we
also refer to the TSA and TSR as the retirement savings plans.)
These new features are available to the eligible employees
listed on the cover of this guide.
6 Roth After-Tax Contributions
6 What Are Roth After-Tax Contributions?
10 Roth After-Tax Contributions and Your Paycheck
11 Are Roth After-Tax Contributions Right for You?
14 Bringing It All Together: Roth After-Tax Contribution Examples
22 Roth In-Plan Conversions
22 Benefits and Costs
23 Is a Roth In-Plan Conversion Right for You?
25 R
oth In-Plan Conversions and
Rolling Over to a Roth IRA Are Not Identical
26 Taxes on a Roth In-Plan Conversion
27 Consider Both Pre-Tax and Roth After-Tax Contributions
28 How to Get Started With the New Roth Features
28 Contact Vanguard
30 Roth Questions and Answers
Review the Financial Wellness Video Series
To help you manage your financial wellness, KFH/KFHP and SCPMG have
developed a Financial Wellness Video Series. The series explores a wide range
of financial issues and points you to resources that can inspire you and assist
you in planning ahead to meet your financial goals. Watch the videos at
vanguard.com/kpvideoseries.
2
The tax and estate planning information contained herein is general in nature, is provided for
informational and illustration purposes only, and is not legal or tax advice. Kaiser Permanente does
not provide legal or tax advice. Kaiser Permanente cannot guarantee that the information is accurate,
complete, or timely. Laws of a particular state or other applicable laws may impact the applicability,
accuracy, or completeness of the information. Federal and state laws and regulations are complex and
frequently change. Kaiser Permanente does not assume any obligation to inform you of any subsequent
changes
in the
Roth After-Tax
Features
July tax
2014 law or other factors that could affect the information contained herein. Always
consult an attorney, tax professional, or financial planner about your specific legal or tax situation.
•
Be sure to watch the two new videos highlighting the Roth after-tax features.
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Introducing
Roth After-Tax Features
Eligible employees participating in the TSA and TSR have the
following Roth after-tax features available to them:
• Roth after-tax contributions. Roth after-tax contributions offer an alternative to the pre-tax
contributions already available in the TSA and TSR. Roth after-tax contributions are taxed
when made, and current tax law generally allows you to withdraw earnings on Roth after-tax
contributions tax-free if you are age 59½ and made your first Roth after-tax contribution at
least five years earlier.
• Roth in-plan conversions. Roth in-plan conversions allow you to convert your current pre-tax
retirement savings plan account (or a portion of your account) to a Roth after-tax account
within the TSA or TSR. This can be a significant benefit. For example, you may want to
consider a Roth in-plan conversion if you expect to be at either the same or a higher income
tax rate at the time of withdrawal than at conversion.
Please note that these features are part of the TSA and TSR, not separate plans.
Important! There are many factors to consider when electing Roth after-tax features. You should
consider consulting a tax or financial advisor about the Roth features as the tax implications can vary.
This brochure gives you more information on how the Roth after-tax features work and how they
may fit into your financial plan.
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Roth After-Tax Contributions
If you are an eligible employee, you can make all or a portion of
your TSA or TSR contributions on a Roth after-tax basis.
What Are Roth After-Tax Contributions?
Roth after-tax contributions are a way to contribute to your TSA or TSR that allows you to withdraw
from your Roth account tax-free, as long as certain IRS requirements are met (see page 7 for
details). This feature is available in addition to the pre-tax contributions in the TSA and TSR and the
after-tax contributions in the Kaiser Permanente Supplemental Savings and Retirement Plan (Plan B).
The big difference between pre-tax contributions and Roth after-tax contributions is when
they’re taxed. Pre-tax contributions (and any earnings) are taxed when you take a distribution.
Roth after-tax contributions are taxed when your contributions are made.
• Pre-tax contributions (tax deferred or taxed at the time of distribution): For pre-tax
contributions, you contribute to the TSA or TSR before taxes are withheld. In addition,
your pre-tax contributions are excluded from income for purposes of federal income taxes
for the year the contribution is made. This may reduce your taxable income in that year.
You do not pay taxes on the contributions or any investment earnings until your pre-tax
account is distributed.
• Roth after-tax contributions (taxed at the time the contribution is made): For Roth after-tax
contributions, you contribute to the TSA or TSR after taxes are taken out of your pay. Your
Roth after-tax contributions are included in income for purposes of federal income taxes
for the year the contribution is made. This will not reduce your taxable income in that year.
Because Roth after-tax contributions are made on an after-tax basis, making Roth aftertax contributions to the plan at the same level may reduce your take-home pay more than
pre-tax contributions. When you take a distribution, the portion of the distribution that
represents earnings on Roth after-tax contributions will be tax-free if you are at least age
59½ and made your first Roth after-tax contribution at least five years earlier.
Important tax consideration. If you receive a distribution of your Roth after-tax contributions
and earnings before age 59½ or less than five years after your first Roth after-tax contribution,
the distribution of your contributions is not taxed, but the earnings are subject to ordinary
federal income tax (and if you are under age 59½, a 10 percent federal penalty tax).
Roth After-Tax Contributions Versus After-Tax Contributions in Plan B
If you are eligible to participate in Plan B, you have the option of making after-tax contributions
in Plan B. Earnings on after-tax contributions in Plan B are taxed when distributed. In contrast,
the portion of a distribution that represents earnings on Roth after-tax contributions can be
distributed tax-free if you are at least age 59½ and made your first Roth after-tax contribution
at least five years earlier.
• After-tax contributions in Plan B: When you receive a distribution of after-tax contributions
in Plan B, you are taxed on any earnings on your contributions at distribution, regardless of
your age or when you made the first after-tax contribution.
• Roth after-tax contributions in the TSA and TSR: When you receive a distribution of Roth
after-tax contributions, any earnings are tax-free if you made your first Roth after-tax
contribution at least five years earlier and the distribution is made after age 59½, death,
or total and permanent disability.
See page 21 for an example of how you can save more for retirement through Plan B.
More information on Plan B is available in the Summary Plan Description.
Are Roth After-Tax Contributions the Same as a Roth IRA?
No. Roth Individual Retirement Accounts (IRAs) and Roth
6
after-tax contributions to your TSA or TSR are not the same.
Important! Retirement Planning Idea for Your Consideration
Both allow you to save for retirement on an after-tax basis and
If you are already making after-tax contributions to Plan B, but
both give you the potential for tax-free distributions. However,
not contributing the full annual IRS contribution limit for pre-tax
there are key differences in contribution limits, income limits,
and Roth after-tax contributions (in 2014, $17,500; or $23,000 if
and distributions. Review the chart on page 8 for some of the
over age 50), then you may want to consider making Roth
differences between a Roth IRA and Roth after-tax contributions.
after-tax contributions in the TSA or TSR. As described earlier,
For more information on IRAs — including Roth IRAs —
if you make Roth after-tax contributions, the earnings on your
visit vanguard.com/ira.
Roth after-tax contributions may be distributed tax-free.
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Your Retirement Savings Plan Contribution Choices at a Glance
The chart below provides an overview of some differences between pre-tax and Roth after-tax
contributions in the TSA and TSR, after-tax contributions in Plan B, and Roth IRAs.
PROVISION
PRE-TAX CONTRIBUTIONS
(TSA AND TSR)
ROTH AFTER-TAX
CONTRIBUTIONS
(TSA AND TSR)
AFTER-TAX CONTRIBUTIONS
(PLAN B ONLY)
ROTH IRA
(NOT PART OF TSA OR TSR)
Contributions
Pre-tax dollars
After-tax dollars
After-tax dollars
After-tax dollars
Income limits
None
None
None
Yes1
Contributions subject to
tax at distribution
Yes
No
No
No
Earnings subject to tax at
distribution
Yes3
No, if you meet certain
requirements3
Yes3
No, if you meet certain
requirements3
Tax penalty on distributions
before age 59½
10% federal penalty tax on
contributions and earnings4
10% federal penalty tax on
earnings but not contributions4
10% federal penalty tax on
earnings but not contributions4
10% federal penalty tax on
earnings but not contributions4
Maximum annual contributions
Subject to annual IRS personal
contribution limit ($17,500 in
2014 or $23,000 if you are age
50 or older)
Subject to annual IRS personal
contribution limit ($17,500 in
2014 or $23,000 if you are age
50 or older)
Not subject to annual IRS
personal contribution limit
$5,500 in 2014 ($6,500 if you
are age 50 or older)
Also subject to the annual IRS
total defined contribution plan
limit ($52,000 or $57,500 if you
are age 50 or older)5
Also subject to the annual IRS
total defined contribution plan
limit ($52,000 or $57,500 if you
are age 50 or older)5
Yes, generally required by April 1
of the year after you turn age 70½
if you are no longer employed by
KFH/KFHP or SCPMG
Yes, generally required by April 1
in the year after you turn age
70½ if you are no longer
employed by KFH/KFHP or
SCPMG (unless the money is
rolled over to a Roth IRA)
Required distributions
(i.e., age 70½ distribution)
2
2
IRS Annual Contribution Limits Include Roth After-Tax Contributions
The IRS limits the amount of pre-tax and Roth after-tax contributions that can be made to
IRS tax-qualified retirement plans, like the TSA and TSR, each year. The annual IRS limit for
2014 is $17,500 ($23,000 if age 50 or older). This limit applies to all pre-tax and Roth after-tax
contributions in the TSA and TSR.
Important! If you have already met the IRS contribution limit of $17,500 for 2014 ($23,000 if you are
age 50 or older), you will be unable to make Roth after-tax contributions until 2015. However, you
may still be able to elect a Roth in-plan conversion in 2014 (see page 22 for more information on
this feature).
In addition to the IRS limit just described, the IRS also limits the amount of combined employee
and employer contributions to all IRS tax-qualified retirement plans that you can receive in a year.
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2
2
However, contributions are
subject to the annual IRS total
defined contribution plan limit
($52,000 or $57,500 if you are
age 50 or older)5
Yes, generally required by
April 1 in the year after
you turn age 70½ if you are
no longer employed by
KFH/KFHP or SCPMG
1 To contribute to a Roth IRA, your adjusted
gross income must be under the income
limits (for 2014 these limits are $129,000 for
single taxpayer, or $191,000 for married filing
jointly taxpayer).
2 You will be responsible for paying any
applicable federal, state, local, or foreign taxes
on a withdrawal of pre-tax contributions from
your accounts. Distributions of Roth after-tax
contributions, after-tax contributions, or Roth
IRA contributions are not usually taxed.
3 You will be responsible for paying any
applicable federal, state, local, or foreign taxes
on a withdrawal of contributions and earnings
on pre-tax contributions and earnings on aftertax contributions. When taking a distribution of
Roth after-tax contributions or from a Roth IRA,
the portion of the withdrawal that represents
earnings will be tax-free if your initial Roth
after-tax contribution was made more than five
years ago, and the withdrawal is after age 59½,
death, or total and permanent disability.
4 The 10% federal penalty tax generally applies,
unless you meet an exception.
There are two IRS limits — one for pre-tax and
Roth after-tax contributions, and a second on
all contributions to a defined contribution plan.
The first limit is $17,500 ($23,000 for participants
age 50 or older) in 2014 and applies to the sum
of all pre-tax and Roth after-tax contributions.
After-tax contributions in Plan B are not
subject to this limit. The second limit is $52,000
($57,500 for participants age 50 or older) in
2014 and applies to the total contributions
to your account, including the sum of all pretax, Roth after-tax contributions, after-tax
contributions, and employer contributions.
5 No
This limit applies to the sum of all pre-tax, Roth after-tax, after-tax, and employer contributions
(such as those made in Plan B). For 2014, this amount is $52,000 ($57,500 if age 50 or older).
If you are eligible to participate in Plan B, your after-tax contributions in Plan B are not subject to
the annual IRS contribution limit of $17,500 or $23,000 for age 50 or older. As a result, if you are
already saving the maximum in the TSA or TSR, you may want to consider also making after-tax
contributions to Plan B to save more for retirement.
Note: If you are a highly compensated employee, you may receive a refund of your contributions
(pre-tax, Roth after-tax, and/or after-tax) so the applicable plan can satisfy certain IRS requirements.
For more information on IRS limits, visit vanguard.com/contributionlimits.
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Roth After-Tax Contributions and Your Paycheck
As discussed in this brochure, Roth after-tax contributions could provide you with tax-free
income when you take a distribution. If you switch from pre-tax contributions to Roth after-tax
contributions, it’s important to note that your take-home pay may decrease. That’s because more
of your income will be subject to income taxes.
Here are some examples of the potential effect of Roth after-tax contributions on take-home pay:
Example 1: Sarah is at the 15 percent federal income tax rate and contributes $3,000 a year to
the TSR through pre-tax contributions. If she switches to Roth after-tax contributions in the TSR,
the $3,000 is subject to federal income taxes, so Sarah would pay $450 more in federal income
taxes annually ($3,000 x 0.15 = $450). If Sarah chooses to keep her contributions to the TSR at
$3,000 a year as Roth after-tax contributions, then each of Sarah’s biweekly paychecks may be
reduced by an additional $17.31 ($450 ÷ 26 = $17.31).1
Example 2: Bill is at the 25 percent federal income tax rate and contributes $9,500 a year to
TSA through pre-tax contributions. If he switches to Roth after-tax contributions, the $9,500 is
subject to federal income taxes, so Bill would pay $2,375 more in federal income taxes annually
($9,500 x 0.25 = $2,375). If Bill chooses to keep his contributions to the TSA at $9,500 a year
as Roth after-tax contributions, then each of Bill’s biweekly paychecks may be reduced by an
additional $91.35 ($2,375 ÷ 26 = $91.35).1
1 All tax references apply to federal taxes only. Individual state tax laws may vary.
Roth After-Tax Contributions and Your Take-Home Pay
For an idea of how switching from pre-tax to Roth after-tax contributions could change your
take-home pay, the table below may help you. The dollar amount at the intersection of the two
factors is the reduction in pay on a biweekly basis (based on 26 pay periods per year) to account
for income taxes on Roth after-tax contributions if your contribution percentage to the plan
remains the same. Please keep in mind that actual circumstances may be different.
PERCENTAGE OF CONTRIBUTION TO RETIREMENT SAVINGS PLAN
3%
6%
ELIGIBLE PAY
9%
12%
15%
DECREASE IN BIWEEKLY TAKE-HOME PAY
$25,000
$3
$6
$9
$12
$14
$50,000
$9
$17
$26
$35
$43
$75,000
$13
$26
$39
$52
$65
$100,000
$29
$58
$87
$115
$144
Consider Your Tax Credits and Deductions
Switching from pre-tax to Roth after-tax contributions could increase your taxable income. This
could, in turn, affect your eligibility for various tax credits and deductions. For example, tax credits
and deductions that could be affected include those for dependent children, and expenses for
day care and education.
Therefore, before you decide to make Roth after-tax contributions, consider checking your tax
return (or ask a tax advisor or financial planner) to see whether any of your deductions or credits
may be reduced or eliminated. Many credits and deductions phase out as your taxable income
increases. The impact could be large or small, depending on your situation.
Are Roth After-Tax Contributions Right for You?
Making Roth after-tax contributions may offer a financial advantage over pre-tax contributions
depending on your situtation. Keep in mind that how you make your contributions is your choice.
Should you pay taxes when the contributions are made by making Roth after-tax contributions
or should you make pre-tax contributions? Or, should you contribute a combination of the two?
Consider the following factors:
• If you think your tax rate will be lower when you take a distribution, it may be better
to keep making pre-tax contributions. That way you’ll save on taxes when you make the
contribution and postpone paying taxes generally until you take a distribution, when you
may be at a lower tax rate. Your rate could be lower for a number of reasons, including
changes in tax laws or being at a lower tax rate when you take a distribution.
• If you think your tax rate will be higher when you take a distribution, it may be better to
begin making Roth after-tax contributions. That way you’ll pay taxes on your income at the
same (or lower) rate when you make the contribution, and not pay taxes when you withdraw
your Roth after-tax contributions and earnings (assuming you meet the requirements
described on page 7).
Of course, no one can predict how tax rates may change in the future. So, you may want to
consider making both pre-tax and Roth after-tax contributions to your retirement savings plan
(this is known as tax diversification) if you are not sure what your tax rate will be at the time of
distribution. See page 27 for more information on tax diversification.
Determining if Roth after-tax contributions are right for you depends on many things — including
your income, family status, other retirement benefits, and government tax policy. If you are not
sure you want to commit all your contributions to Roth after-tax contributions, you can increase
your contribution rate and elect Roth after-tax contributions for that increase. You can also switch
part of your current contribution amount to Roth after-tax contributions.
Remember, you can change the amount you contribute as often as you wish, whether you are
making pre-tax or Roth after-tax contributions, or any combination of the two.
Assumptions: Estimates are rounded to the nearest whole dollar and are based on the IRS withholding tables assuming you elected two
exemptions in 2014. The impact on your biweekly take-home pay may vary based on a variety of factors, including your tax withholding election.
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11
Who Might Benefit from Roth After-Tax Contributions
IS THIS YOU?
WHY YOU MIGHT BENEFIT
Who Might Not Benefit
IS THIS YOU?
WHY YOU MIGHT NOT BENEFIT
You pay taxes at a low rate
when the contributions are
made and you expect your
tax rate will be higher when
you take a distribution.
Making Roth after-tax contributions costs you a little when you
make the contribution, but could result in tax savings when you
take a distribution from your Roth account.
You may need to withdraw
some or all of your
Roth contributions within
five years.
Any Roth after-tax contributions withdrawn within five years of
your first Roth after-tax contribution will lose the Roth tax
advantage. This means you may be subject to income taxes
(and, if you are under age 59½, a 10% federal penalty tax) on
any earnings distributed.
Your career is just getting
started.
You expect your income — and tax rate — to rise in the years to
come. It may be beneficial to consider Roth after tax-contributions.
You expect Social Security
to be the mainstay of your
retirement.
You’re financially well
prepared for retirement
(high savings).
Chances are you’ll be at the same or a higher tax rate when you
take a distribution. Roth after-tax contributions could result in tax
savings when you take a distribution.
Chances are your income will be lower when you need to take
a distribution from your account. Consequently, you may be at
a lower tax rate when you take a distribution than you are now.
As a result, it may be better to contribute on a pre-tax basis.
Your pay spikes due to big
commissions or bonuses.
You contribute the
maximum to your
retirement savings plan.
If you are contributing the maximum to the plan year after year,
you may have accumulated significant pre-tax savings. Switching
to Roth after-tax contributions could decrease the portion of your
account that is subject to federal income taxes when distributed,
resulting in more spendable income.
Your tax rate may be higher this year than when you take a
distribution from your Roth account. You may be better off
deferring taxes by making pre-tax contributions and paying at
a lower rate later when you take a distribution.
You are currently taking
advantage of tax credits
such as the earned
income credit.
Switching to Roth after-tax contributions raises your taxable
income and you could lose valuable tax credits and/or deductions.
You need to weigh whether the benefits of these credits and
deductions are more valuable than Roth after-tax contributions.
You may contribute up to the annual IRS contribution limit for
pre-tax and Roth after-tax contributions. For 2014, this limit
is $17,500 ($23,000 if you’re age 50 or older), which applies to
your total pre-tax and Roth after-tax contributions.
Your income prevents
you from contributing to
a Roth IRA1
You can obtain the advantages of Roth after-tax contributions
within your TSA or TSR, which doesn’t have the income restrictions
of a Roth IRA.
You are not certain what
your tax rate may be in
the future when you take
a distribution.
You may want to consider making both pre-tax and Roth aftertax contributions so that you have assets in your account that are
taxed at different rates when distributed. This can be beneficial
in the event of changes to tax rates or taxable income.
See “Consider Both Pre-Tax and Roth After-Tax Contributions”
on page 27 for more information on this topic.
1 To contribute to a Roth IRA, your 2014 modified adjusted gross income cannot exceed $191,000 for married taxpayers filing jointly or $129,000
for single filers.
IMPORTANT! ESTATE PLANNING INFORMATION FOR YOUR CONSIDERATION
In addition to the considerations in the table on page 12, Roth after-tax contributions
may also be right for you if you are thinking about estate planning and leaving money to
your beneficiaries. In this case, Roth after-tax contributions could be an important tool in
your estate planning because you can leave your Roth account to your beneficiaries on
a tax-free basis. If your first Roth after-tax contribution was at least five years earlier, your
beneficiaries could receive a distribution of your Roth after-tax contributions (and earnings)
tax- and penalty-free.
Keep in mind, though, that if you die before satisfying the five-year period, that fiveyear period carries over to your beneficiary. Once the five-year period is satisfied, your
beneficiary may receive a distribution tax-free. A distribution of earnings related to your
Roth after-tax contributions before the end of the five-year period may be subject to
federal (and possibly state) income tax.
Note: After you leave Kaiser Permanente, you may want to consider rolling over your
TSA or TSR Roth account to a Roth IRA (before you reach age 70½) to avoid age
70½ distributions. You may need to wait five years after the rollover to take a tax-free
distribution of earnings from your Roth IRA.
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Bringing It All Together: Roth After-Tax Contribution Examples
Fred knows that saving is important, so he decides to contribute to the TSA. With his eligible
salary of $60,000, he decides that he will budget 5 percent, or $3,000, each year (which is $115.38
per pay period) for retirement savings. Fred has a choice about when he will be taxed on the
amounts he contributes toward his retirement savings plan. He can contribute on a pre-tax basis
and delay being taxed until the account is distributed. Alternatively, he can make Roth aftertax contributions, which are taxed when the contributions are made, but not when Fred takes a
distribution. (Fred plans to satisfy the Roth distribution requirements as described on page 7.)
The difference is when his income is taxed — either when the money goes in, or when the
money comes out.
An Example: Tax Rate Stays the Same … Consider Either Roth After-Tax or Pre-Tax Contributions
Let’s assume Fred’s income tax rate is the same at the time he contributes to the TSA and when
he takes a distribution from the TSA.
While this may be unlikely, the following example demonstrates why many financial and tax
advisors believe that pre-tax and Roth after-tax contributions will yield roughly the same amount,
net of income taxes, when distributed, if an employee’s income tax rate remains the same from
the time the contributions are made until the time a distribution occurs.
TAX RATE STAYS THE SAME
(25 percent now, 25 percent after 20 years)
WHEN THE MONEY GOES IN
FRED MAKES PRE-TAX CONTRIBUTIONS
FRED MAKES ROTH AFTER-TAX
CONTRIBUTIONS
Fred’s contributions are not subject to income tax1
when made, so Fred’s taxable income is reduced by
the amount of his contribution
Roth after-tax contributions are subject to
taxes when made and do not reduce Fred’s
taxable income
Eligible pay (annual)
ROTH AFTER-TAX CONTRIBUTIONS
PRE-TAX CONTRIBUTIONS
$60,000
$60,000
PAYCHECK EFFECT
Amount Fred has budgeted to
use toward retirement saving
contributions per pay period
(5% of pay)
$115.38
$115.38
$28.84
$0
Note: Tax rules are subject to change.
Less: Income tax based
on budgeted amount
(25% tax rate)
WHEN THE MONEY COMES OUT
Contribution to plan per pay
period
$86.54
$115.38
Yearly contribution to plan
$2,250
$3,000
1 Contributions are generally not subject to federal and state income taxes, but local taxes may apply.
FRED TAKES A DISTRIBUTION OF PRE-TAX
CONTRIBUTIONS AND EARNINGS AT AGE 65
FRED TAKES A DISTRIBUTION OF ROTH
AFTER-TAX CONTRIBUTIONS AND EARNINGS
AT AGE 65
Income taxes are due for the year in which the
distribution is made
No income taxes are due if the Roth distribution
requirements are satisfied
Note: Tax rules are subject to change.
ACCOUNT BALANCE EFFECT AFTER 20 YEARS
Account balance after 20 years
(assumes 6% return)
$85,125
$113,500
Income tax due upon
distribution (25% tax rate)
$0
$28,375
Net amount available after
income taxes
$85,125
$85,125
Note: This simplified example is for illustrative purposes only. In this example, we assume that contributions are made equally over 26 pay periods
a year, over a 20-year period, with investments growing at 6 percent annually. Values may have slight rounding for ease of presentation. Actual
elections to the plan would be in percentages at the contribution level. This example does not account for salary adjustments over time.
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15
Income Tax Rate Is Lower at the Time of Distribution … Consider Pre-Tax Contributions
Now let’s assume that Fred’s income tax rate is lower when he takes a distribution from the TSA.
The following example demonstrates why many financial and tax advisors believe that pre-tax
contributions, at these contribution levels, are financially more advantageous when the income tax
rate in effect at the time a distribution occurs is lower than at the time contributions were made.
INCOME TAX RATE IS LOWER
(35 percent now, 25 percent after 20 years)
Eligible pay (annual)
INCOME TAX RATE IS HIGHER
(25 percent now, 35 percent after 20 years)
ROTH AFTER-TAX CONTRIBUTIONS
PRE-TAX CONTRIBUTIONS
$60,000
$60,000
Eligible pay (annual)
PAYCHECK EFFECT
Amount Fred has budgeted to
use toward retirement saving
contributions per pay period
(5% of pay)
$115.38
Less: Income tax based
on budgeted amount
(35% tax rate)
$40.38
Contribution to plan
$75.00
$115.38
Yearly contribution to plan
$1,950
$3,000
$73,775
Income tax due upon
distribution (25% tax rate)
$0
Net amount available after
income taxes
$73,775
$0
$28,375
$85,125
a year, over a 20-year period, with investments growing at 6 percent annually. Values may have slight rounding for ease of presentation. Actual
elections to the plan would be in percentages at the contribution level. This example does not account for salary adjustments over time.
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PRE-TAX CONTRIBUTIONS
$60,000
$60,000
PAYCHECK EFFECT
Amount Fred has budgeted to
use toward retirement saving
contributions per pay period
(5% of pay)
$115.38
$115.38
Less: Income tax based
on budgeted amount
(25% tax rate)
$28.84
$0
Contribution to plan
$86.54
$115.38
Yearly contribution to plan
$2,250
$3,000
ACCOUNT BALANCE EFFECT AFTER 20 YEARS
$113,500
Note: This simplified example is for illustrative purposes only. In this example, we assume that contributions are made equally over 26 pay periods
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ROTH AFTER-TAX CONTRIBUTIONS
$115.38
ACCOUNT BALANCE EFFECT AFTER 20 YEARS
Account balance after 20 years
(assumes 6% return)
Income Tax Rate Is Higher at the Time of Distribution … Consider Roth After-Tax Contributions
Now, let’s assume that Fred’s income tax rate is higher when he takes a distribution from the
TSA. The following example demonstrates why many financial and tax advisors believe that
Roth after-tax contributions, at these contribution levels, are financially more advantageous
when the income tax rate in effect at the time a distribution occurs is higher than at the time
the contributions were made.
Account balance after 20 years
(assumes 6% return)
$85,125
$113,500
Income tax due upon
distribution (35% tax rate)
$0
$39,725
Net amount available after
income taxes
$85,125
$73,775
Note: This simplified example is for illustrative purposes only. In this example, we assume that contributions are made equally over 26 pay periods
a year, over a 20-year period, with investments growing at 6 percent annually. Values may have slight rounding for ease of presentation. Actual
elections to the plan would be in percentages at the contribution level. This example does not account for salary adjustments over time.
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17
Uncertainty About Predicting Future Tax Rates
Predicting future tax rates is difficult. Keep in mind that your tax rate is not just a function of
your taxable income — federal taxes may change. Your taxes may also change if you move to a
different state or country after retirement. In addition, while you may believe your tax rate will
go down when you take a distribution from your retirement savings plan, this may not necessarily
occur because often significant deductions (such as your home mortgage deduction) may no
longer apply when you take a distribution from your plan in retirement. Additionally, federal or
state legislation could increase tax rates in response to federal or state budgetary constraints.
Also, if you are early in your career, your tax rate will usually increase as your income increases
while you advance in your career and get closer to retirement. This means that your tax rate now
could actually go up when you decide to take a distribution from your plan.
Fred Decides to Save Even More for Retirement
After considering whether to contribute on a pre-tax or Roth after-tax basis, Fred has decided
that instead of contributing at 5 percent of his eligible pay, he will contribute 10 percent of his
eligible pay. In this way, Fred builds an even greater nest egg for retirement. The following chart
compares Fred’s contributions at 5 and 10 percent, assuming the income tax rate stays the same.
Remember — the choice of pre-tax contributions or Roth after-tax contributions is your decision,
based on your personal situation.
INCOME TAX RATE IS THE SAME
(25 percent now, 25 percent after 20 years)
PERCENTAGE OF CONTRIBUTION TO RETIREMENT SAVINGS PLAN
5%
If you are uncertain about your future tax rates, you may consider contributing both on a pre-tax
and Roth after-tax basis. To learn more about tax diversification, refer to page 27 of this guide.
Eligible pay (annual)
10%
ROTH AFTER-TAX
CONTRIBUTIONS
PRE-TAX
CONTRIBUTIONS
ROTH AFTER-TAX
CONTRIBUTIONS
PRE-TAX
CONTRIBUTIONS
$60,000
$60,000
$60,000
$60,000
PAYCHECK EFFECT
Amount Fred has
budgeted to use
toward retirement
saving contributions
per pay period
$115.38
$115.38
$230.77
$230.77
Less: Income tax
based on budgeted
amount (25% tax rate)
$28.84
$0
$57.68
$0
Contribution to plan
$86.54
$115.38
$173.08
$230.77
Yearly contribution
to plan
$2,250
$3,000
$4,500
$6,000
ACCOUNT BALANCE EFFECT AFTER 20 YEARS
Account balance after
20 years (assumes
6% return)
$85,125
$113,500
$170,250
$227,000
Income tax due upon
distribution
(25% tax rate)
$0
$ 28,375
$0
$56,750
Net amount available
after income taxes
$85,125
$ 85,125
$170,250
$170,250
Note: This simplified example is for illustrative purposes only. In this example, we assume that contributions are made equally over 26 pay
periods a year, over a 20-year period, with investments growing at 6 percent annually. Values may have slight rounding for ease of presentation.
Actual elections to the plan would be in percentages at the contribution level. This example does not account for salary adjustments over time.
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19
ARE YOU SAVING ENOUGH?
A good rule of thumb is that you may need to replace 75 to 85 percent of your ending
salary in your retirement years — although individual circumstances may vary significantly.
If you are contributing less than 10 percent of your current pay to the plans, you may not
have sufficient retirement savings to meet that goal. If you started saving for retirement
late in your career, you may need to contribute more than 10 percent to catch up.
Roth After-Tax Contributions and Plan B Example
As a reminder, if you contribute the IRS maximum to the TSA or TSR, you may want to consider
contributing more on an after-tax basis to Plan B if you are eligible for that plan. After-tax
contributions in Plan B are not subject to the $17,500 (or $23,000 if age 50 or older) annual IRS limit.
Here’s an example of how you can save more with Plan B: Susan would like to maximize her
savings for retirement. She is 45 years old and her salary is $100,000. Now she also plans to make
TSR contributions up to the IRS maximum. Here’s how she can save even more by using Plan B.
If you need assistance deciding how much to save, consider talking to a financial advisor.
You may also contact Vanguard at 1-800-523-1188 or vanguard.com/retirementplans
for information about the advice services available to TSA and TSR participants.
PLAN AND TYPE OF CONTRIBUTION
AMOUNT
TSR pre-tax contributions
$9,000
TSR Roth after-tax contributions
$8,500
TSR COMBINED TOTAL CONTRIBUTIONS
$17,500
Plan B employer contribution of 5% of eligible pay ($100,000 x 5%)
$5,000
Plan B after-tax contribution1 ($100,000 x 10%)
$10,000
PLAN B COMBINED TOTAL CONTRIBUTIONS
$15,000
TOTAL RETIREMENT SAVINGS PLAN CONTRIBUTIONS (TSR + PLAN B)
$32,500
Susan’s total annual contribution is less than the annual IRS maximum of $52,000 ($57,500 if age 50 or older).
1 After-tax contributions are limited to 10 percent of eligible pay.
Note: Under Plan B, you can make after-tax contributions up to 10 percent of your annual eligible
pay. After-tax contributions in Plan B are also subject to an annual IRS maximum that limits
the total employer and employee contributions in all of your savings plans (known as defined
contribution plans). For 2014, this amount is $52,000 ($57,500 if age 50 or older). If you are a highly
compensated employee, you may receive a refund of your after-tax contribution so that Plan B
can satisfy certain IRS requirements.
Please refer to “Your Retirement Savings Plan Contribution Choices at a Glance” on page 8 for
more information about after-tax contributions in Plan B.
Learn More and Check Out the Roth Assessment Tool
To learn more about Roth after-tax contributions, go to
vanguard.com/rothfeature. There, you can use the Roth
assessment tool and compare Roth after-tax contributions
to pre-tax contributions.
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21
Roth In-Plan Conversions
Is a Roth In-Plan Conversion Right for You?
Just like making Roth after-tax contributions, deciding to elect a Roth in-plan conversion depends
greatly on your circumstances, including your current and future tax rates. As you weigh your
decision, here are some important questions to answer:
• How much tax will you owe for the Roth in-plan conversion? The amount you convert is
In addition to making Roth after-tax contributions, you also
have the opportunity to convert all or a portion of your existing
pre-tax savings in the TSA or TSR to a Roth after-tax account
within your retirement savings plan. This is known as a Roth
in-plan conversion.
Benefits and Costs
Just like Roth after-tax contributions, a Roth in-plan conversion could be a significant benefit,
especially if you expect to be at either the same or a higher income tax rate at the time of
withdrawal than you are when the Roth conversion is made. You can convert portions of your
pre-tax balance to a Roth after-tax account in the TSA or TSR at any time, even in multiple years.
subject to income taxes. These taxes could be significant and depend on the amount that
you convert and your tax rate.
• Do you have money outside the plan to pay your taxes? Vanguard will not withhold taxes
from a Roth in-plan conversion. This means you must pay the taxes for the year of conversion
from another source. Note: You will receive an IRS Form 1099-R for the tax year of the
conversion. This tax form will report this additional taxable income to the IRS.
• Will a Roth in-plan conversion have other adverse tax consequences? Electing a Roth
in-plan conversion may increase your taxable income for the year of the conversion,
which could push you into a higher income tax rate and/or cause you to lose valuable tax
credits and/or deductions.
• Can you wait five years after the Roth in-plan conversion before taking a distribution? If
you withdraw Roth in-plan conversion assets within five years of the conversion, you may lose
the Roth tax advantages. Note: A new separate five-year period applies to each conversion.
Any Roth in-plan conversion amount can be withdrawn tax-free if you are at least age 59½ and it
has been at least five years since the conversion. If you withdraw Roth in-plan conversion assets
within five years of the conversion, you will owe a 10 percent federal penalty tax on the portion
of the withdrawal that represents converted assets, unless you are age 59½ or older. Each Roth
in-plan conversion is subject to a separate five-year period.
Earnings attributable to a Roth conversion are tax-free if it has been five years since your first
contribution or conversion (whichever is earlier) and you are age 59½ or older. If you do
not meet these conditions, the portion of the withdrawal that represents earnings from the
Roth in-plan conversion is subject to ordinary income tax and may be subject to a 10 percent
federal penalty tax.
Important! You should weigh any potential future tax benefit against the tax cost of the
conversion. If you elect a Roth in-plan conversion, your pre-tax deferrals that are converted to
Roth funds become taxable income in the year of conversion. Vanguard will not withhold taxes
on a Roth in-plan conversion, so you must pay those taxes from another source. This may result
in a significant tax bill, so you need to be aware of the tax implications and plan for paying the
taxes related to a Roth in-plan conversion. In addition, a Roth in-plan conversion could push you
into a higher tax rate because the amount converted is added to your taxable income for the
year of the conversion.
A Roth in-plan conversion cannot be reversed. Because of the potential tax consequences,
we recommend that you consult a qualified tax advisor or financial planner before electing
a Roth in-plan conversion.
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23
Who Might Benefit From a Roth In-Plan Conversion
IS THIS YOU?
You expect your tax rate
to be the same or higher
in the future.
You think you may
have some years with
high expenses during
your retirement and
are interested in tax
diversification.
WHY YOU MIGHT BENEFIT
If you are at the same or a higher tax rate when you take a
distribution, you may benefit from a Roth in-plan conversion
because any distribution of Roth conversion amounts may
be tax-free.
If you convert a portion of your pre-tax savings to Roth, you could
benefit by having some of your TSA or TSR account taxed at
different rates. This can be beneficial in the event of changes to
tax rates or taxable income.
See “Consider Both Pre-Tax and Roth After-Tax Contributions”
on page 27 for more information on this topic.
Who Might Not Benefit From a Roth In-Plan Conversion
IS THIS YOU?
WHY YOU MIGHT NOT BENEFIT
You will need to access
your money within five
years of the in-plan
conversion or before
you reach age 59½.
If you withdraw Roth in-plan conversion assets within five years of
the conversion, you will owe a 10 percent federal penalty tax on the
portion of the withdrawal that represents converted assets. (Note:
A new separate five-year period applies to each in-plan conversion.)
You would find paying
the tax owed on the Roth
in-plan conversion difficult.
You must pay the taxes due on the conversion from another source
of money. In addition, the conversion amount might raise your
taxable income significantly enough to push you into a higher
federal income tax rate, or cause you to lose valuable tax credits
and/or deductions.
You expect your tax rate to
be lower when you take a
distribution from your Roth
account than it would be
at the time of conversion.
You may pay more in taxes when you convert than you would when
you receive a distribution of pre-tax savings.
Roth In-Plan Conversions and Rolling Over to a Roth IRA Are Not Identical
Although your plan permits Roth in-plan conversions, you may also be eligible to roll over
or convert all or a portion of your savings to a Roth IRA. Keep in mind that only assets that
you are otherwise eligible to withdraw (for example, due to a termination from employment
or as an age 59½ in-service withdrawal) can be converted to a Roth IRA. There are important
differences, including:
• You cannot undo (or recharacterize) a Roth in-plan conversion — even if the value of
your Roth account falls after the conversion. A Roth IRA conversion can be reversed back
to pre-tax savings by being “recharacterized” to a traditional IRA.
• You must take required age 70½ distributions from your TSA or TSR Roth in-plan
conversion account (unless you are still employed by KFH/KFHP or SCPMG), but not
from a Roth IRA. This could be an important difference if you wish to leave your Roth
account to your beneficiaries.
Note: To avoid IRS-required age 70½ distributions, after you leave your employer, you may
want to consider rolling over your TSA or TSR Roth account to a Roth IRA (before age 70½).
You may need to wait five years after the rollover to take a tax-free distribution of earnings
from your Roth IRA.
Earnings attributable to a Roth conversion are tax-free if it
has been five years since your first contribution or conversion
(whichever is earlier) and you are age 59½ or older. If you do
not meet these conditions, the portion of the withdrawal that
represents earnings from the Roth in-plan conversion is subject to
ordinary income tax and may be subject to a 10 percent federal
penalty tax.
A Roth in-plan conversion cannot be reversed. Because of the potential tax consequences,
we recommend that you consult a qualified tax advisor or financial planner before considering
a Roth in-plan conversion.
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25
Taxes on a Roth In-Plan Conversion
You will owe ordinary income taxes on pre-tax money converted to Roth for the year of
conversion. Because Vanguard does not withhold taxes for a Roth in-plan conversion, you must
pay these taxes with money from outside the TSA or TSR. Take a look at the following examples
for more information:
EXAMPLE 1: Jim Consider Both Pre-Tax and
Roth After-Tax Contributions
EXAMPLE 2: Jennifer
Jim has $21,000 of pre-tax money in
his TSA account. He elects a Roth in-plan
conversion of $6,000. Assuming his
combined federal and state tax rate is
28% and his tax rate does not increase
as a result of the conversion, he owes an
additional $1,680 in taxes for the year of
the conversion. Jim needs $1,680 outside
the plan to pay the additional taxes for
the Roth in-plan conversion.
Jennifer has $265,000 of pre-tax money
in her TSR account. She elects a Roth
in-plan conversion for $200,000.
Assuming Jennifer and her husband have
a combined federal and state tax rate
of 35% and their tax rate does not
increase as a result of the conversion,
they owe an additional $70,000 in taxes
on the conversion. As a result, they
will need $70,000 outside the plan to
pay the additional taxes for the Roth
in-plan conversion.
Account balance
$21,000
Account balance
$265,000
Roth in-plan
conversion amount
$6,000
Roth in-plan
conversion amount
$200,000
Taxes owed on conversion
$1,680
Taxes owed on conversion
$70,000
Not sure if you should save on a pre-tax or Roth after-tax basis?
Consider tax diversification — or holding both pre-tax and
Roth after-tax savings in your TSA or TSR account.
This may mean making some pre-tax and some Roth after-tax contributions. Or, it may mean
only converting a portion of your pre-tax savings to Roth. It may also mean keeping your current
account as pre-tax and making Roth after-tax contributions in the future.
Tax diversification could be beneficial especially if you expect to have major expenses
(for example, a house or a car) in your retirement years. Having a tax-free source of income to
pay for these expenses could be a huge help.
Consider the following example: Peter is retired and normally withdraws $50,000 of pre-tax
money per year from his TSR to pay his expenses. This $50,000 is subject to ordinary income taxes
each year. However, one year Peter needs to withdraw an additional $40,000 to pay unanticipated
expenses. If Peter only has pre-tax savings in his TSR, his taxable income for that year would
increase by $40,000 and could potentially push him into a higher tax rate. However, if Peter
withdraws the extra $40,000 from his Roth after-tax account, that amount would be tax-free
(provided he is age 59½ or older and he has held the Roth account for at least five years) and,
as a result, Peter’s taxable income would not change.
A strategy of tax diversification could be a wise choice for many participants. Remember, there are
certain situations when it may be an especially good idea and some when it may make less sense.
• If you’re financially well-prepared for retirement, the Roth features may make sense.
Strong savers and those with generous retirement benefits may have sizable taxable
income when amounts are withdrawn. Having Roth amounts that can be withdrawn
tax-free may be a big help.
Learn More About Roth In-Plan Conversions
For more information about Roth in-plan conversions,
go to vanguard.com/inplanconversion.
• If you’re not well-prepared for retirement, pre-tax contributions may make sense. Your
income — and tax rate — may be lower when the amounts are withdrawn. By making
pre-tax contributions, you’ll avoid paying taxes at a higher rate today and pay them at
a potentially lower rate when you take a distribution.
You should discuss your situation with a qualified tax advisor or financial planner.
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How to Get Started
With the New Roth Features
If you decide you’d like to make Roth after-tax contributions,
you can complete the transaction online. To do so:
1. Log on to your account at vanguard.com/retirementplans.
2. Select Manage my money. (If you have multiple accounts at Vanguard, you may need
to select Employer plans first.)
3. Select Change My Paycheck Deduction.
To elect a Roth in-plan conversion, call Vanguard Participant Services at 1-800-523-1188.
Associates are available Monday through Friday from 5:30 a.m. to 6 p.m., Pacific time
(8:30 a.m. to 9 p.m., Eastern time).
CONTACT VANGUARD
If you have any questions about the Roth after-tax features or would like to access
your account, you can contact Vanguard in the following ways:
• Online. Log on to your account at vanguard.com/retirementplans any time.
Not yet registered for immediate, secure online account access?
Go to vanguard.com/register. You will need your Vanguard plan number:
094998 for the TSA; 094480 for the TSR.
• Personal assistance. Vanguard Participant Services associates are available at
1-800-523-1188 Monday through Friday from 5:30 a.m. to 6 p.m. Pacific time
(8:30 a.m. to 9 p.m. Eastern time).
• Interactive Voice Response. Call Vanguard’s 24-hour interactive VOICE® Network
at 1-800-523-1188. You will need a personal identification number (PIN) to use
VOICE. To create a PIN, follow the prompts.
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Roth Questions and Answers
To help you better understand these features, here are some of
the top questions and answers about Roth after-tax contributions
and Roth in-plan conversions. Please read this information along
with the rest of this guide because there can be tax implications
to making these elections.
The tax and estate planning information contained herein is general in nature, is provided for
informational and illustration purposes only, and is not legal or tax advice. Kaiser Permanente does
not provide legal or tax advice. Kaiser Permanente cannot guarantee that the information is accurate,
complete, or timely. Laws of a particular state or other applicable laws may impact the applicability,
accuracy, or completeness of the information. Federal and state laws and regulations are complex and
frequently change. Kaiser Permanente does not assume any obligation to inform you of any subsequent
changes in the tax law or other factors that could affect the information contained herein. Always
consult an attorney, tax professional, or financial planner about your specific legal or tax situation.
3. How is the five-year period calculated for Roth after-tax contributions?
The five-year period begins on January 1 of the year you first make a Roth after-tax
contribution to the TSA or TSR. It ends when five consecutive years have passed. For
example, if you make the first Roth after-tax contribution to the TSA or TSR on September 1,
2014, the five-year period begins on January 1, 2014, and starting January 1, 2019, the Roth
money can be withdrawn tax-free after age 59½, death, or total and permanent disability.
(Keep in mind that separate five-year period rules apply for Roth in-plan conversions.
For information on the five-year period for Roth in-plan conversions, see question 2 under
“Roth In-Plan Conversions” on page 33).
4. What if my distribution doesn’t meet the five-year and age 59½ conditions?
If you take a distribution from your Roth after-tax account in the TSA or TSR before you
meet the conditions described in question 1 on the previous page, you pay ordinary income
tax (and generally a 10 percent federal penalty tax if less than age 59½) on the portion of
the distribution that represents earnings.
5. Are Roth after-tax contributions to the TSA or TSR subject to any limits?
Yes. Your Roth after-tax and pre-tax contributions to the TSA or TSR cannot exceed the
annual IRS contribution limit. If you make both Roth after-tax contributions and pre-tax
contributions to the TSA or TSR, the combined total cannot exceed the limit. For 2014, the
limit is $17,500 ($23,000 for age 50 or older catch-up contributions), so your total pre-tax and
Roth after-tax contributions for 2014 must not be greater than this annual amount.
For more information on IRS contribution limits, visit vanguard.com/contributionlimits.
Roth After-Tax Contributions
1. What are Roth after-tax contributions?
Roth after-tax contributions allow you to save on an after-tax basis. If you make Roth aftertax contributions, you pay taxes on that money when it is contributed and do not pay taxes
on the earnings when withdrawn if:
• The first Roth after-tax contribution was made at least five years earlier; and
• The withdrawal is after age 59½, death, or total and permanent disability.
2. What are the requirements for a tax-free distribution of Roth after-tax contributions?
In general, to take a qualified tax- and penalty-free distribution of your Roth after-tax
contributions and earnings, the first Roth after-tax contribution must have been made
at least five years earlier and the distribution must be after age 59½, death, or total and
permanent disability.
Note: Roth IRAs are subject to separate contribution limits. In addition, unlike a Roth IRA,
Roth after-tax contributions are not limited by your income.
6. If I contribute the maximum amount allowed in pre-tax and Roth after-tax contributions,
can I contribute any additional amount?
That depends. You can only make pre-tax and Roth after-tax contributions to the TSA
or TSR up to the annual IRS limit. However, if you are eligible to participate in the Kaiser
Permanente Supplemental Savings and Retirement Plan (Plan B), you can make after-tax
contributions in that plan above the annual IRS contribution limits.
Note: You should consider making after-tax contributions to Plan B only after you have
made the maximum pre-tax or Roth after-tax contributions to the TSA or TSR.
If you die, the five-year period carries over to your beneficiary. Once the five-year period is
satisfied, distributions to your beneficiary are tax-free.
See page 7 for more information on these conditions.
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Roth In-Plan Conversions
7. Do I have to take a distribution at age 70½ from my TSA or TSR Roth after-tax account?
Yes. You have to take an age 70½ required distribution from your TSA or TSR (unless you
are still employed by KFH/KFHP or SCPMG), regardless of whether you made pre-tax or
Roth after-tax contributions.
Note: You can avoid taking an age 70½ required distribution from your Roth account by
rolling it over to a Roth IRA after you leave KFH/KFHP or SCPMG. Please note that you will
not need to take an age 70½ required distribution from a Roth IRA during your lifetime, but
your beneficiaries will be required to take required minimum distributions after your death.
8. Can I roll over Roth money from a previous employer-sponsored retirement savings plan
to the TSA or TSR?
Yes. If you have Roth after-tax money in a previous employer-sponsored retirement
savings plan, you can roll it over to your TSA or TSR in the same way you can with pre-tax
contributions. When you make a direct rollover of Roth money from a previous employer plan,
the period those funds were in your Roth account under that previous employer’s plan counts
toward the five-year period. For more information, contact Vanguard at 1-800-523-1188.
9. What can I do with my Roth money once I leave KFH/KFHP or SCPMG?
You generally have the same options for your Roth account as for your pre-tax account in the
TSA and TSR. In most cases, you can leave your money in the plan or take a distribution. If you
request a distribution, the payment options are the same as those for your pre-tax account.
Please refer to the Summary Plan Description for details on distribution options.
10. Can I invest Roth after-tax money through my Vanguard Brokerage Option account in the
TSA or TSR?
Yes. Just like your pre-tax account, your Roth account can be invested through your
Vanguard Brokerage Option account. However, you cannot elect different investments for
your Roth and pre-tax accounts in your Vanguard Brokerage Option account. For example,
if you invest both your pre-tax and your Roth after-tax account through your brokerage
account, you cannot elect to invest your pre-tax account in one mutual fund and your
Roth after-tax account in another. Instead, your pre-tax and Roth after-tax accounts will be
invested proportionately in the mutual funds.
1. What is a Roth in-plan conversion?
A Roth in-plan conversion allows you to convert current pre-tax savings to Roth
after-tax money within the TSA or TSR. Money converted to a Roth after-tax account,
and any earnings on your in-plan conversion, can be withdrawn free of taxes when you
take a distribution provided certain rules are met as described in question 2 below.
2. What rules apply to a Roth in-plan conversion?
Money converted to a Roth after-tax account in the TSA or TSR, can be withdrawn tax- and
penalty-free when you take a distribution, if you are at least age 59½ and the conversion
happened at least five years earlier.
A new separate five-year period applies to each in-plan conversion. If you elect a Roth
in-plan conversion in different years, a separate five-year period will apply to each conversion.
Note: Different rules apply to earnings generated from money converted to a Roth account.
Earnings can be withdrawn tax- and penalty-free if you are at least age 59½ and it has
been at least five years since your first Roth after-tax contribution or your first Roth in-plan
conversion (whichever is earlier). A new separate five-year period does not apply to earnings.
3. Will a Roth in-plan conversion affect my tax rate?
If you elect a Roth in-plan conversion, your pre-tax deferrals that are converted to Roth
funds become taxable income in the year of conversion. In some instances, this could move
you to a higher tax rate or may cause other adverse tax consequences.
4. Are there other tax consequences of a Roth in-plan conversion?
In addition to the potential tax rate change mentioned in question 3 above, you should
consider the following before electing a conversion:
• There is no tax withholding from your TSA or TSR account for the conversion, so you
must pay those taxes from another source.
• You will pay taxes on the amount of a Roth in-plan conversion for the year of conversion.
You should consider that state and local income taxes may apply in addition to
federal taxes.
5. How are Roth in-plan conversions different than Roth after-tax contributions?
Roth in-plan conversions apply to existing pre-tax balances when a conversion is elected.
On the other hand, with Roth after-tax contributions, you elect to make a specific amount
of future Roth after-tax contributions to the TSA or TSR. Roth after-tax contributions can be
stopped at any time, but a Roth in-plan conversion cannot be reversed.
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6. What are the benefits of a Roth in-plan conversion?
A Roth in-plan conversion allows you to pay taxes on the conversion and then withdraw the
amount converted (and earnings) tax-free. This could be a benefit if you expect to be at
either the same or a higher income tax rate at the time of withdrawal than at the time of the
conversion. You should consult a tax or financial advisor who can provide examples of the
potential tax consequences before electing a Roth in-plan conversion.
7. Do I need to convert my entire balance at once?
No. You can elect a Roth in-plan conversion for all or a portion of your pre-tax savings within
the plan. You can also request multiple Roth in-plan conversions. (Note: Each Roth in-plan
conversion is subject to a separate five-year holding period.)
8. What happens if I withdraw Roth in-plan conversion account money within five years
of the conversion?
If you withdraw Roth in-plan conversion assets within five years of the conversion you will
owe a 10 percent federal penalty tax on the portion of the withdrawal that represents
converted assets, unless you are age 59½ or older.
A new separate five-year period applies to each in-plan conversion. If you elect a Roth
in-plan conversion in different years, a separate five-year period will apply to each conversion.
Earnings attributable to a Roth conversion are tax-free if it has been five years since your
first contribution or conversion (whichever is earlier) and you are age 59½ or older. If you
do not meet these conditions, the portion of the withdrawal that represents earnings
from the Roth in-plan conversion is subject to ordinary income tax and may be subject
to a 10 percent federal penalty tax.
9. Can I change my mind about electing a conversion?
A Roth in-plan conversion cannot be reversed. Because of the potential tax consequences,
we recommend that you consult a qualified tax advisor or financial planner before electing
a Roth in-plan conversion.
10. If I request a Roth conversion, can I convert my money back to pre-tax savings in
the future?
No. Even if the value of your Roth account falls because your investments lose value after
the conversion, a Roth in-plan conversion cannot be undone. However, you may be eligible
to convert all or a portion of your savings to a Roth IRA. A Roth IRA conversion can be
converted back to pre-tax savings by being “recharacterized” as a traditional IRA. You
should consult with a tax advisor or financial planner to go over all of your options before
electing a Roth in-plan conversion.
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All investing is subject to risk, including the possible loss of the money you invest.
The tax and estate planning information contained herein is general in nature, is
provided for informational and illustration purposes only, and is not legal or tax advice.
Kaiser Permanente does not provide legal or tax advice. Kaiser Permanente cannot
guarantee that the information is accurate, complete, or timely. Laws of a particular state
or other applicable laws may impact the applicability, accuracy, or completeness of the
information. Federal and state laws and regulations are complex and frequently change.
Kaiser Permanente does not assume any obligation to inform you of any subsequent
changes in the tax law or other factors that could affect the information contained
herein. Always consult an attorney, tax professional, or financial planner about your
specific legal or tax situation.
Kaiser Foundation Hospitals and Kaiser Foundation Health Plan, Inc. (KFH/KFHP) and
the Southern California Permanente Medical Group (SCPMG), as applicable, reserve the
right to amend or terminate any or all of the employee benefit plans described in this
document in any way and at any time. Such changes will be made in accordance with
the procedures contained in the official plan documents for the plan. You will be notified
if KFH/KFHP or SCPMG changes or terminates any of your employee benefits. In case
of any omission or conflict between what is written in this guide and in the official plan
documents, the official plan documents always govern.
Advice is provided by Vanguard Advisers, Inc., a federally registered investment advisor. Eligibility restrictions may apply.
Vanguard Brokerage Services is a division of Vanguard Marketing Corporation, Member FINRA.
Vanguard and VOICE are trademarks of The Vanguard Group, Inc.
ROTH GUIDE 2014
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