Capitalizing on the Retirement Opportunity
Jeff Van Keulen, National Sales Manager, Retirement Wealth
Strategies
Ameriprise Financial Services, Inc. Member NASD and SIPC.
©2006 Ameriprise Financial, Inc. All rights reserved.
For internal use only. Not approved for use with clients.
January 6, 2006
Rollovers are Hot
> Searching Rollover
IRA’s on ‘Google’
brings up 64,000 hits
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©2006 Ameriprise Financial, Inc. All rights reserved.
For internal use only. Not approved for use with clients.
2
Agenda
> Turning the new, more flexible portability rules
into opportunities
> Understanding the rollover and distribution options in
a Summary Plan Description (SPD)
> Understanding the distribution options generally
available to participants
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©2006 Ameriprise Financial, Inc. All rights reserved.
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3
Portability Options
Qualified Plan
(QP)
IRA
457
403(b)
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4
Qualified Plan
IRA
> In 2001, the IRS began to allow the roll over of after-tax
dollars to an IRA
> Considerations:
– After-tax basis in an IRA must be tracked by taxpayer
– All of a taxpayer’s IRAs are aggregated for determining aftertax/non-deductible basis
– IRS Form 8606 is filed each year distributions are made from any
of the IRA owner’s IRAs and when any after tax or non-deductible
dollars are added to the IRA
– After rolling after-tax dollars to an IRA, any IRA distribution will
include after-tax basis
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5
Example
> Qualified plan
After-tax basis available for withdrawal:
– No withholding
– No taxes
– No penalty
$50,000
Gain and pre-tax dollars
$50,000
After-tax basis
$100,000
Fair Market Value
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6
Government 457
IRA
> Governmental 457 plans
can be rolled to an IRA,
after triggering event
> Governmental 457 plans
can be amended to accept
rollovers from other
qualified plans
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7
Nonqualified Deferred
Compensation Arrangements
> Deferred compensation plans
– Distributions based on contract
– Portability rules do not apply
– Not rollable to IRA or other plans
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©2006 Ameriprise Financial, Inc. All rights reserved.
For internal use only. Not approved for use with clients.
8
403(b)
IRA
> Employer-sponsored and employee contribution 403(b)s
can be rolled to an IRA, after triggering event
> IRAs can be transferred to 403(b) plans, if 403(b) contract
or plan permits
> TSA balances may be transferred to other TSAs
while employed
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©2006 Ameriprise Financial, Inc. All rights reserved.
For internal use only. Not approved for use with clients.
9
Qualified Plan vs. an IRA
> Reasons to keep funds
in QP:
– Age 55 rule
– Loans
– Federal protection from
creditors
– Net Unrealized Appreciation tax
benefits
– Forward averaging for those
born before 1936
> Reasons to consider rollover to
an IRA:
– Generally more investment
choices
– Greater control over
distributions
– IRA owner versus qualified plan
participant
– Generally more flexible
beneficiary options
for heirs
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©2006 Ameriprise Financial, Inc. All rights reserved.
For internal use only. Not approved for use with clients.
10
Portability’s Main Point
> Understanding portability will help you:
– Differentiate yourself as a retirement expert
– Reassure clients that you consider all the alternatives when
creating a financial plan
– Position yourself to ask for referrals
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©2006 Ameriprise Financial, Inc. All rights reserved.
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11
Summary Plan Document Key Issues
> Distribution options
> In-service withdrawals, loans and hardship withdrawals
> Investment options
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12
Normal Retirement Age
> SPD Covers Normal Retirement Options
– Time specified in SPD stating when participant is entitled to a
distribution of all the amounts in the plan, typically age 65
– Generally, later of time participant attains age 65 or fifth
anniversary of initial plan participation
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13
Age 55 Rule
> If termination of employment occurs on or after
age 55, withdrawals are not penalized the
> 10% premature distribution penalty
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14
Qualified Plan Distribution Options
Cash Distribution*
Partial
Withdrawals
Partial IRA Rollover
Qualified Plan
Full IRA
Rollover
Income Stream
Distribution of
Employer Securities
* Including Forward Averaging
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15
Qualified Plan Distribution
Options Summary
> Cash Distribution (partial or full)
– Taking the dollars in cash: subject to income taxes,
20% withholding and possible 10% premature distribution penalty
– Forward Averaging*
> Distribution is taxed at 1986 tax rates
when withdrawn
> Lump sum distribution requirements must be met
> Must be born before January 1, 1936
> Cannot roll any portion of the lump sum distribution or forward
averaging is forfeited
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16
Qualified Plan Distribution
Options Summary
> Employer securities: in-kind distribution of qualifying
employer securities
– Lump sum distribution requirements* must be met for NUA
treatment for all securities, except the five year plan participation
rule does not apply
– Income taxes due on cost basis
– NUA taxed at capital gains rates
– For distributions not qualifying as a lump sum distribution, NUA tax
treatment applies only to securities purchased with after-tax
contributions
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17
Net Unrealized Appreciation
> The difference between the cost basis (the amount paid
at purchase) and the fair market value of the stock at the
time of distribution
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Net Unrealized Appreciation Example
???
Future Appreciation
Fair Market Value = $100/share
at time of distribution
1,000 Shares
NUA
$90/share
Cost Basis
$10/share
Basis = $10
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19
Net Unrealized Appreciation Example
???
1,000
Shares
$100/share $100,000
$10/share $ 10,000
Fair Market Value
= $100/share
NUA
$ 90,000
Further Gain
NUA
$90/share
Cost Basis
$10/share
Basis = $10
The $90,000 NUA would be
subject to Long Term Capital
gains taxes when stock is sold
rather than income taxes at time
of distribution if distribution is
done correctly
Always work with an Accountant
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20
Qualifying for Special Tax Treatment
> Forward Averaging and NUA
– At least one triggering event is met:
>
>
>
>
Age 59 ½
Death
Severance from employment
Disability (if self employed)
– Entire balance must be distributed within one year*
> For forward averaging, two additional requirements must
be met:
– Person must have been plan participant for at least five years
– Born before 1936
*For NUA, if this requirement is not met, NUA treatment applies only to employer securities purchased with after-tax dollars.
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21
Client’s 401(k)
> $350,000 Mutual Funds
> $100,000 Fair Market Value of company stock with a
$10,000 cost basis
> $70,000 Fair Market Value after-tax account with a
$40,000 cost basis
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22
IRA Rollover
> Direct Rollover the $350,000 in mutual funds to an
Ameriprise Financial IRA
– No 20% tax withholding
– No 10% early distribution penalty tax
– No taxes due on the distribution
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23
Company Stock
> Complete an “in kind” distribution of the company stock
–
–
–
–
No 20% withholding
10% early distribution penalty tax depending on age
Basis taxed as ordinary income
Later if you sell the stock, the profit is taxed at the capital gain rate
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24
After Tax Money
> $40,000 after tax cost basis distributed and $30,000 gain
in after tax account rolled to IRA
– No 20% withholding
– No 10% early distribution penalty tax
– No taxes due on the distribution
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25
Income Streams
> Annuitization:
– Qualified joint and survivor annuity based stream of income
– Certain plans are required to offer an annuity to
married participants
– No 20% withholding (if 10 years or more)
> Partial Withdrawals
–
–
–
–
May be allowed (plan document)
Changeable
May invalidate Lump Sum Distribution eligibility
20% withholding would apply
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26
Substantially Equal Periodic Payments
> Provide premature withdrawals from a qualified plan or
IRA without 10% penalty
> Payment amount is determined by one of three formulas
> Brentmark software can help determine payment amount
> SEPP rules are different for IRAs and Qualified Plans
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SEPP
> From IRA
– Income can be level or variable
– Duration: later of 5 years or age 59 ½
– Possible penalty:
> 10% premature distribution penalty tax on full amount distributed
> Proper forms need to be filed to waive 10% penalty (“code 2”
1099R or IRS form 5329)
more…
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28
SEPP
> From Qualified Plan
– Income can be level or variable
– Duration: later of 10 years or age 59 ½ to
avoid withholding
– Possible penalty: 20% withholding for income taxes on full distribution
– Special considerations
> SEPP from qualified plans make entire plan ineligible for rollover during
duration of SEPPs
> Election for Recipients of Periodic Payments must be filed with Plan
Trustee to avoid 20% withholding
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29
Question
> Are you aware that choosing one distribution option may
invalidate the ability to do another?
– Rolling employer securities to an IRA forfeits
NUA treatment
– For those eligible (born before 1936), rolling plan assets to an
IRA forfeits forward averaging treatment for entire lump
sum distribution
– Income stream payments from a qualified plan may make the
entire plan ineligible for rollover
– Income stream payments are also ineligible for rollover
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Question
> Do you know the tax consequences of each of these
distribution options?
> Taxes are dependent on the action taken:
– Due immediately
– Deferred
– Portion immediately taxed at regular income tax rates with a
portion at capital gains rate when sold
– Premature distribution penalty
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31
Question
> Are you aware that some distribution options
are irrevocable?
– Some options such as forward averaging cannot be reversed
once selected
– Taking an income stream commits the client to take distributions
for a specified period of time
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32
Question
> Are you aware that most distribution options are not
“all or nothing”?
> Participants can take an in-kind distribution of
some employer securities and roll the rest of the
securities and remaining plan assets to an IRA
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33
Accessing Qualified Plan Assets
During Employment
> In-service distributions
> Hardship distributions
> Loans
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Determine Eligibility
> The ability to take in-service distributions is
determined by the plan document
> Eligibility rules vary widely
> The only way to know the ‘ifs’ and ‘hows’ is to review
the plan document that the client can get from
the administrator
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35
Advantages of In-service Distributions
> Control and ownership
> Diversification
> Beneficiary options
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In-service Distribution Checklist
> Are in-service distributions right for my client?
> Issues/Concerns:
–
–
–
–
–
Retirement age
Highly appreciated employer stock
After-tax money
Creditor protection
Will it prohibit me from making future retirement
plan contributions?
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37
Death Distributions
> Spousal Beneficiaries
– Roll it to own IRA or another
qualified plan
– Leave it in plan in inherited status
– Distribute it
> Non-Spouse Beneficiaries
– Leave it in plan, if permitted
– Distribute it
– Cannot transfer or roll over to an
Inherited IRA
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38
Investment & Other Options
> Many 401(k) plans limit the number of choices
> IRAs generally offer more investment options and
more control
> Remember that a plan participant is not an owner of
the plan, but is only a participant bound by the rules
of the plan document
> An IRA holder is an owner and generally has more
flexibility and full control of the account
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39
Owner vs. Participant
> Diversification
– Some qualified plans limit investment options or force people to
follow complex self-directed options
– IRAs generally offer more investment options than qualified plan
> Plan participants do not ‘own’ the plan and are bound by
the rules of the plan document
> IRA holders are ‘owners’ which generally offers more
flexibility and control of the account
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40
Custodian Checklist
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41
What is a Stretch IRA?
> Stretch IRA Sample
Tom Stinson
IRA Owner
Anita Stinson, wife
Tom’s IRA beneficiary,
rolls to her own IRA
Ruby Harper,
Anita’s IRA beneficiary
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Stretch IRA Case Study
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43
Stretch IRA Case Study
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44
Stretch IRA Case Study
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45
Summary
> Portability of qualified plans, 403(b)s, 457s and IRAs
> Summary Plan Description
> Consolidation Ideas
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46
Thank You
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