IRA Rollovers I V T DOL RULE: YOUR OPPORTUNITY W I T H I F E P A C I F I C. For financial professional use only. Not for use with the public.

Transcription

1 IRA Rollovers W I T H H R I V T E L DOL RULE: YOUR OPPORTUNITY I F E P A C I F I C E A

2 TABLE OF CONTENTS You and the DOL Rule 2 Evaluate Best Interest 4 Your Opportunities 18 The Beauty of Age 21 Making Income Last 24 Required Minimum Distributions and Flexibility 31 Inherited IRAs 34 Benefits for Beneficiaries 38 More Resources 40 Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. No bank guarantee Not a deposit May lose value Not FDIC/NCUA insured Not insured by any federal government agency

3 WELCOME TO IRA ROLLOVERS DOL Rule: Your Opportunity With the advent of the new Department of Labor (DOL) Fiduciary Rule, there has been much focus on the topic of IRA rollovers. The rule hasn t changed the opportunities represented by IRA rollovers. For many clients, rollovers remain an important strategy for achieving their retirement goals. For financial professionals, rollovers can be a powerful way to grow your practice and deepen your value to clients. What has changed is the importance of understanding how to satisfy the intent of the rule as you and your client evaluate rollover strategies. Generally, recommendations regarding retirement accounts will now be held to a fiduciary standard of care and must be in the best interest of your client. This may call for renewed attention to three components of the rollover process: The education you provide to a client. The comparative evaluations you perform regarding each client s current situation versus the potential advantages of a rollover. The documentation you keep that details your client discussions. With those three points in mind, IRA Rollovers DOL Rule: Your Opportunity was created to: Provide enhanced clarity regarding the DOL Fiduciary Rule. Supply you with information, tools, and resources to help you evaluate your client s options. Help you uncover opportunities in today s IRA rollover market. Pacific Life is not affiliated with your financial institution. Remember that you must always follow your financial institution s policies, procedures, and guidelines regarding the DOL Fiduciary Rule and learn all you can about best practices for meeting the rule s intent. R I V E H T

4 YOU AND THE DOL RULE

5 The new DOL Fiduciary Rule will apply to investment recommendations made on or after June 9, 2017, with the applicability date for certain conditions of the rule and exemptions being moved to January 1, Therefore, beginning June 9, 2017, giving investment advice to a client regarding retirement accounts in return for compensation will be considered a fiduciary act. It is important to note that a financial professional acting as a fiduciary will be required to comply with the Impartial Conduct Standards, which requires all of the following: 1) Act in a client s best interest. 2) Charge reasonable compensation. 3) Avoid misleading statements. The full implementation of the Best Interest Contract (BIC) Exemption, including the contract requirement and requirements to implement policies and procedures, will be effective January 1, The BIC Exemption allows you to continue receiving compensation that may vary based on investment advice (for example, transaction-based payments such as commissions) if your firm enters into a contract that states you will act in your client s best interest. For level-fee fiduciaries who are adopting the streamlined BIC Exemption, a contract is not required. You need to ensure and be able to demonstrate that your advice is in the best interest of your client. So what does the rule say about whether IRA rollover advice can be considered a fiduciary act? If there is (1) no recommendation involved or (2) no compensation earned (whether direct or indirect), the DOL rule does not treat IRA rollovers as a fiduciary act. For example, if you provide general education or are not compensated, it would not be a fiduciary act. However, to satisfy the DOL rule, the BIC Exemption is not enough. You also need to act according to the contract s intent. In other words, you need to ensure and be able to demonstrate that your advice is in the best interest of your client. As we ll discuss throughout this guide, education, a comprehensive evaluation of the client s unique circumstances, and documentation are important elements of this new standard of care. You may also want to keep in mind the following concepts, located on the next page. 2

6 Grandfathering You may continue to receive compensation as a result of investment advice made prior to June 9, 2017, with certain limitations. However, any new advice with respect to grandfathered investments (investments made prior to June 9, 2017) must meet the best interest standards. Reasonable Compensation Ensuring that compensation is reasonable is a crucial component in making sure you re acting in the client s best interest. In terms of IRA rollovers, reasonable compensation includes a careful evaluation of: The market prices and benchmark for the options considered. The types of services provided by the client s current option versus the new option. The benefits being delivered to meet the investor s needs as a result of the new option. How your compensation compares to that of other financial professionals who have similar education and experience for the accounts and services provided. In conclusion, the DOL Fiduciary Rule has introduced a new way in which financial professionals must operate in order to continue providing retirement advice and services. It requires new procedures to manage and avoid conflicts of interest, the provision of proper disclosure, a comprehensive approach in determining whether advice is in the client s best interest, and an enhanced need to document all the factors considered leading up to any recommendation regarding retirement accounts. If you are registered with a broker/dealer, ensure you comply with its standards regarding the DOL rule, and learn all you can about best practices for meeting the rule s intent. 3

7 EVALUATE BEST INTEREST

8 As mentioned previously, one of the changes brought about by the new DOL Fiduciary Rule is an enhanced need for financial professionals to provide thorough, comparative evaluations regarding the benefits of a rollover (whether from a qualified plan or another IRA) versus leaving assets in a client s existing option. Therefore, it s important for financial professionals to evaluate and document such factors as: The fees and expenses of both the existing option and the proposed option. Whether the existing plan sponsor pays for some or all the plan s administrative expenses. The different levels of services and investments available under the existing option versus the proposed option. Access to loans under the existing option versus the proposed option. It should be noted that, according to the rule, only financial professionals electing the streamlined BIC Exemption as a level-fee fiduciary are required to document the issues in the bullets above. However, in a FAQ on the rule released by the DOL on October 27, 2016, the department stated that evaluating these issues is integral to a prudent analysis of whether a rollover is appropriate. Therefore, it would make sense for any financial professional seeking to meet best-interest standards to perform an analysis of such issues before recommending a rollover. One of the changes brought about by the new DOL Fiduciary Rule is an enhanced need for financial professionals to provide thorough, comparative evaluations regarding the benefits of a rollover. 4

9 To help you perform such an analysis and document your findings, you may want to use the following Pacific Life IRA Rollover Checklist. It is designed to help you and your client work together to consider a multitude of key factors in deciding whether an IRA rollover may be in his or her best interest. On the following pages, a copy of the checklist has been bound into this guide for your reference. Copies for use with your clients can be found in the back pocket. Additional copies can be ordered from the Pacific Life Financial Professionals website at Click the Order Literature button located on the left-hand side of the page. 5

10 H R I V T E W I T H L I F E P A C I F I C IRA ROLLOVER CHECKLIST In many instances, rolling over your retirement plan assets to an IRA can help you better achieve your retirement goals. Before making this decision, it s important to review key aspects of your financial situation and carefully evaluate the pros and cons that a rollover might offer. This checklist is designed to help you and your financial professional work together to perform such an evaluation. Walk through it, and ask questions along the way. After all, being informed, considering all the facts, and working with a financial professional can be a tremendous help in making sound decisions about your financial future. No bank guarantee Not a deposit May lose value Not FDIC/NCUA insured Not insured by any federal government agency 10/ A 6

11 GATHERING INFORMATION Client Information General Client Spouse Name Date of Birth Address Telephone Marital Status (Goal III * ) Number of Children (Goal III * ) Employment Employer Name Are you retired? (Y/N) If not, expected retirement year? Tax Current Tax Rate (Goal IV * ) Expected Retirement Tax Rate (Goal IV * ) Social Security Expected Age to Start Benefits Estimated Benefits (Annual) Other Level of Investment Expertise (i.e., novice, intermediate, expert) Risk Tolerance (i.e., conservative, moderate, aggressive) Liquidity Concerns (Goal I * ) (How much access to your retirement savings do you need?) Diversification Concerns (How important is having your retirement savings invested across a wide variety of asset classes?) Retirement Plan Assets (Please circle all plans whether active or inactive.) 401(k) 403(b) 457(b) Traditional IRA Roth IRA Pension SIMPLE IRA SEP-IRA Other 401(k) 403(b) 457(b) Traditional IRA Roth IRA Pension SIMPLE IRA SEP-IRA Other *The goal correlates with the section under Questions About Your Goals. 7

12 Client Information Client Spouse Other Yes No Yes No Will you receive (or are now receiving) pension income from an employer plan? (Goals I, III * ) Important Goals with Retirement Assets (Please check all that apply.) Continued Accumulation/Growth Tax Management Generate Retirement Income Now Provide Retirement Income in the Future Guaranteed Lifetime Income Healthcare Expenses Legacy Continued Accumulation/Growth Tax Management Generate Retirement Income Now Provide Retirement Income in the Future Guaranteed Lifetime Income Healthcare Expenses Legacy Is your intention to roll funds from your current plan/ira? If so, why? Existing Option vs. New Option Name of Current Plan/IRA Being Compared Obtained and Reviewed the Necessary Documents? Yes No (e.g., plan documents, quarterly statements, fee disclosure statements, etc.) List of Documents Reviewed Investments/Contributions Current Plan/IRA New IRA Answer: Yes or No (add details if needed) Yes No Yes No Do you/will you own company stock? Do you plan to keep the company stock in your new IRA? (Goal IV * ) Are you satisfied with the investment options available to you? (Goal II * ) *The goal correlates with the section under Questions About Your Goals. 8

13 Investments/Contributions Current Plan/IRA New IRA Answer: Yes or No (add details if needed) Yes No Yes No Will you be losing any guaranteed benefits? N/A N/A (i.e., guaranteed income, death benefit if you terminate your current plan/ira) (Goals I, II, III * ) Will any plan benefits be lost or suspended? N/A N/A (i.e., employer matching contributions; ability to take a loan if you elect to roll assets) (Goal II * ) Are you contributing to your current retirement plan/ira? Will you make contributions to your new IRA? (pretax or after-tax Roth account) (Goals II, IV * ) Is your employer matching contributions? (Goal II * ) N/A N/A Fees/Expenses Current Plan/IRA New IRA Answer: Yes or No (add details if needed) Yes No Yes No Do you know the fees and expenses of your plan/ira? (i.e., recordkeeping fees, investment fees, advisory fees) (Goal II * ) Are any fees paid by your employer? N/A N/A Will you incur surrender charges if you liquidate your current plan/ira? (If so, please list in Roll retirement plan assets to an IRA under Next Steps and Action Items.) N/A N/A Does your plan/ira charge a fee to facilitate payments to you? (i.e., required minimum distributions (RMDs), systematic withdrawals, distribution, rollovers, loans) (Goal I * ) *The goal correlates with the section under Questions About Your Goals. 9

14 Features/Services Current Plan/IRA New IRA Answer: Yes or No (add details if needed) Yes No Yes No Do you/will you receive any personal advice about investment options? If so, what fee do you pay for that advice? Will you receive ongoing investment management services? If so, what is the fee for those services? Are you looking for additional benefits that are not available in your current retirement plan/ira, such as lifetime distribution options? (Goal II * ) N/A N/A Are lifetime distribution options available to you? (Goal I * ) Are you satisfied with the income options available to your beneficiaries? (Goal III * ) *The goal correlates with the section under Questions About Your Goals. 10

15 Features/Services Current Plan/IRA New IRA Answer: Yes or No (add details if needed) Yes No Yes No Do you have an existing loan? N/A N/A Are nonhardship in-service withdrawals offered? (Goal II * ) N/A N/A Does the plan allow for multiple withdrawals? (i.e., rollovers, distributions) (Goal I * ) Does your plan/ira offer the option of a qualified longevity annuity contract (QLAC)? (Goals IV, V * ) N/A N/A Other/Miscellaneous Questions Client Spouse Answer: Yes or No (add details if needed) Yes No Yes No Do you have concerns about creditor protection? (Check state-specific information for IRA creditor protection.) Have you done any planning and analysis to meet healthcare needs in retirement? (Goal V * ) Any other matters/options that are important to you? If so, indicate below. *The goal correlates with the section under Questions About Your Goals. 11

16 EVALUATING OPTIONS Life Stage Considerations Younger than Age 59½ Additional 10% Federal Tax: Prior to age 59½, withdrawals may trigger an additional 10% federal tax, unless an exception applies. Governmental 457(b) Plans: The additional 10% federal tax does not apply to withdrawals from these plans. SEPP/72(t) Payments: One exception to the additional 10% federal tax is distributions that are substantially equal periodic payments over the IRA owner s life and must run for the longer of five years or until reaching age 59½. Separation from Service at or after Age 55: If a participant separates from service at or after the year he/she attains age 55, distributions from 401(k) and 403(b) plans do not incur the additional 10% federal tax. Loans: Loan privileges offered through the employer plan are not available with an IRA. Roth Conversion: Taxes are paid in the year of a conversion from an IRA to a Roth IRA in exchange for future tax-free income when qualified distribution rules are met, which means the Roth IRA account has been held for five years or more AND the owner has attained age 59½. Ages 60 through 70 Increase Social Security Benefits: Workers can receive increased Social Security benefits by waiting until age 70 to claim benefits. Income Bridge: If deferring Social Security benefits, individuals may want to build an income bridge to help them afford the things they need in the meantime (for example, by using an immediate annuity). Taxation of Social Security Benefits: Be cautious not to take unnecessary taxable income while receiving Social Security benefits. Doing so may increase the percentage of those benefits that are taxable (up to 85% of benefits may be included as income). Qualified Roth IRA distributions provide a tax-free source of income that is not taken into account when determining taxability of Social Security benefits. Ages 70½ and Older Lower RMD Amounts: The addition of a QLAC to an individual s retirement income plan may help manage tax liabilities by delaying RMDs from a portion of retirement assets while creating pension-like income to hedge against longevity risk. No RMDs from Roth IRA: Since RMDs are not required from a Roth IRA, individuals may accumulate greater savings to be used for retirement or to pass to beneficiaries. Note: When converting retirement assets to a Roth IRA, participants/owners will have to report income for the year the conversion takes place. Qualified Charitable Distributions (QCDs): Traditional IRA owners who are at least age 70½ can take advantage of the QCD rule to exempt an RMD from taxation (capped at $100,000 per taxpayer per year). QCDs are not permitted from other types of qualified plans such as 401(k) or 403(b) plans. Beneficiary Considerations: Individuals may want to limit the funds distributed to their beneficiaries. Some deferred annuity contracts may permit an owner to preselect how the annuity death benefit is paid to their beneficiaries (e.g., inherited IRA, annuity payments). Roth IRA Death Benefit: Upon death, Roth IRA assets pass income-tax-free to beneficiaries, assuming a five-year waiting period is satisfied. 12

17 Questions About Your Goals (As Identified in Client Information Section) Goal I. Guaranteed Lifetime Income Importance of More Guaranteed Income A. Are you concerned about running out of money in retirement? B. Does your current retirement plan/ira offer guaranteed income for life to cover your current or future income needs? C. How much will you receive (or are currently receiving) in pension income from an employer retirement plan? How much is the lump-sum payout? Will there be a reduction or elimination of benefits for your surviving spouse? D. If you will not be receiving pension income, would you be interested in receiving guaranteed income for one life or both lives? E. What are the requirements/restrictions on the frequency of withdrawals from your current retirement plan/ira that conflict with your needs? F. What fee does your current retirement plan/ira charge for: RMDs, systematic withdrawals, distributions, rollovers, loans? Goal II. Continued Accumulation/Growth Importance of Growth A. Itemize the list of current investment options available in your existing retirement plan/ira. How is the account allocated? B. Do you have an idea of the amount you will need for income in retirement? C. Are you saving enough to meet your anticipated income need? D. List the current fees and expenses that are being charged by your current retirement plan/ira that you are responsible for. 13

18 Goal II. Continued Accumulation/Growth Importance of Growth (continued) E. How much are you contributing to your current retirement plan? How much is your employer matching? F. How much are you contributing to your IRA (traditional or Roth)? G. What benefits from your current retirement plan will be lost/forfeited if you elect to roll assets to an IRA? H. What benefits from your IRA will be lost if you elect to roll assets to another IRA? I. What benefits are you looking to add to your current retirement account if you roll assets? Goal III. Legacy Importance of Passing Assets to Beneficiaries A. Is there a pension reduction for a surviving spouse? If so, how much? B. Are there any remaining pension benefits to non-spousal beneficiaries? C. Do you plan on passing assets or income to beneficiaries? If so, would you like/need to place restrictions on options/amounts they receive? 14

19 Questions About Your Goals (continued) Goal III. Legacy Importance of Passing Assets to Beneficiaries (continued) D. Do you have specific amounts you would like to leave to beneficiaries? E. Are your beneficiaries in a higher tax bracket than you? F. Does your current retirement plan/ira offer guaranteed and/or stepped-up death benefits? Goal IV. Tax Management Importance of Paying Less in Taxes A. Do you have a current need to manage taxes? B. Do you anticipate having a need for tax management in retirement? C. How much of your retirement plan consists of company stock, and what is the current value and/or cost basis? D. Would you like to better manage taxes by reducing your RMDs? 15

20 Goal V. Healthcare Expenses Importance of Covering Healthcare Expenses A. Have you planned for healthcare needs in retirement? If so, how much coverage have you purchased? Is the policy protected for inflation? B. If you don t have a healthcare plan, would you be interested in learning more about creating a plan? C. Do you currently have healthcare expenses? If so, how much? D. How much are you paying in Medicare costs (premiums, co-pays, deductibles)? Ideas to Consider Possible Solutions Tax management More guaranteed income in retirement Manage heathcare expenses Leverage guarantees for more tax-deferred or tax-free growth Leverage guarantees for more tax-deferred or tax-free income QLAC or Roth IRA Delay Social Security benefits Lifetime income solutions Guaranteed income from employer s pension plan Control taxable income to help pay for Medicare expenses Increase savings to help pay for Medicare expenses More options for legacy planning Predetermined beneficiary payout option Provide beneficiaries with a guaranteed death benefit Create lifetime income for beneficiaries Leave the funds within the retirement plan or existing IRA 16

21 DOCUMENT WHAT S NEXT Next Steps and Action Items Keep the funds within the existing retirement plan and/or IRA Roll retirement plan assets to an IRA (surrender charges may apply) Need More Information Personal information Current retirement plan and/or IRA information Goal information Other Our next meeting will be on / /. Please bring all requested information and/or documentation with you to our next meeting so that we can best determine next steps. This IRA checklist is to be used by you and your financial professional. Please do not return to Pacific Life. Pacific Life is a product provider. It is not a fiduciary and therefore does not give advice or make recommendations regarding insurance or investment products. Pacific Life, its affiliates, its distributors, and respective representatives do not provide any employer-sponsored qualified plan administrative services or impartial advice about investments and do not act in a fiduciary capacity for any plan. 17

22 YOUR OPPORTUNITIES

23 Performing an IRA rollover has long been an important strategy in helping to meet retirement objectives. But how do you know if a rollover may be the right strategy for a specific client? Certainly, rollovers are not appropriate in all situations, so it s important to ask all the applicable questions before finalizing a rollover decision. The IRA Rollover Checklist in the previous section of this guide will give you many of the essential questions that should be addressed in assessing if moving a client s funds from his or her current option to a new IRA makes sense. Identifying Rollover Opportunities Barring any circumstances that would not be in the client s best interest, there are several reasons a client might consider a rollover. Rollovers can help a client: Continue to save for retirement on a tax-advantaged basis (if the client is leaving an employer-sponsored plan and will continue to have earned income). Better manage his or her retirement assets by consolidating several retirement accounts into one. Access a broader selection of investment options than may be available within the current retirement plan. Gain a source of tax-free income in retirement through conversion to a Roth IRA. (Note: Taxes must be paid on the traditional IRA at the time it is converted to a Roth IRA.) Benefit from the option of guaranteed lifetime income, using an annuity, if that is not a feature offered by the client s current plan. Barring any circumstances that would not be in the client s best interest, there are several reasons a client might consider a rollover. Manage required minimum distributions (RMDs) during retirement through the use of a qualified longevity annuity contract (QLAC). Specify how his or her beneficiaries will receive inherited assets through a predetermined beneficiary payout option. Key Considerations When Evaluating IRA Rollover Options While an IRA rollover may be in the best interest of some clients, there may be instances in which leaving the assets in the current plan may be the best option. Below are some questions that you may want to ask as you help your client evaluate whether or not an IRA rollover is in his or her best interest. For a more detailed list of questions, including the list below, please see the IRA Rollover Checklist in the previous section of this guide. Do you know what your current fees and expenses are? Will any of your plan benefits be forfeited or suspended? Are you looking for additional benefits that are not currently available to you? Are you satisfied with the investment options currently available to you? 18

24 IRA Rollover Basics An IRA rollover is the act of moving assets, without tax consequences to the client, from an employer-sponsored plan into a traditional IRA. For the purposes of this guide, we will also discuss converting a traditional IRA to a Roth IRA. There is an up-front tax consequence to a conversion (taxes must be paid at the time of the conversion), but a client may be able to take income from his or her Roth IRA tax-free as long as he/she meets certain requirements. See the following for details. In considering whether an IRA rollover or Roth IRA conversion may be appropriate, it s important to keep in mind: The different types of IRAs. How IRAs compare to employer-sponsored plans. What kinds of assets are eligible for rollovers. While IRAs come in several forms, most fall into three categories: 1. Traditional IRA: A client with earned income and who is younger than age 70½ can contribute to a traditional IRA. Depending on the client s income level, traditional IRAs offer tax deductions for all or part of contributions. 2. Roth IRA: Roth IRAs allow a client to make contributions with after-tax money and offer no tax deductions. Investors pay taxes now and may enjoy tax-free income later. However, the client must hold his or her Roth IRA for at least five years and not take distributions before reaching age 59½ for the growth portion of the Roth IRA to be tax-free Inherited IRA: When an IRA owner dies, the designated beneficiary, if an individual, can establish an inherited IRA and start taking required minimum distributions. By spreading the death benefit over the beneficiary s own life expectancy, he or she can reduce current income-tax liability by not taking a lump-sum distribution. The beneficiary can also enjoy continued tax deferral on the assets remaining in the inherited IRA. For more on special considerations for inherited IRAs, see the Inherited IRAs section in this guide. 1 If a client has not reached age 59½, there are circumstances in which, as long as the client has held the Roth IRA for five years, he or she may still be able to take distributions tax-free. Examples include death, disability, or a first-time home purchase. See IRS Publication 590-B for a complete list. 19

25 Overview of IRA and Employer-Sponsored Plans Traditional IRA Roth IRA Defined Benefit Plan Defined Contribution Plan Eligible Participants - Must have earned income and be younger than age 70½. - Individuals with certain modified adjusted gross income levels may not be able to fully deduct contributions. - Must have earned income. - No maximum age restrictions. - Individuals with certain modified adjusted gross income levels may not be able to contribute. - Two years of service with employer (one year of service with employer for 401(k) plans). - Must be at least 21 years old. - Must work at least 1,000 hours per year. - Plans may offer less restrictive participation requirements. - Check with plan for specifics. Contribution Limit for 2017 $5,500 Maximum annual benefit $215,000 - Employee Salary Deferral: Lesser of 100% of compensation or $18,000 - Employer Profit Sharing: Lesser of 25% of compensation or $54,000 - Total Contribution: Lesser of 100% of compensation or $54,000 ($60,000 if age 50 or older) Catch-Up Contribution for 2017 $1,000 N/A $6,000 Taxation of Distributions Ordinary income Qualified distribution: no income tax Ordinary income Ordinary income and/or net unrealized appreciation Eligible Rollover Types Assets from these accounts: Traditional IRA Roth IRA Defined Benefit Plan Defined Contribution Plan May be rolled over into: - Another IRA - SEP-IRA - TSA/403(b) plan - 401(a) or 401(k) plan - 457(b) governmental plan - Individual(k) - Roth IRA 1 - SIMPLE IRA 2 Another Roth IRA - Another 401(a) or 401(k) plan - IRA - SEP-IRA - TSA/403(b) plan - 457(b) governmental plan - Individual(k) - Roth IRA 1 - SIMPLE IRA 2 1 When converting from a traditional IRA to a Roth IRA, taxes are due on the traditional IRA assets at the time of the conversion. 2 During the first two years after an employee s SIMPLE IRA is established, assets should not be rolled over or converted to any type of retirement account except another SIMPLE IRA. If distributions do not meet this two-year rule, they will be subject to an additional 25% federal tax. 20

26 THE BEAUTY OF AGE

27 When evaluating whether or not an IRA rollover may be in the client s best interest, here are two questions to consider: 1. What is your client s age? 2. What are your client s circumstances? The following charts will help you identify your client s circumstances and evaluate whether an IRA rollover may be an appropriate option to consider. Younger than Age 59½ Before a client reaches age 59½, he or she may not have thought about his/her IRA and employer-sponsored plan, and might be cautious about the possible additional 10% federal tax for distributions during this time of life. However, there are some strategies a client might consider. Circumstance Still employed and looking for income later Opportunities In-Service Rollovers If still employed, a client s current employer-sponsored plan may allow for nonhardship in-service rollovers, enabling the client to further diversify his or her overall portfolio and consider other options not offered through the current plan. Roth Conversions When a client is not looking to take distributions immediately, he or she may want to consider the potential benefits of converting to a Roth IRA. Taxes are due on the fair market value of the amount converted to a Roth IRA. However, a Roth IRA offers two advantages not found in a traditional IRA: 1. Tax-free earnings (if certain conditions are met). 2. No required minimum distributions (RMDs). Planning to retire early and looking for income now Three of the most common scenarios that are exempt from the additional 10% federal tax on early distributions are: 1. Substantially equal periodic payments (SEPP)/72(t) program. 2. Inherited IRAs established by beneficiaries. 3. Single-premium immediate annuities (SPIAs) with a lifetime payout option. Have other retirement assets tied to former employer plans and looking to plan for retirement income Consolidate Retirement Accounts Most pretax retirement accounts accumulated from prior employers retirement plans (i.e., 401(k), SEP-IRA, SIMPLE IRA 1 ) can be rolled over and combined into a single IRA for easier management of assets. 1 During the first two years after an employee s SIMPLE IRA is established, assets should not be rolled over or converted to any type of retirement account except another SIMPLE IRA. If distributions do not meet this two-year rule, they will be subject to an additional 25% federal tax. 21

28 Ages 60 to 70 In this age range, a client may be thinking about when to start retirement and how to make managing his or her sources of retirement income as simple and substantial as possible. The following strategies may help. Circumstance Planning to retire and looking for income now Opportunities A client can receive increased Social Security benefits by waiting until full retirement age or delaying until age 70 to claim those benefits. During this waiting period, a client may consider accessing other retirement assets to meet income needs and look to different rollover options to accomplish this. Be cautious in advising a client to take unnecessary taxable income while receiving Social Security benefits. Doing so may increase the percentage of those benefits that are taxable (up to 85% of benefits may be included as income). One possible option to help manage the taxes due on Social Security benefits: Consider a Roth IRA conversion before the client claims Social Security benefits. Although the conversion is taxable, this may provide a tax-free source of income in the future, as qualified distributions are not taken into account when determining taxability of Social Security benefits. Planning to retire and looking for income later A client could consider using a portion of his or her retirement assets to purchase a deferred income annuity (DIA), specifically as a QLAC, which may help reduce future RMDs and create pension-like income to hedge longevity risk. 22

29 Older than Age 70 If the circumstances are right, even a client older than age 70 may benefit from a rollover. The strategies involved depend on whether the client is more concerned about his/her own income needs versus leaving a legacy for beneficiaries. Circumstance More concerned with managing income needs Opportunities Converting to a Roth IRA With no RMD requirements, Roth IRAs provide more flexibility regarding how much income your client chooses to take at any one time. They also provide a possible source of income that may be income-tax free. Taxes are due on the fair market value of the amount converted. Important Reminders IRA: If a client has assets in a traditional IRA (including a SEP-IRA or SIMPLE IRA), he or she must begin taking RMDs no later than April 1 of the year following the year he or she turns age 70½. Employer-sponsored plans: If a client is not an owner of a business (5% or more ownership) and still employed by an employer that offers a qualified plan [i.e., 401(k) and 403(b)], he or she may be able to delay RMDs until April 1 of the year following the year of retirement. Guaranteed Income for Life A single-premium immediate annuity (SPIA) can guarantee steady lifetime income. Many payout options are available to help meet a client s specific income needs, and the annuitized portion may also help the client meet RMD requirements. A deferred income annuity (DIA) purchased with a portion of retirement assets specifically as a qualified longevity annuity contract (QLAC) could help reduce future RMDs and create pension-like income to hedge longevity risk. More concerned with providing a legacy to beneficiaries Legacy Planning with a Roth IRA Tax advantages for beneficiaries: If a client wants to help minimize taxes for beneficiaries, he or she can convert a qualified plan or traditional IRA to a Roth IRA. This may allow beneficiaries to access the Roth IRA portion of their inheritances without tax ramifications. Deferral advantages for Roth IRA owners: While traditional IRAs and inherited Roth IRAs have RMD requirements, Roth IRAs do not. Therefore, Roth IRAs (if they are not inherited) provide more latitude than a traditional IRA when it comes to deferring distributions. A client can accumulate assets in the Roth IRA for as long as he or she wishes and then pass them along to beneficiaries upon death. Beneficiary Considerations Updating beneficiary designations: Talk to your client to ensure he or she has named the appropriate beneficiaries. This will help avoid unintended consequences when transitioning assets. Predetermined beneficiary payout option: For a client who may be concerned about a beneficiary s ability to manage an inheritance, many annuity providers offer a predetermined beneficiary payout option. This option enables a deferred annuity contract owner to preselect a lifetime income payment method for each named beneficiary. For more information, see the Benefits for Beneficiaries section in this guide. 23

30 MAKING INCOME LAST

31 Many employer-sponsored plans do not offer participants options that create guaranteed lifetime income. In fact, in a recent Government Accountability Office (GAO) study, two-thirds of plans surveyed did not offer a withdrawal option (payments from accounts, sometimes designated to last a lifetime), and about three-quarters did not offer the option of an annuity. 1 In evaluating what may or may not be in your client s best interest when it comes to his or her retirement plan assets, an important consideration is the client s desire for guaranteed income in retirement. One potential benefit of rolling over assets from an employer-sponsored retirement plan to an IRA may be the ability to give your client an additional source of guaranteed lifetime retirement income through an annuity. Does Your Client s Plan Offer Guaranteed Lifetime Income Options? 1 Two-Thirds of Plans Do Not Offer Withdrawal Options Three-Quarters of Plans Do Not Offer an Annuity Option Annuities can help address the possibility that a client in retirement might outlive his or her income. This is called longevity risk, and is a very common concern among retirees. The following data underscores why: 2 Once a client reaches age 65, there is a 50% chance a male will live to age 87 and a female to age 90. For married couples, there is a 50% chance that one spouse will live to age 94, and a 25% chance that one will live to age 98. This means a client may have to manage retirement savings over a period of 30 to 35 years. To hedge against longevity risk, it s important to carefully evaluate how much guaranteed lifetime income each client may need in retirement given his or her future expenses. Social Security benefits may provide a portion of guaranteed lifetime income. Yet, for many clients, Social Security benefits may not be enough. Supplementing Social Security benefits with an annuity may be one solution that could help your client create the lifetime income he or she needs. On the following pages, a copy of the Pacific Life Income & Expense Worksheet has been bound into this guide for your reference. The worksheet can be used to help your client determine his or her income gap. Copies for use with your clients can be found in the back pocket of this guide or ordered from the Pacific Life Financial Professionals website at Click the Order Literature button located on the left-hand side of the page. 1 GAO Highlights. 401(k) PLANS: DOL Could Take Steps to Improve Retirement Income Options for Plan Participants. United States Government Accountability Office. August Society of Actuaries. RP-2014 Mortality Tables Report. October 2014 (Revised November 2014). Annuity guarantees are subject to the claims-paying ability and financial strength of the issuing insurance company and do not protect the value of the variable investment options, which are subject to market risk. 24

32 Income & Expense Worksheet According to Employee Benefits Research Institute, 1 nearly two-thirds (64%) of workers say they are a lot (36%) or a little (28%) behind when it comes to planning and saving for retirement. As you approach retirement, part of your planning may include creating a retirement income strategy that will provide you with predictable, guaranteed income. This worksheet can help you and your financial professional determine how much monthly income you may need in retirement to support your everyday expenses and the amount of assets you have available to fund these needs. Monthly Income Guaranteed Retirement Income Social Security $ Traditional Pension Annuity Payments Wages, Salaries, Tips Dividends Other Income Interest Rental Income Other Total $ Monthly Expenses Necessary Discretionary Mortgage/Rent $ $ Housing Utilities (electricity, water, cable) Repairs/Improvements Insurance Food Groceries Dining Out Car Payment Transportation Car Insurance Other Expenses (gas, repairs) Public Transportation 1 Helman, Ruth, et al. The 2015 Retirement Confidence Survey: Having a Retirement Savings Plan a Key Factor in Americans Retirement Confidence. Employee Benefit Research Institute, Issue Brief No April

33 Monthly Expenses (cont.) Necessary Discretionary Health Insurance $ $ Long-Term Care Medicare Healthcare/Medical Co-pays Vision/Dental Other Out-of-Pocket Expenses Clothing Personal Other Dependent Care Children/Grandchildren/Parents Local (movies, theater) Entertainment Travel Hobbies Federal State Taxes Local Property Other Credit Cards Debt Payments Other Gifts Charity Other Pets Life Insurance Total $ $ Total Necessary Expenses Total Discretionary Expenses Total Monthly Expenses $ + $ = $ How much additional income will you need to cover your expenses? Total Monthly Income Total Monthly Expenses Income Gap $ $ = $ 26

34 Now that you have determined how much additional income your savings must generate to cover the income gap, complete the rest of the worksheet to determine the assets available for funding your retirement needs. Assets 401(k), 403(b), 457 $ Retirement Savings Traditional IRAs Roth IRAs Annuities Stocks Investments Bonds Mutual Funds Money-Market Funds Savings Cash Checking Certificates of Deposit Other Real Estate Primary Residence, Vacation Home, Rental Property Life Insurance Cash Value Other Total Assets $ Will you be using all your assets to fund your retirement? For example, you may not plan on using the proceeds from the sale of your home or surrendering your life insurance policy. Assets Not Dedicated to Retirement Funding Primary Residence $ Life Insurance Cash Value Legacy Desires (inheritance for loved ones) Other Total $ Total Assets Assets Not Dedicated to Retirement Funding Assets Available for Funding Retirement Needs $ $ = $ The assets available for funding your retirement needs may be used to generate the additional income needed to cover the gap identified on the previous page. 27

35 Using Annuities for Guaranteed Income One option for generating additional guaranteed income to cover the income gap is the use of an annuity. There are basically four annuity product types from which to choose. There is a spectrum of annuity products offering different levels of guaranteed income or decision-making control. Certain clients may decide to forgo guaranteed interest rates in exchange for a product that may provide asset growth and greater access to account values. Variable annuities, for example, are long-term investments that may offer greater growth potential than fixed annuities, which may result in higher future income. However, they also carry greater investment risk and may lose value as markets decline. Higher Guaranteed Income DEFERRED INCOME ANNUITY Income Later IMMEDIATE ANNUITY Income Now FIXED INDEXED ANNUITY with Optional Income Rider Income Now or Income Later VARIABLE ANNUITY with Optional Income Rider or Partial Annuitization Income Now or Income Later Lower Control Higher 28

36 The main comparison points between these product types are as follows: Single-Premium Immediate Annuity (SPIA) Deferred Income Annuity (DIA) Fixed Indexed Annuity (FIA) Variable Annuity (VA) For clients needing: Income now Income later Income now or later How It Compares May provide the maximum amount of guaranteed income now. Provides guarantees for future income. Provides growth potential through interest crediting based on the positive performance of an index, subject to a maximum interest rate or cap. Provides growth potential through a broad selection of investment options. How It Works Client makes a purchase payment and, when the contract is issued, immediately begins receiving income. Client makes a purchase payment or series of payments and receives income at a later date chosen by the client. Client allocates purchase payments among a choice of interest-crediting options, including a fixed account option and options that earn interest based on any positive movement of a market index. Client allocates purchase payments among a wide variety of investment options. Access to Contract Values No No Yes, through withdrawals. However, amounts exceeding the free amount may be subject to a withdrawal charge. Withdrawals from a fixed indexed annuity may be subject to a market value adjustment (MVA). If younger than age 59½, an additional 10% federal tax may apply. Withdrawals of taxable amounts are subject to ordinary income tax. Market Risk None None None Yes Income Options Immediate, guaranteed income payments. Guaranteed income payments beginning at a later date. - Annuitization. - Purchase of a guaranteed minimum withdrawal benefit (GMWB) for an additional cost. - Annuitization. - Partial annuitization. - Purchase of a guaranteed minimum withdrawal benefit (GMWB) for an additional cost. Withdrawals will reduce the contract value and the value of the death benefit and may reduce the value of any optional benefits. The value of the variable investment options will fluctuate so that shares, when redeemed, may be worth more or less than the original cost. Given the characteristics of these annuity product types, consider having a conversation that explores such questions as: How soon do you need income? How important is guaranteed income versus growth potential or access to cash value? What are your liquidity needs? How much control over the contract do you want? 29

37 Qualified Longevity Annuity Contracts (QLACs) Help Reduce Taxes and Increase Lifetime Income One source of guaranteed income a client might consider is a fixed, deferred income annuity (DIA) as a qualified longevity annuity contract (QLAC). On July 1, 2014, the U.S. Department of the Treasury released final regulations on QLACs. The main goal of QLACs is to make DIAs more accessible to retirement plans (for example, traditional IRAs) and provide retirees: More options to manage retirement income. The ability to defer required minimum distributions (RMDs), which can help with tax management. If your client has a retirement plan that does not offer a QLAC option, rolling over into a traditional IRA may be a way to give the client access to QLAC benefits. How a QLAC Works A QLAC is funded by purchasing a DIA with a portion of a client s traditional IRA or other qualified assets, either with a lump sum or a series of purchase payments. On a specified future date chosen by the client, the QLAC will begin to generate steady, guaranteed lifetime income. In addition to guaranteed lifetime income, QLACs offer a tax-management opportunity for clients. This is because traditional IRA assets used to purchase a QLAC will not be included in calculating the client s RMDs when he or she reaches age 70½. Therefore, if the client doesn t need additional income, he or she may be able to withdraw less from his/her traditional IRA in order to meet the RMD requirements, resulting in less income exposed to taxation. In order for the contract to be eligible as a QLAC, certain requirements under Treasury regulations must be met, including limits on the total amount of purchase payments that can be made to the contract. Qualified contracts, including traditional IRAs, Roth IRAs, and QLACs, are eligible for favorable tax treatment under the Internal Revenue Code (IRC). Certain payout options and certain product features may not comply with various requirements for qualified contracts, which include required minimum distributions and substantially equal periodic payments under IRC Section 72(t). Therefore, certain product features, including the ability to change the annuity payment start date and to exercise withdrawal features, may not be available or may have additional restrictions. 30

38 REQUIRED MINIMUM DISTRIBUTIONS AND FLEXIBILITY

39 As clients approach age 70½, they must begin taking required minimum distributions (RMDs) from qualified plans, unless they are still working and not a 5% or more owner of the business. Some might consider rolling over qualified plan assets into a traditional IRA to gain more flexibility in how those assets are distributed. As discussed earlier, many employer-sponsored plans do not offer the wide variety of distribution choices available to IRA account owners. The more distribution options the client has, the greater the opportunity to hedge against longevity risk (see the subsection titled Using Annuities for Guaranteed Income in the Making Income Last section), manage taxes (see the QLAC discussion in the Making Income Last section), and address legacy goals (see the Benefits for Beneficiaries section). Another strategy is to consider converting funds into a Roth IRA. While this triggers a taxable event at the time of the conversion, it can help clients who want to manage their RMDs because, once assets are in a Roth IRA, there are no RMD requirements. Understanding RMDs Clients considering a rollover into a traditional IRA should be aware of the RMD requirements they ll face at age 70½ so that they can prudently create a long-term retirement income strategy. Generally, RMDs start in the year the owner of a traditional IRA reaches age 70½. However, an owner can defer taking his or her first RMD up to April 1 of the following year. If the IRA owner does defer payment (i.e., the first RMD is taken between January 1 and April 1 of the following year), the IRA owner will also have to take his or her second RMD (or current-year RMD) by December 31 of that same year. Failure to begin taking RMDs could trigger an excise tax equal to 50% of the amount required for distribution. How to Calculate RMDs for IRAs During the IRA owner s lifetime, RMDs are generally calculated based on the Uniform Lifetime Table in IRS Publication 590-B, which is the equivalent of the joint life expectancies of the IRA owner plus a spouse not more than 10 years younger. It does not matter whether a spouse is actually named; all IRA owners may use the Uniform Lifetime Table. If an IRA owner s spouse is the sole beneficiary and more than 10 years younger, the actual life expectancies of the IRA owner and the spouse (which can be found in the Joint Life and Last Survivor Expectancy Table) may be used instead of the Uniform Lifetime Table. Owners with several IRAs can calculate the RMD for each account separately and do one of the following: Take the entire distribution from one account. Take the distribution from a combination of accounts. However, only like-kind retirement plans can be aggregated for RMD purposes. For example, if an owner has a traditional IRA and TSA/403(b), the IRA RMD can be taken only from the IRA account, and the TSA/403(b) RMD can be taken only from the TSA/403(b) account. 31

40 To calculate RMDs for deferred annuity contracts, you need the following two items: 1. The contract value plus actuarial present value (APV) of any additional benefits as of December 31 of the previous year. Additional benefits include items such as death benefits and living benefits. Exceptions to additional benefits are: - Guaranteed return-of-premium (ROP) death benefits. - Benefits with pro rata reductions for withdrawals, provided the APV of the benefit is not more than 20% of the contract value. 2. Life expectancy factor. For all owners, except those with a sole beneficiary who is a spouse more than 10 years younger, the life expectancy factor will be based on the owner s attained age during the year and the Uniform Lifetime Table. For owners with a sole beneficiary who is a spouse more than 10 years younger, the life expectancy factor will be based on ages attained during the year and the Joint Life and Last Survivor Expectancy Table. To determine the life expectancy factor, consult the Life Expectancy Tables found in IRS Publication 590-B. The RMD is calculated as follows: Preceding year December 31 contract value + the APV of any additional benefits (year-end balance) Life expectancy factor = RMD amount Hypothetical Example 1. Wayne will turn age 70½ in November of this year and plans to take an RMD from his IRA, which is invested in a deferred annuity contract with no additional benefits. The sole beneficiary of the IRA is Wayne s spouse, Susan, age 65. The year-end balance of Wayne s IRA is $289,000. Since Susan is not more than 10 years younger than Wayne, the Uniform Lifetime Table would be used. The life expectancy shown below is for attained age 70. Year-end balance $289,000 Life expectancy factor 27.4 = RMD amount $10,547 32

41 2. On the other hand, if Susan were more than 10 years younger than Wayne (for example, age 55), the Joint Life and Last Survivor Expectancy Table would be used. The life expectancy factor shown below is for attained ages 55 and 70. Year-end balance $289,000 Life expectancy factor 31.1 = RMD amount $9, If Wayne s deferred annuity contract offers a death benefit that guarantees the greater of a return of premium or the step-up value on any anniversary, the calculation needs to include the APV of that death benefit. For example, let s say the annuity company has determined that the APV of the death benefit is $60,000. Since that is greater than 20% ($57,800) of the contract value as of December 31 of the preceding year, the APV must be added to the contract value when calculating the RMD. Year-end balance: $349,000 ($289,000 + $60,000) Life expectancy factor 31.1 = RMD amount $11,222 Pacific Life offers an online calculator to help determine a client s RMDs. To access this calculator, go to the Pacific Life Financial Professionals website at and click the Calculators & Illustrations button located on the left-hand side of the page. Note that the RMD calculation differs slightly for inherited IRAs. Also, this calculator does not calculate the APV of additional benefits. For more information, see the next section of this guide. 33

42 INHERITED IRAs

43 There was a time when a non-spousal beneficiary was not allowed to roll qualified retirement plan assets [for example, 401(k), governmental 457(b), or 403(b) assets] to an inherited IRA. Therefore, qualified retirement plans would typically require non-spousal beneficiaries to receive the assets in a lump sum, creating a tax liability on the entire amount. However, because of the Pension Protection Act of 2006 (PPA) and the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA), this is no longer the case. Today, a non-spousal beneficiary may roll inherited qualified retirement plan assets directly into an inherited IRA. This enables the beneficiary to continue to benefit from tax-deferred growth potential and better manage the tax impact of distributions. A non-spousal beneficiary of a qualified plan may also convert the inherited plan assets by directly rolling to an inherited Roth IRA (IRS Notice ). The election to move the beneficiary proceeds from the qualified plan to the inherited Roth IRA will be subject to income tax. You or your client should check with the plan s administrator to find out about plan requirements. When considering a rollover into an inherited IRA, there are several special factors to keep in mind: Distributions from inherited IRAs are not subject to the additional 10% federal tax. Beneficiaries cannot make their own traditional IRA or Roth IRA contributions into an inherited IRA (either traditional or Roth). When establishing and/or transferring inherited IRA assets, beneficiaries must transfer funds directly. Inherited IRA assets can be combined only if they are from the same decedent. IRA Death Benefit Distribution Options Depending on whether an IRA owner dies before or after the required minimum distribution (RMD) beginning date (generally age 70½), beneficiaries have the choice of any of the following options to take distribution of their individual interest in the death benefit. 1. IRA Owner s Death Occurs before the RMD Beginning Date Spousal Beneficiary Non-Spousal Beneficiary Trust Beneficiary Lump Sum Five-Year Rule Distribute entire contract value by December 31 of the fifth year following the year of the IRA owner s death Lifetime Payments Such as systematic withdrawals or annuitized payments Paid over the beneficiary s life expectancy. Must begin by December 31 of the year following the year of the owner s death. Paid over the oldest beneficiary s life expectancy. 1 Must begin by December 31 of the year following the year of the owner s death. Roll Over to Individual IRA N/A N/A 1 The trust must meet the following conditions: (1) valid under state law, (2) irrevocable or became irrevocable upon the death of the IRA owner, (3) the beneficiaries of the trust are identifiable from the trust instrument, and (4) copy of the trust or a certified list of all beneficiaries (including contingent and remaindermen) must be supplied to the IRA provider by October 31 of the year following the year of the IRA owner s death. 34

44 1I. IRA Owner s Death Occurs after the RMD Beginning Date Spousal Beneficiary Non-Spousal Beneficiary Trust Beneficiary Lump Sum Lifetime Payments Such as systematic withdrawals or annuitized payments Paid over the longer of the beneficiary s or owner s life expectancy. Must begin by December 31 of the year following the year of the owner s death. Paid over the longer of the oldest beneficiary s or owner s life expectancy. 1 Must begin by December 31 of the year following the year of the owner s death. Roll Over to Individual IRA N/A N/A Calculating Inherited IRA RMDs Owners of inherited IRAs who choose systematic withdrawals should be aware that RMDs that are not withdrawn may be subject to a 50% excise tax. Therefore, it s important to know the rules for calculating inherited IRA RMDs and to take them in a timely manner. The key to understanding these rules is that the RMD calculation for inherited IRAs is similar to the rules for traditional IRAs (see the previous section of this guide). However, only the Single Life Table can be used. By taking withdrawals over a single life expectancy, beneficiaries will be able to: Receive distributions for years to come. Continue tax deferral on any gains within the inherited IRA. Manage the tax impact on the distribution. The calculation is: Year-end balance Single life expectancy factor = RMD amount Determining the Life Expectancy Factor To determine the beneficiary s single life expectancy factor, consult the Single Life Table found in IRS Publication 590-B. Note that spousal beneficiaries of IRAs use a different life expectancy calculation method than other beneficiaries. 1 The trust must meet the following conditions: (1) valid under state law, (2) irrevocable or became irrevocable upon the death of the IRA owner, (3) the beneficiaries of the trust are identifiable from the trust instrument, and (4) copy of the trust or a certified list of all beneficiaries (including contingent and remaindermen) must be supplied to the IRA provider by October 31 of the year following the year of the IRA owner s death. 35

45 For Spousal Beneficiaries of Inherited IRAs Spouses do not typically use an inherited IRA unless they are younger than age 59½ and want to avoid the 10% federal tax for taking a distribution. If a client does have an inherited IRA from a spouse: Use the single recalculated life expectancy to calculate the RMD. Each year, a different life expectancy from the IRS table is used. For example: - A spousal beneficiary who is age 50 as of December 31 of the year following the year of the IRA owner s death will use a life expectancy factor of 34.2 years for the first year of the calculation. The following year, use a life expectancy factor of 33.3 years. The life expectancy factor is recalculated for each subsequent year. Distributions must begin by the later of: - December 31 of the year following the year of the IRA owner s death. - December 31 of the year the IRA owner would have attained age 70½. For Non-Spousal Beneficiaries of Inherited IRAs Each beneficiary will have the ability to use his or her own life expectancy in calculating the RMD, provided they each: - Establish themselves as a designated beneficiary by September 30 of the year following the year of the IRA owner s death. - Set up separate accounts and take the first distribution by December 31 of the year following the year of the IRA owner s death. The first year s life expectancy factor is determined using the beneficiary s attained age as of December 31 of the year following the year of the IRA owner s death. Each subsequent year, the remaining life expectancy factor will be reduced by one. Example - A non-spousal beneficiary who is age 40 as of December 31 of the year following the year of the IRA owner s death would have a first-year single life expectancy factor of The second year s factor will be 42.6 (43.6 1). Distributions must begin by December 31 of the year following the year of the IRA owner s death. 36

46 Inherited IRA Illustration The power of this distribution technique is illustrated below. In this example, if a 42-year-old non-spousal beneficiary inherits a $300,000 IRA and takes distributions in the form of an inherited IRA, he or she may receive distributions over 40.7 years, totaling $1,048,774. The RMD amount would differ from year to year, based on the previous year s account value as of December 31. Assumptions At the death of the 65-year-old IRA owner, the non-spousal beneficiary is age 42 and the account value is $300,000. Growth rate: 5%. First-year single life expectancy factor: Distributions are taken at the beginning of the year. Required Minimum Distributions $70,000 $56,000 $42,000 $28,000 $14,000 $ This is a hypothetical example for illustrative purpose only. It does not reflect a specific annuity, an actual account value, or growth rate. Source: Pacific Life Inherited IRA Distributions Calculator, December

47 BENEFITS FOR BENEFICIARIES

48 Another important consideration when evaluating whether or not an IRA rollover is in your client s best interest is legacy planning. Is your client interested in passing a portion of his or her assets on to the next generation? If so, does the current plan provide any form of a death benefit guarantee? Rolling over qualified plan assets into an IRA may help with legacy goals. For example, by using an annuity within an IRA, a client may gain the opportunity to help provide for beneficiaries through three unique annuity contract features: Death benefit protection that helps mitigate the effect of market volatility on the client s legacy. Most companies provide a death benefit guarantee that is the greater of either account value or total premium, adjusted for withdrawals. A choice of death benefit distribution options that provides beneficiaries the flexibility to adjust payments to meet their needs. Predetermined beneficiary payout options that enable a client to control how the death benefit is distributed to beneficiaries. Giving Your Client Control: Predetermined Beneficiary Payout Options It s not unusual for a client to be concerned that a beneficiary is too young to manage assets, easily influenced, or fiscally irresponsible. For such a client, many annuities offer a predetermined beneficiary payout option. The advantages include: The client can determine how and when beneficiaries will receive payouts. RMD requirements must still be met. Tax-deferral benefits are extended (compared to allowing a beneficiary to take a lump-sum distribution that is subject to immediate taxation). Generally available at no extra cost and can be added, removed, or changed at any time. Only your client, as the owner, can change or cancel the option. Available for traditional and Roth IRA annuity contracts that have not yet been annuitized. Can provide different income options to meet the needs of different beneficiaries. 38

49 Common Scenarios for Predetermined Beneficiary Payout Options Scenario A beneficiary has difficulty managing finances. Strategy Beneficiary with Full Restriction Select either the annuity or scheduled payout option. This will limit the distributions for the life of the beneficiary. A beneficiary is relatively young, and, although the client does not want him or her to have access immediately to all the money, the intent is to provide access once the beneficiary reaches a specific age. Beneficiary with Partial Restriction Select either: A percentage to be paid as a lump sum, with the remainder paid through the annuity or scheduled payout option. The scheduled payout option and choose life expectancy with future cash access so the beneficiary will have unlimited access to any remaining death proceeds upon reaching a specific age. Beneficiaries abilities to manage money differ. Multiple Beneficiaries, but Not All of Them Are Restricted Client can identify the restricted beneficiaries when completing the form. The form should not include any beneficiaries who are not restricted. The death benefit is not life insurance and is includable in ordinary taxable income to the beneficiaries when paid. 39

50 MORE RESOURCES

51 Our Specialized Team Retirement Strategies Group In addition to ongoing service through your Pacific Life consultative wholesaler, financial professionals are encouraged to take advantage of one team of subject-matter experts that is composed of field and home-office members. These teams can help with IRA rollovers and provide practical solutions to a variety of complex financial-planning issues. The Retirement Strategies Group (field) is available to meet with you personally as well as speak at client seminars and meetings. The Retirement Strategies Group (home office) is ready to consult with you by phone at (800) , ext. 3939, or at RSG@Pacificlife.com. Topics addressed regularly by these teams include: Retirement income strategies Beneficiary planning Tax planning Estate planning Planning for healthcare expenses Social Security income planning Financial planning for the small-business owner And more... The Retirement Strategies Group (Field) To take advantage of the expertise offered by Pacific Life s Retirement Strategies Group, call your Pacific Life consultative wholesaler at (800) Reed J. Lloyd CRC, CRPS Reed is a Field Vice President at Pacific Life and oversees the Retirement Strategies Group (field). He has more than 20 years of industry experience with a focus on retirement income planning, as well as small-business retirement plans. Immediately prior to his current position, Reed served as Assistant Vice President of the Advanced Marketing Group. Michelle P. O Haren JD, LLM, CPA, CFP, ChFC Michelle is a Senior Retirement Strategies Group Consultant with more than 25 years of industry experience in the areas of financial planning and wealth management. She began her career in the tax department of KPMG before running financial planning groups for two major insurance companies. She also has had advanced planning and education roles with a broker/dealer firm and financial services firm. 40

52 The Retirement Strategies Group (continued) James B. Schomburg JD, LLM, MSFS, CFP, RICP Jim is a Senior Retirement Strategies Group Consultant with more than 20 years of industry experience. Prior to his current position, he worked as an advanced marketing attorney for other insurance and wealth-management firms. He began his financial services career in the private practice of law, focusing on estate planning and administration as well as family and real estate law. Susan Wood JD, CFP, CRC Susan is a Senior Retirement Strategies Group Consultant with more than 25 years of industry experience, including financial planning and wealth management. She has worked in a private planning firm, a joint venture with a trust company, broker/dealer firms, and financial services companies. She has provided continuing education to both financial and legal professionals. Retirement Strategies Group (Home Office) To take advantage of the expertise offered by Pacific Life s Retirement Strategies Group (home office), call (800) , ext. 3939, or RSG@Pacificlife.com. Chin Kim, Assistant Vice President, Retirement Strategies Group CFA, CLU, ChFC, FLMI Chin Kim leads the Retirement Strategies Group, as Assistant Vice President in the Retirement Solutions Division at Pacific Life. His core responsibilities includes sharing and supporting retirement strategies concepts through development of marketing materials and tools and leading the team members in the field and in the home office. Gary Pence, Manager, Retirement Strategies Group (home office) CLU, ChFC 20 years of industry experience. Specialties include TSA/403(b) plans and planning strategies for Social Security benefits. Steve Chmelka, Senior Retirement Strategies Group Consultant CRC 25 years of industry experience. Specialties include SIMPLE IRAs, SEP-IRAs, and Individual(k)s. 41

53 Caroline Elrod, Retirement Strategies Group Consultant JD Five years of industry experience. Specialties include charitable planning and contract structuring. Chad Goforth, Senior Retirement Strategies Group Consultant JD 13 years of industry experience. Specialties include inherited IRAs and planning for healthcare expenses in retirement. Clients should consult their tax advisors and attorneys regarding their specific situations. 42