Roth After-Tax Features

Transcription

1 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)

2 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. 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. 2 Roth After-Tax Features July 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 Roth 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. Be sure to watch the two new videos highlighting the Roth after-tax features. Roth After-Tax Features July

3 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. 4 Roth After-Tax Features July 2014 Roth After-Tax Features July

4 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 after-tax contributions to your TSA or TSR are not the same. Both allow you to save for retirement on an after-tax basis and both give you the potential for tax-free distributions. However, there are key differences in contribution limits, income limits, and distributions. Review the chart on page 8 for some of the differences between a Roth IRA and Roth after-tax contributions. For more information on IRAs including Roth IRAs visit vanguard.com/ira. Important! Retirement Planning Idea for Your Consideration If you are already making after-tax contributions to Plan B, but not contributing the full annual IRS contribution limit for pre-tax and Roth after-tax contributions (in 2014, $17,500; or $23,000 if over age 50), then you may want to consider making Roth after-tax contributions in the TSA or TSR. As described earlier, if you make Roth after-tax contributions, the earnings on your Roth after-tax contributions may be distributed tax-free. 6 Roth After-Tax Features July 2014 Roth After-Tax Features July

5 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 Yes 1 Contributions subject to tax at distribution Earnings subject to tax at distribution Tax penalty on distributions before age 59½ Maximum annual contributions Required distributions (i.e., age 70½ distribution) Yes 2 No 2 No 2 No 2 Yes 3 10% federal penalty tax on contributions and earnings 4 Subject to annual IRS personal contribution limit ($17,500 in 2014 or $23,000 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 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 No, if you meet certain Yes 3 No, if you meet certain requirements 3 requirements 3 10% federal penalty tax on earnings but not contributions 4 Subject to annual IRS personal contribution limit ($17,500 in 2014 or $23,000 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 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) 10% federal penalty tax on earnings but not contributions 4 Not subject to annual IRS personal contribution limit 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 10% federal penalty tax on earnings but not contributions 4 $5,500 in 2014 ($6,500 if you are age 50 or older) No 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. 5 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. 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 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. 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. 8 Roth After-Tax Features July 2014 Roth After-Tax Features July

6 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 $17.31 ($ = $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, = $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. ELIGIBLE PAY PERCENTAGE OF CONTRIBUTION TO RETIREMENT SAVINGS PLAN 3% 6% 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 The impact on your biweekly take-home pay may vary based on a variety of factors, including your tax withholding election. 10 Roth After-Tax Features July 2014 Roth After-Tax Features July

7 Who Might Benefit from Roth After-Tax Contributions Who Might Not Benefit IS THIS YOU? WHY YOU MIGHT 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 re financially well prepared for retirement (high savings). You contribute the maximum to your retirement savings plan. You expect your income and tax rate to rise in the years to come. It may be beneficial to consider Roth after tax-contributions. 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. 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. 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. You expect Social Security to be the mainstay of your retirement. Your pay spikes due to big commissions or bonuses. You are currently taking advantage of tax credits such as the earned income credit. 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 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. 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. Your income prevents you from contributing to a Roth IRA 1 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. IMPORTANT! ESTATE PLANNING INFORMATION FOR YOUR CONSIDERATION 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. 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. 12 Roth After-Tax Features July 2014 Roth After-Tax Features July

8 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 $ 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 ROTH AFTER-TAX CONTRIBUTIONS PRE-TAX CONTRIBUTIONS FRED MAKES PRE-TAX CONTRIBUTIONS FRED MAKES ROTH AFTER-TAX CONTRIBUTIONS Eligible pay (annual) $60,000 $60,000 PAYCHECK EFFECT Fred s contributions are not subject to income tax 1 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 Amount Fred has budgeted to use toward retirement saving contributions per pay period (5% of pay) $ $ Contributions are generally not subject to federal and state income taxes, but local taxes may apply. Note: Tax rules are subject to change. WHEN THE MONEY COMES OUT Less: Income tax based on budgeted amount (25% tax rate) Contribution to plan per pay period $28.84 $0 $86.54 $ FRED TAKES A DISTRIBUTION OF PRE-TAX CONTRIBUTIONS AND EARNINGS AT AGE 65 Income taxes are due for the year in which the distribution is made Note: Tax rules are subject to change. FRED TAKES A DISTRIBUTION OF ROTH AFTER-TAX CONTRIBUTIONS AND EARNINGS AT AGE 65 No income taxes are due if the Roth distribution requirements are satisfied Yearly contribution to plan $2,250 $3,000 Account balance after 20 years (assumes 6% return) Income tax due upon distribution (25% tax rate) Net amount available after income taxes ACCOUNT BALANCE EFFECT AFTER 20 YEARS $85,125 $113,500 $0 $28,375 $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. 14 Roth After-Tax Features July 2014 Roth After-Tax Features July

9 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) ROTH AFTER-TAX CONTRIBUTIONS Eligible pay (annual) $60,000 $60,000 Amount Fred has budgeted to use toward retirement saving contributions per pay period (5% of pay) Less: Income tax based on budgeted amount (35% tax rate) PAYCHECK EFFECT $ $ $40.38 $0 Contribution to plan $75.00 $ Yearly contribution to plan $1,950 $3,000 Account balance after 20 years (assumes 6% return) Income tax due upon distribution (25% tax rate) Net amount available after income taxes ACCOUNT BALANCE EFFECT AFTER 20 YEARS $73,775 $113,500 $0 $28,375 $73,775 $85,125 PRE-TAX CONTRIBUTIONS 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. 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. INCOME TAX RATE IS HIGHER (25 percent now, 35 percent after 20 years) ROTH AFTER-TAX CONTRIBUTIONS Eligible pay (annual) $60,000 $60,000 Amount Fred has budgeted to use toward retirement saving contributions per pay period (5% of pay) Less: Income tax based on budgeted amount (25% tax rate) PAYCHECK EFFECT $ $ $28.84 $0 Contribution to plan $86.54 $ Yearly contribution to plan $2,250 $3,000 Account balance after 20 years (assumes 6% return) Income tax due upon distribution (35% tax rate) Net amount available after income taxes ACCOUNT BALANCE EFFECT AFTER 20 YEARS $85,125 $113,500 $0 $39,725 $85,125 $73,775 PRE-TAX CONTRIBUTIONS 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. 16 Roth After-Tax Features July 2014 Roth After-Tax Features July

10 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. 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. 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 ROTH AFTER-TAX CONTRIBUTIONS 5% 10% PRE-TAX CONTRIBUTIONS ROTH AFTER-TAX CONTRIBUTIONS PRE-TAX CONTRIBUTIONS Eligible pay (annual) $60,000 $60,000 $60,000 $60,000 PAYCHECK EFFECT Amount Fred has budgeted to use toward retirement saving contributions per pay period Less: Income tax based on budgeted amount (25% tax rate) $ $ $ $ $28.84 $0 $57.68 $0 Contribution to plan $86.54 $ $ $ 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) Income tax due upon distribution (25% tax rate) Net amount available after income taxes $85,125 $113,500 $170,250 $227,000 $0 $ 28,375 $0 $56,750 $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. 18 Roth After-Tax Features July 2014 Roth After-Tax Features July

11 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. If you need assistance deciding how much to save, consider talking to a financial advisor. You may also contact Vanguard at or vanguard.com/retirementplans for information about the advice services available to TSA and TSR participants. 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. 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 contribution 1 ($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. 20 Roth After-Tax Features July 2014 Roth After-Tax Features July

12 Roth In-Plan Conversions 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. 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 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. 22 Roth After-Tax Features July 2014 Roth After-Tax Features July

13 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 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. You will need to access your money within five years of the in-plan conversion or before you reach age 59½. You would find paying the tax owed on the Roth in-plan conversion difficult. 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. 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.) 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. 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 may pay more in taxes when you convert than you would when you receive a distribution of pre-tax savings. 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. 24 Roth After-Tax Features July 2014 Roth After-Tax Features July

14 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: Consider Both Pre-Tax and Roth After-Tax Contributions EXAMPLE 1: Jim 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. Account balance $21,000 Roth in-plan conversion amount $6,000 Taxes owed on conversion $1,680 Learn More About Roth In-Plan Conversions For more information about Roth in-plan conversions, go to vanguard.com/inplanconversion. 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 $265,000 Roth in-plan conversion amount $200,000 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. 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. 26 Roth After-Tax Features July 2014 Roth After-Tax Features July

15 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 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: for the TSA; for the TSR. Personal assistance. Vanguard Participant Services associates are available at 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 You will need a personal identification number (PIN) to use VOICE. To create a PIN, follow the prompts. 28 Roth After-Tax Features July 2014 Roth After-Tax Features July

16 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. 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. 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. 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. 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. 30 Roth After-Tax Features July 2014 Roth After-Tax Features July

17 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 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. Roth In-Plan Conversions 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. 32 Roth After-Tax Features July 2014 Roth After-Tax Features July

18 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. 34 Roth After-Tax Features July 2014 Roth After-Tax Features July