RSP TERMINATION HEADLINE GUIDE a decision guide for legacy US Airways Subhead pilots

Transcription

1 RSP TERMINATION HEADLINE GUIDE a decision guide for legacy US Airways Subhead pilots INTRODUCTION With the termination of the Retirement Savings Plan (RSP), you will have to decide what to do with the assets you currently have in the plan. Do you take a lump sum distribution and cover current expenses? Do you roll the funds over into your Pilot 401(k) account? Or do you roll the funds over into an IRA at an outside custodian? As you consider your options, it is important to remember qualified plans (including 401ks and IRAs) allow you to save for retirement on a tax-deferred basis. When making this decision it s key you understand these options to avoid any premature taxes and penalties. clearygulladvisors.com page 1

2 OPTION SUMMARY With the termination of your RSP, you must make a decision on what to do with the assets in your plan. You have three choices: The major advantages of IRAs include diverse investment options, professional management option, exceptions allowing penalty-free early withdrawals and the ability to stretch the tax deferral. OPTION 1 - LUMP-SUM DISTRIBUTION: While cashing out is tempting, in most cases it s not a good idea. Taking a lump sum distribution can significantly reduce your retirement savings. Not only will you miss out on the continued tax deferral of your funds, but you will also face an immediate tax. This option is not advisable unless you absolutely need the money and have no other alternatives. Penalties The lump sum distribution will be subject to federal, and in some cases state, income tax on amounts representing pre-tax contributions and earnings. The distribution will be added to your taxable income for the year and may push you into a higher income tax bracket. Furthermore, if you re under the age of 59½, you may have to pay a 10 percent penalty to the IRS for premature distributions, unless you qualify for an exception. OPTION 2 - DIRECT ROLLOVER TO IRA: A second option is to roll your assets into an Individual Retirement Account (IRA). Rolling your RSP into an IRA allows you to continue deferring taxes and investing for retirement. If done properly, a rollover will not incur immediate income tax or penalty. IRA custodians generally offer many investment options to choose from without specific loyalty to a certain company or predetermined set of investments. Assets in an IRA may be: Self-managed; or Managed by an investment advisor you hire. Per IRS rules, distributions taken from an IRA prior to age 59½ may be subject to an early withdrawal penalty of 10%. There are exceptions to this rule, including: withdrawing $10,000 for a first time home purchase and withdrawing qualified expenses for education *. While these withdrawal exceptions are penalty-free, they re still subject to federal, and in some cases, state income tax. A third exception would be taking withdrawals pursuant to IRS Regulation 72t. 1 Protecting your loved ones Tax-deferred status is not only important for your retirement savings, it can also be important for your family. Proper beneficiary designation for your IRA will allow both spousal and non-spousal beneficiaries to continue the tax deferral of your account even after your death. 2 This is a very beneficial, long term estate and income tax planning strategy, and is often referred to as the stretch strategy. Tax laws also allow 401(k) plans to offer the stretch option; however, the AAL Pilot 401(k) Plan for Pilots generally pays a lump sum distribution to your beneficiaries within five years of your death. 3 If you re considering marriage, it may be best to roll your RSP balance to an IRA to avoid having * Withdrawals for education expenses may not exceed the amount owed for expenses incurred during the calendar year of the withdrawal. clearygulladvisors.com page 2

3 federal spousal rights attach to the plan benefits. Unlike qualified plan benefits, an IRA could be protected from state law spousal rights via a prenuptial agreement. 4 To some, a Roth IRA conversion may be appealing A Roth IRA is a retirement savings vehicle in which after-tax dollars grow tax-free. Qualified distributions from Roth IRA accounts are withdrawn on a tax-free basis. Due to uncertainty regarding future tax rates and the potential you may be in a higher tax bracket during retirement, you may want to consider converting all or a portion of your RSP balance to a Roth IRA. Is a Roth Conversion right for me? Your Pilot 401(k) also allows for a Roth Conversion. Conversions to Roth Accounts are subject to income tax in the year of the conversion. Protection Federal law provides creditor protection from bankruptcy for contributory IRAs of up to $1 million total for all IRAs held per individual. Further protection of IRAs for claims outside of bankruptcy varies by state. However, rollover balances from qualified retirement plans are given full protection from attachment by creditors regardless of whether an individual files for bankruptcy. In order to maintain this protection, rollover balances must be kept separate from other IRA dollars and must be clearly identified as rollover IRAs. OPTION 3 - TRANSFER YOUR FUNDS TO THE PILOT 401(K) PLAN: Transferring your funds to the Pilot 401(k) will avoid current taxation and will allow you to continue the tax deferred savings of your funds for retirement. Benefits of the Pilot 401(k) option include a loan provision, hardship withdrawals, creditor protection and convenience. Taking a loan from the Pilot 401(k) is one way of using your retirement savings prior to retirement without incurring income tax or penalty. The loan provision, on the Pilot 401(k), allows you to borrow up to the lesser of $50,000 or 50% of your vested account balance at an agreed upon interest rate. You must pay back the loan within 54 months unless it was taken for construction or purchase of a primary residence, in which case you can take up to 15 years to repay the loan. 5 Hardship Withdrawls Another way of accessing the Pilot 401(k) funds prior to retirement is through a Hardship Withdrawal. Subject to approval by the Plan Administrator, you may access your before-tax savings to take care of a severe financial hardship. The amount withdrawn may not exceed the amount of the immediate financial need and proper documentation will be required to prove the existence of the hardship. Possible approved hardships include: medical expenses purchase of primary residence education expenses prevent eviction burial and funeral costs & repair of damage to primary residence. 6 Although hardship withdrawals are approved by the plan, they will still incur income tax at the federal and possibly state level. In some cases you may be penalized for a premature withdrawal. Subject to certain limited exceptions. clearygulladvisors.com page 3

4 Considering an early exit? If you plan on retiring from flying at the airline between age 55 and 59½ you might benefit from rolling your RSP into the Pilot 401(k). Typically, you would be allowed to begin withdrawing from your Pilot 401(k) at age 59½. But, if for any reason your employment is terminated after age 55, you may elect a distribution from your Pilot 401(k) penalty free. Those who separate from service before reaching age 55 would still be able to take penalty-free, distributions from an IRA before age 59½ through IRS Regulation 72t. Regulation 72t withdrawals avoid the 10% penalty if certain guidelines are followed. Protection Creditor protection within the plan is robust. Most 401(k) plans receive unlimited protection from creditors under federal law. With certain exceptions, your creditors cannot seize your plan funds to satisfy any of your debts and obligations regardless of whether you declare for bankruptcy. 7 Your Pilot 401(k) Options The Pilot 401(k) plan has four tiers through Fidelity. Your tier options are: TIER OPTION DESCRIPTION CONCLUSION Choosing what to do with your RSP assets can be a complicated decision. Prior to making your final decision, you may want to discuss your particular situation with a qualified tax professional or investment advisor. ABOUT CLEARY GULL The professionals at Cleary Gull Advisors have specialized in helping airline pilots and families achieve their retirement and estate planning goals. Our ClearWealth Financial program provides you the services you need to put you on track for your retirement while you re still working. Services include: Pilot 401(k) professional portfolio management and asset allocation, ClearWeatlh Financial Plan, Retirement Income Coordination and Estate Planning and Family Survivorship Guidance. To learn more about our services or your RSP options, contact our Pilot Retirement Consultants: PATRICK MCGILL Retirement Consultant pmcgill@clearygull.com Tier 1 Target Date Funds Tier 2 Index Funds Tier 3 Actively Managed Funds Tier 4 Self-directed Brokerage Account A diversified, all-in-one mix of stocks, bonds and other investments included in tiers two and three that automatically adjust the fund s asset allocation as you get closer to the target date These funds attempt to track the structure and performance of various market indices such as the S&P 500 Index. These funds attempt to outperform various market indices such as the S&P 500 Index. Fidelity BrokerageLink gives you access to thousands of funds and investment options allowing you to design a customized retirement portfolio. It is also possible for you to retain a professional investment advisor to manage the account on your behalf. JACLYN SMALL Retirement Consultant jsmall@clearygull.com ROBERT WARNER Managing Director rwarner@clearygull.com clearygulladvisors.com page 4

5 SUMMARY - IRA AND 401(K) KEY DIFFERENCES IRA PILOT 401(K) Investment Options Movement of Funds Loans Education Expense Medical Expense Normal Distributions Tax Withholding Fees Estate Issues Creditor Protection Roth IRA Conversion Almost unlimited. Unlimited transfers and reallocations. Shortterm restrictions and redemption fees may apply on certain investments. Not allowed. Can withdraw for qualified education expenses of owner, spouse, children and grandchildren of owner. Withdrawal is taxable, but penalty-free. Can withdraw for qualified unreimbursed medical expenses that exceed 7.5% of AGI, for medical insurance during period of unemployment and disability. Can begin at 59½. Under IRS rule 72(t) you can start earlier without penalty, but with restrictions. Taxed at ordinary income rates. At owner discretion may withhold at time of withdrawal or pay tax later in year. Controlled by owner. Based on investments made, custodian or investment advisor chosen. Potential expenses include but are not limited to commission, transaction fees, mutual fund expenses and advisory fees. Unless in marital property state, can name anyone as primary beneficiary. Both spouse and non-spouse beneficiaries can stretch. Rollover balances receive full protection under federal law. Protection of non-rollover balances varies by state and only applies when filing for bankruptcy. Yes, this is possible. Almost unlimited provided through four tiers of investment options. Generally, unlimited. However, transfers and reallocations may be restricted as determined by the plan. Short-term redemption fees may apply. May be allowed up to lesser of $50,000 or 50% of vested balance. Loan must be paid back on a required schedule. Can apply for withdrawal under plan hardship provision. If approved can withdraw for next 12 months of education expense. Taxable and subject to 10% penalty if younger than 59½ years. Medical expenses not covered by insurance for employee, spouse, or dependents subject to 10% penalty if younger than 59½ years. Can begin at 59½, even if you re still working. If you stop working after age 55, but before 59½ you can withdraw before then without penalty Taxed at ordinary income rates. Automatic 20% withholding. Determined by plan sponsor. Based on investments made and fees charged by plan sponsor. Potential expenses include but are not limited to commission, transactional fees, mutual fund expenses and record keeping fees. Federal law dictates spouse as primary beneficiary unless spouse legally agrees to change. Both spouse and non-spouse beneficiaries receive distribution within five years of a pilot s death. Generally full protection under federal law regardless of whether you file for bankruptcy. Yes, this is possible. 1, 2 Source: IRS Publication 590 3, 5, 6 Source: American Airlines, Inc. 401(k) Plan for Pilots - Summary Plan Description (Oct. 27, 2015, updated Jan.1, 2016) 4 Source: Life and Death Planning for Retirement Benefits (2015-7th edition) by Natalie B. Choate 7 Source: Bankruptcy Abuse Prevention & Consumer Protection Act of 2005 Cleary Gull Advisors does not provide legal or tax advice. The information provided is for educational purposes only, should not be considered a recommendation to proceed in any particular manner, and represents our understanding of the current laws and your plan s provisions. Before making a decision, carefully consider the advantages and disadvantages of each option including potential expenses. clearygulladvisors.com page 5