Making Informed Rollover Decisions

Transcription

1 Making Informed Rollover Decisions WHAT TO DO WITH YOUR EMPLOYER-SPONSORED RETIREMENT PLAN ASSETS UNDERSTANDING ROLLOVERS Deciding wat to do wit qualified retirement plan assets could be one of te most important financial decisions you will make. Retiring, canging jobs, or oterwise terminating employment presents many decisions tat you sould consider, one of wic is wat to do wit te assets in your former employer s 401(k), 403(b) or oter employer-sponsored qualified retirement plan. Deciding wat to do wit tose assets could be one of te most important financial decisions you will make. In particular, you may be able to: 1. Take a lump-sum distribution 2. Stay in your former employer s plan 3. Roll over to your new employer s plan 4. Directly roll over to an Individual Retirement Account (IRA) 1 TAKING A LUMP-SUM DISTRIBUTION Unless you ave an immediate financial need, taking a lump-sum distribution from your employer s plan may not be te best option for you. You will be subject to ordinary income tax including a 20% mandatory federal income tax witolding in te year in wic you receive te distribution, and if you are under age 59½ a 10% penalty tax may also apply. Additionally, your retirement assets will no longer continue to grow on a tax-deferred basis, unless you elect to roll tem over witin 60 days (also known as an indirect rollover 2 ). Speak wit your tax advisor if you are considering an indirect rollover. INVESTMENT AND INSURANCE PRODUCTS ARE: NOT FDIC INSURED NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY NOT A DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED BY, JPMORGAN CHASE BANK, N.A. OR ANY OF ITS AFFILIATES SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED 1

2 UNDERSTANDING YOUR OTHER OPTIONS Tere are many factors tat could influence wic options may be best for you Te decision you make today can ave long-term implications. Tere are many factors tat could influence wic of te oter tree options may be best for you and it is important to understand te advantages and disadvantages involved wit eac coice. Te decision you make today can ave long-term implications. Here are some of te factors you sould consider. Investment Coices If te investment coices offered in your current or future employer plan meet your needs, ten you sould consider staying in your current employer s plan or rolling over te balance to your future employer s plan. Some employer plans may also offer access to managed accounts or self-directed brokerage accounts tat provide te opportunity for broader diversification. If aving access to a wider range of investments including individual stocks and bonds, mutual funds and managed accounts is important to you and suc investments are not available in your current or future employer s plan, an IRA may be a better option. Am I satisfied wit te investment options available in my current or future employer s plan? Does my plan allow for easy reallocation as I near retirement and/or my goals cange? Would an IRA offer additional investment options tat are important to me? Access to Additional Financial Services Some employer plans offer access to varying levels of investment advice, planning tools, telepone elp lines, educational materials and worksops. Similarly, IRA providers may also offer various financial services, including investment advice from a Financial Advisor, distribution planning and goals-based financial planning. Wat financial services are available in my employer s plan and ow satisfied am I wit tem? Is te convenience of aving all of my retirement savings consolidated at one financial institution important to me? Is aving a Financial Advisor wo can provide advice wit regard to my retirement investments important to me? 2

3 Ability to Take Loans and Witdrawals Knowing tat you can take advantage of te loan provision in your new employer s plan (if available) may be important to you. Many employer-sponsored qualified retirement plans allow for loans to be taken against your vested account balance. In contrast, taking loans from an IRA is not allowed. Knowing tat you can take advantage of te loan provision in your new employer s plan (if available 3 ) may be important to you. If so, you sould tink about rolling over to your new employer s plan. Remember to first ask your new employer if future contributions will be restricted if you take a loan. Also keep in mind tat all outstanding loan balances not repaid wen you ultimately leave your employer will likely be treated as a taxable distribution and may also be subject to te 10% penalty tax. Instead of taking a loan, you may find te financial need to witdraw funds directly from your employer plan or IRA. Wen it comes to witdrawals, please note te following significant differences between an employer s plan and an IRA: TREATMENT OF WITHDRAWALS FROM AN EMPLOYER PLAN VS. AN IRA Taxation of witdrawals STAY IN FORMER EMPLOYER S PLAN OR ROLL OVER TO NEW EMPLOYER S PLAN Witdrawals will generally be subject to taxation at ordinary income rates. ROLL OVER TO IRA Witdrawals will generally be subject to taxation at ordinary income rates. Early witdrawal penalties 4 Witdrawals before age 59½ may be subject to a 10% penalty tax (unless you terminate employment wit te plan sponsor on or after age 55 or anoter exception applies) Witdrawals before age 59½ may be subject to a 10% penalty tax (unless an exception applies) Distribution options Employer plans may offer more limited distribution options IRAs offer flexible distribution options, including te ability to request witdrawals at any time and to establis regularly sceduled systematic payments 3

4 Taking Required Minimum Distributions Wen you turn age 70½, you must begin taking Required Minimum Distributions (RMDs) from employer plans and IRAs, subject to te following exceptions: If you are working and participating in te qualified retirement plan were you work, you do not ave to take any RMD from tat plan until te year after you retire (unless you are a 5% owner of te business or te plan oterwise requires) Rot IRA owners are not required to take RMDs (but, after te account owner s deat, beneficiaries may be subject to required minimum distribution rules). 5 Is it important to ave te ability to borrow from my retirement assets? Did I terminate (or do I expect to terminate) employment between ages 55 and 59½? Wen do I plan to begin taking witdrawals? Wat amount do I plan to take? Will I require systematic retirement distributions and, if so, at wat frequency? Is a specific payment date important to me? Do I want te ability to access my retirement assets if an unexpected need arises? It is important for you to carefully review and compare te fees and expenses associated wit your available options. Fees and Expenses Fees and expenses can erode te value of your retirement savings over time. It is important for you to carefully review and compare te fees and expenses associated wit your available options. Employer plans typically include administrative fees (e.g., recordkeeping, compliance, trustee fees) and fees for services suc as access to a customer service representative. In some cases, employers pay some or all of te plan s administrative fees and plans may ave lower fees and expenses tan are available in an IRA. Te plan may also offer no-load mutual funds and institutional sare classes tat ave lower investment-related expenses tan similar investments available in an IRA. IRA providers may carge annual account fees or oter fees for maintaining your IRA, and te investments offered may include a sales carge at purcase and may ave iger internal expenses tan te investments in an employer plan. How do te fees and expenses associated wit my employer s plan compare wit IRA fees and expenses? Am I getting a good value for te services tat matter to me? 4

5 Protection from Creditors and Legal Judgments If you currently ave, or anticipate aving, a need to protect your retirement assets from creditors or legal judgments, you need to know wat protection is afforded to employer plans and IRAs. Generally, assets eld in your employer s plan will ave unlimited protection from creditors wile IRAs are protected in bankruptcy proceedings only and, even ten, only up to a certain dollar amount. State laws vary regarding te protection of IRA assets in lawsuits. Be sure you consult wit an attorney for more information on protecting your retirement assets from creditors or legal judgments. Will I need to protect my retirement assets from creditors or legal judgments? Taxes Weter you keep your retirement assets in an employer-sponsored qualified retirement plan or roll tem over to an IRA, tey will continue to grow on a taxdeferred basis until tey are witdrawn. If your employer s plan allowed after tax contributions, tey may be eligible for rollover to a Rot IRA. 6 You may want to discuss te nuances of tis strategy furter wit your tax or legal advisor. Special Considerations for Employer Stock: If your employer-sponsored qualified retirement plan account includes appreciated employer stock, tere is a unique option you sould take into account wen assessing your options. Te Net Unrealized Appreciation or NUA strategy refers to te utilization of a specialized tax treatment wen distributing employer stock as part of a lump sum distribution 7 from suc a plan. NUA refers to te difference in value between te cost basis of te employer stock (i.e., wat you paid for te stock) and its current market value. Te NUA tax treatment will be determined based on weter te employer stock was purcased using pre-tax or after-tax contributions. Tis discussion assumes tat te employer stock was purcased wit pre-tax contributions. If you elect to utilize te NUA strategy, te employer stock is distributed in-kind to your taxable non-retirement account; te balance of your non-employer stock assets in your plan account can be similarly distributed or tey may be rolled over to te plan of a successor employer or an IRA wic will accept suc assets. Wit NUA tax treatment, te cost basis of te employer stock is taxed at your ordinary income rate in te year of te distribution from te employer s plan, and an additional early witdrawal penalty tax 4 may apply if you are under age 59 ½. 5

6 However, if you elect to utilize te NUA strategy te appreciation on your employer stock oldings at te date of distribution is taxable at te long-term capital gains tax rate wen you ultimately sell te stock; and any additional appreciation tereafter is taxable at te applicable sort- or long-term capital gains tax rate (depending on te olding period) wen te stock is subsequently sold. Te capital gains tax rates 8 are generally lower tan applicable ordinary income tax rates. NUA EXAMPLE ASSUMPTIONS Lump-sum distribution 7 includes 1,000 sares of your employer s stock purcased wit pre-tax contributions Cost basis of te employer stock is $10 per sare Fair market value (FMV) of te employer stock on te date of distribution is $50 per sare T A X EMPLOYER STOCK COST BASIS Based on te above assumptions, you would pay ordinary income tax on te $10,000 cost basis ($10 per sare times 1,000 sares). $ NET UNREALIZED APPRECIATION Te Net Unrealized Appreciation of $40 per sare ($50/sare FMV minus $10/sare cost basis) would be recognized as a long-term capital gain upon sale of te stock. $$ POST DISTRIBUTION EARNINGS Any additional gain above te fair market value of $50 per sare would be a sort-term capital gain if te sares were sold witin one year of wen you received tem or a long-term capital gain if te sares were sold after olding tem for one year. Te NUA illustration displayed is ypotetical in nature and does not reflect actual investment results or guarantees of future results. Tere are many factors wic will affect weter te NUA strategy is appropriate for you: pre- and post-distribution growt rates, capital gains tax rates, ordinary income tax rates and te potential need to diversify, to name a few. Furtermore, elections regarding your employer stock to eiter utilize te NUA strategy or roll over to an IRA or te plan of a successor employer are often irrevocable. In particular, if you roll employer stock over to an IRA, it is no longer eligible for NUA tax treatment and any gains will be taxed at ordinary income tax rates wen distributions are taken from te IRA. In tis regard, please note tat JPMorgan Case & Co. and its affiliates do not provide legal, tax, or accounting advice. Before making decisions wit legal, tax, or accounting ramifications, you sould consult appropriate professionals for advice specific to your situation. 6

7 Do I make after-tax contributions to my employer s plan? Do I ave appreciated employer stock in my employer s plan? 1 Under a direct rollover, assets distributed from an employer-sponsored qualified retirement plan (e.g., 401(k), 403(b) or 457(b) account) are payable directly to te receiving IRA custodian/trustee, for te benefit of te participant. 2 Wit an indirect rollover, te assets are distributed to te participant/employee, wo as 60 days after te date of receipt to roll over te distributed funds to an IRA or eligible retirement plan. Rollovers of assets from an employer-sponsored qualified retirement plan are not subject to te same restrictions as IRA-to-IRA rollovers (i.e., IRA-to-IRA rollovers are limited to one every 12 monts). 3 Loans, if available from your current or future employer s plan, are limited to 50% of your vested account balance up to a maximum of $50, Please refer to te IRS cart on penalty tax exceptions ttps:// 5 Please refer to te IRS website for rules pertaining to Required Minimum Distributions for IRA beneficiaries: ttps:// retirement-plans/required-minimum-distributions-for-ira-beneficiaries. 6 Please refer to IRS website ttps:// for additional guidance. 7 A lump-sum distribution is te distribution or payment witin a single tax year of a plan participant's entire balance from all of te employer's qualified retirement plans of one kind (for example, pension, profit-saring, or stock bonus plans), on account of te participant s separation from service, deat, or disability, or after attainment of age 59½. 8 Te net unrealized appreciation on employer securities distributed from an employer s qualified retirement plan is not subject to te 3.8% Medicare surtax on net investment income JPMorgan Case & Co. and its affiliates do not render accounting, legal or tax advice. Estate planning requires legal assistance. You sould consult wit your independent advisors concerning suc matters. Investment ideas presented erein may not be suitable for all investors. Investing involves market risk, including possible loss of principal, and tere is no guarantee tat investment objectives will be acieved. Tis information is not intended as an offer or solicitation for te purcase or sale of any financial instrument. Investing, asset allocation and diversification do not guarantee investment returns and do not eliminate te risk of loss. Speak wit your J.P. Morgan representative concerning your personal investment needs. Banking deposit accounts, suc as cecking and savings, may be subject to approval. Deposit products and related services are offered by JPMorgan Case Bank, N.A. Member FDIC JPMorgan Case Bank, N.A. and its affiliates (collectively JPMCB ) offer investment products, wic may include bank managed accounts and custody, as part of its trust and fiduciary services. Oter investment products and services, suc as brokerage and advisory accounts, are offered troug J.P. Morgan Securities LLC (JPMS), a member of FINRA and SIPC. Annuities are made available troug Case Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Case Insurance Agency Services, Inc. in Florida. JPMCB, JPMS and CIA are affiliated companies under te common control of JPMorgan Case & Co. Products not available in all states JPMorgan Case & Co. 7