OPENING THE DOOR TO EXPANDED RETIREMENT SAVINGS OPPORTUNITIES:

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1 OPENING THE DOOR TO EXPANDED RETIREMENT SAVINGS OPPORTUNITIES: EXPLORING ROTH AND AFTER-TAX FEATURES IN DC PLANS Not FDIC Insured May Lose Value Not Bank Guaranteed RETIREMENT

2 CONTENTS 1 Executive Summary 2 Roth: The Future Trend in Retirement? 2 Which Employees Are Candidates for Roth Accounts? 3 What Are In-Plan Roth Rollovers? 5 Is Roth Right for Your Employees? 6 What Is the Interplay Between Roth Features In Your Plan and Roth IRAs? 10 Roth vs. After-Tax Contributions 10 Can Participants Leverage After-Tax Contributions to Fund a Roth IRA? 11 Conclusion 12 Appendix: Plan Comparison

3 EXECUTIVE SUMMARY Helping your employees pursue the goal of a financially secure retirement is probably at the top of your list of reasons for establishing a retirement plan for your employees. The challenge is that the path to a financially secure retirement can mean many different things to different people. Your workforce likely has a broad spectrum of: u Ages u Tax brackets u Assets outside your retirement plan, and u Opinions regarding future tax rates in the United States Offering a plan that can provide meaningful savings options to a diverse workforce is a balancing act. A growing number of employers are finding that adding Roth features to their retirement plan provides the balance they need to support varied retirement savings strategies without adding undue complexity. In 2013, one-half of plan sponsors surveyed allowed Roth contributions, as compared to only 11% in ,2 Including both pretax and Roth options in your plan allows your employees to choose whether they want to pay taxes on their retirement savings today, or delay taxation until they start withdrawing retirement benefits. The option to pay taxes today is especially popular with younger workers. An Aon Hewitt study revealed that when a Roth feature is available, 17% of younger workers (ages 20 29) made Roth contributions as compared to 9% of workers in their 50s. 1 If your business is trying to attract and retain young talent, this is a statistic to keep in mind. Also keep in mind that Roth accounts can be attractive to highly compensated employees who are overweighted in qualified assets and are looking to diversify the tax status of their retirement savings. We anticipate a growing trend where more plans will add Roth features and more employees will choose to make their retirement savings contributions as Roth rather than pretax in the coming years. Offering Roth features expands the options available to workers as they plan their long-term retirement income strategy, which often includes concentrating retirement assets in IRAs. Like Roth features in employer plans, Roth IRAs are increasing in popularity. In 2013, 19.1 million households had a Roth IRA. 3 Not only is Roth becoming more popular with plan sponsors and employees, there is significant momentum on Capitol Hill to promote Roth strategies. Roth features are viewed as a vehicle for increasing overall retirement savings without the big hit to the current federal budget caused by pretax retirement contributions that reduce an employee s taxable income in the year of contribution. The purpose of this guide is to provide an overview of the Roth features and help you evaluate whether you should add or expand the Roth features in your retirement plan. We will illustrate the potential role Roth features can play in retirement savings and helping individuals meet their unique retirement savings strategies. The guide will: u Illustrate the tax impact short term and long term of Roth features. u Identify the types of employees who are most likely to benefit from Roth features. u Introduce you to the expanded Roth in-plan rollover option. u Address the interplay of Roth 401(k) features and Roth IRAs. u Discuss the difference between Roth and After-Tax contributions. u Address how After-Tax contributions can be leveraged to fund a Roth strategy. As always, you should consult with your financial advisor to evaluate whether adding or expanding Roth features is right for your business and your employees. 1

4 ROTH: THE FUTURE TREND IN RETIREMENT? Including both pretax and Roth contribution options in your plan allows your employees to choose whether they want to pay taxes on their retirement savings today, or delay taxation until they start withdrawing retirement benefits. Roth features are available for 401(k), 403(b), and governmental 457(b) plans as long as the plan also permits pretax elective deferrals. A side-by-side comparison of rules that apply to pretax 401(k) contributions, Roth 401(k) contributions, and Roth IRAs is provided in the Appendix. Allowing Roth contributions is optional, but increasingly common. Approximately 50% of employers allow employees to make Roth contributions. 1,2 Roth options may become even more broadly available if some of the retirement proposals on Capitol Hill move forward. As lawmakers search for alternative ways to reduce the federal budget, Roth contributions have figured prominently in recent retirement savings proposals, including President Obama s new myra savings program. 4 In early 2014, a tax reform draft discussion bill has even proposed eliminating traditional IRA contributions and requiring Roth tax-treatment of an employee s elective salary deferrals that exceed $8, Another proposal advocates Roth Accounts for Youth Savings (RAYS). 6 Congress has even looked to Roth features to raise revenue to offset the costs of other government spending. The expanded in-plan Roth rollover option was included in the American Taxpayer Relief Act of 2012 (ATRA) in part to pay for extended unemployment benefits. We believe Capitol Hill will increasingly look to Roth as a cornerstone of retirement savings policy. WHICH EMPLOYEES ARE CANDIDATES FOR ROTH ACCOUNTS? From an employee standpoint, the decision whether to save on a pretax versus Roth basis really comes down to tax strategy. Do employees want a tax break for retirement savings today or do they want to get the tax benefit in the future? Following are some of the categories of employees who are most likely to take advantage of Roth contributions and related in-plan Roth rollovers (converting pretax assets to Roth status). Younger employees who Those who want to diversify the tax status of their retirement savings Highly paid employees and employees with significant assets who Those who want to reduce taxable income in retirement Employees who want to position retirement assets as part of their estate plan u are in a lower tax bracket today than they anticipate in the future. u have a long time before retirement and anticipate a significant appreciation in the value of their investments. u by creating some tax-free income sources to build flexibility for their retirement payout strategy. u by paying tax on a portion of their retirement savings at today s tax rates to hedge against higher tax rates in the future. u have not been able to contribute to a Roth IRA because of the earned income restrictions such as your valued senior management team. u are not likely to be in a significantly lower tax bracket in retirement. u to reduce the amount of income taken into consideration when calculating whether Social Security benefits are taxable. u because they anticipate a significant appreciation in the value of certain investments and want to pay the tax on the lower value now by converting their pretax assets to a Roth account. u to transfer tax-free assets to beneficiaries after the employee s death. u and want the ability when they reach age 70½ to roll plan assets tax free to a Roth IRA in order to preserve those assets because ROTH plan assets converted to a Roth IRA are not subjected to required minimum distributions (RMDs). 2

5 WHAT ARE IN-PLAN ROTH ROLLOVERS? Employees in salary deferral retirement plans now have a range of tax-advantaged contribution options. Plan terms permitting, plan participants may: u Defer a portion of their salary into the plan as pretax elective deferrals. u Defer a portion of their salary into the plan as after-tax designated Roth contributions. u Convert vested portions of their pretax plan or after-tax assets to a Roth account within the plan. Converting pretax assets to Roth status, called an in-plan Roth rollover, is a taxable event. In the year of conversion, individuals must include in taxable income any pretax amounts rolled over to a Roth account. Once assets are in the Roth account, participants can accumulate tax-free retirement savings, provided they meet the requirements for qualified distributions. Congress Expands the In-Plan Roth Rollover Rules The in-plan Roth rollover, when it was introduced in 2010, applied only to plan assets that were otherwise eligible to be distributed such as distributions to participants who had reached age 59½, severed employment, or met another distribution-triggering event. As a revenue-generating provision of the American Taxpayer Relief Act of 2012 (ATRA), Congress broadened the in-plan Roth rollover rules to allow assets that are not yet eligible to be distributed from the plan to be converted to a Roth account within the plan. Beginning January 1, 2013, any participant in a plan that permits designated Roth contributions and in-plan Roth rollovers may convert their plan assets to a Roth account within the plan even if they are not eligible to take a distribution. In-Plan Roth Rollover Highlights Eligible Plans Eligible Assets Eligible Participants Taxation Rules u 401(k), 403(b), or governmental 457(b) plan that allows designated Roth contributions u Plan must be amended to allow in-plan Roth rollovers u Plans may need amendment to offer expanded rules under the American Taxpayer Relief Act of 2012 (ATRA) u All types of vested plan assets elective deferrals, profit sharing contributions, matching contributions, and earnings u Distribution must qualify as an eligible rollover distribution certain types of distributions, such as required minimum distributions (RMDs) and excess contributions, cannot be converted u Any participant, regardless of income u Spouse beneficiary and former spouses with a plan account balance u Pretax portion is included in income in the year of in-plan rollover u Rolled over amount is not subject to 10% early distribution tax or 20% mandatory withholding u 10% early distribution tax applies to in-plan rollover only if rollover assets are distributed within five years of rollover u Five-year Roth holding period clock starts on January 1 of the year of the first Roth contribution or in-plan rollover 3

6 In-Plan Rollover Considerations for Employees Employees considering an in-plan Roth rollover should consult with their tax advisor to discuss all of the potential tax consequences and evaluate whether the conversion of assets to an after-tax status makes sense in the context of the individual s broader tax strategy. Impact on Current-Year Tax Bracket The entire pretax portion of an in-plan Roth rollover is treated as taxable income to an employee for the year of the rollover. The increase in gross taxable income may put the employee into a higher tax bracket. For higher earners, the increase in gross taxable income may also cause the employee to become subject to the new 3.8% federal tax on net investment income. (This tax applies to married, joint filers with income over $250,000 and single filers with income over $200,000.) The employee s tax advisor can discuss strategies for minimizing the tax consequences of in-plan rollovers, for example, by conducting a series of rollovers (or conversions to a Roth IRA, if eligible) over a number of years to avoid a large tax impact in one year (plan terms permitting). Additional Source for Taxes Due Individuals who convert assets from pretax to after-tax status will want to have money outside the plan to pay the tax liability for the in-plan Roth rollover. Plans cannot withhold on in-plan Roth rollovers from amounts that would not otherwise be eligible for a distribution. The employee cannot withdraw funds from the plan to cover this tax liability unless the employee is otherwise eligible for a distribution from the plan. Additionally, any pretax distribution taken to pay the tax liability on the in-plan rollover will be taxable and may be subject to the 10% early distribution tax if the employee is younger than age 59½. Uncertainty Regarding Future Tax Rates Whether converting assets and paying taxes today is the right move depends on what tax rates will look like in the future for a given employee. Two variables impact this equation: federal tax rates set by Congress and the employee s earnings level today versus in the future. No one can predict with any certainty how Congress may adjust tax rates in the future. In addition, some employees may find themselves at a lower earnings level (i.e., a lower tax bracket) in the future such that they may have paid taxes on their Roth contributions at a higher level than if they had made pretax contributions. Unlike with Roth IRA conversions, which will be discussed later in this guide, in-plan Roth rollovers cannot be reversed. Market Fluctuations Employees also need to keep in mind that if there is a significant downturn in the investment market after they convert, they will have paid taxes on assets at a higher value than the asset may be worth at the time of distribution. However, if their investments increase in value and they meet the requirements for a qualified distribution, they will have tax-free earnings. 4

7 IS ROTH RIGHT FOR YOUR EMPLOYEES? Should you add or expand the Roth features in your plan? Here are some things to consider: u Plan Objectives A good place to begin is by evaluating whether your current plan design is meeting your objectives for the plan and driving strong retirement savings behavior. Is there a healthy participation rate and a healthy average account balance across various sectors of your workforce? If your plan does not have strong performance metrics, you should evaluate whether adding a Roth feature will be beneficial or whether other plan design strategies such as automatic enrollment or safe harbor 401(k) features would be more beneficial. u Workforce Demographics Compare your workforce demographics against the list of likely Roth candidates discussed earlier. The option to pay taxes today using Roth features has been especially popular with younger workers. A recent study by Aon Hewitt revealed that when Roth contributions are available, 17% of younger workers (ages 20 29) made Roth contributions as compared to 9% of workers in their 50s. 1 If your business is trying to attract and retain young talent, a Roth option may have appeal. Roth can also be attractive to your highly compensated employees who are looking to diversify the tax status of their retirement savings. u Competitive Environment Benchmark the availability of Roth options in your industry and marketplace. As more plans add this feature, you may need to offer Roth to remain competitive in attracting and retaining talent. Your advisor can be a great resource to help you evaluate whether Roth features are the right fit for your plan and then educating participants about their expanded options for retirement savings. Ground Rules for Adding Roth Features If you decide to add or modify your Roth plan options, keep the following ground rules in mind. 1 Plan Design Roth contributions and in-plan Roth rollovers are separate, optional features. However, in order to offer in-plan Roth rollovers, your plan must allow participants to make designated Roth contributions. 2 Plan Amendment Your plan document must be amended to add or expand Roth provisions. Amendments must typically be made by the last day of the plan year in which the amendment is effective. (Special rules are available for features added during 2013 and enhancements to safe harbor 401(k) plans made in 2013 or 2014.) 3 Administrative Set-Up Communicate with your payroll provider and plan recordkeeper to make all of the proper adjustments in data collection and plan administration. Some employers limit the frequency of in-plan Roth rollovers (e.g., one per year) to simplify administration and reporting. 4 Employee Education Consider offering participant education that explains the after-tax nature of Roth deferrals versus pretax deferrals. It is important to deliver effective education to explain tax strategies and saving for retirement, including the Roth concept to avoid the added complexity that can overwhelm less financially experienced employees and have a negative impact on participation. 5

8 WHAT IS THE INTERPLAY BETWEEN ROTH FEATURES IN YOUR PLAN AND ROTH IRAS? Offering Roth features in your plan expands the retirement income and estate planning options available to your employees with respect to Roth IRAs. Many plan participants choose to roll their retirement plan assets into an IRA when they retire or move to a new employer. According to the Investment Company Institute (ICI), at the end of fourth quarter 2013, IRAs held more than $6.5 trillion. 7 A substantial portion of these IRA assets originated in an employer retirement plan or other retirement arrangement that was rolled over to the IRA. 3 In 2013, 49% of the 36 million households owning traditional IRAs had plan assets rolled into their IRA. 3 Although traditional IRAs are the primary type of individual retirement arrangement that receives these rollovers, Roth IRAs are an increasingly popular option. If a participant has Roth assets in their employer plan, they can roll these assets tax-free into a Roth IRA. Pretax assets can also be rolled to a Roth IRA through a conversion. Similar to in-plan rollovers, conversions to Roth IRAs are taxable. An individual will include in taxable income the entire amount being converted, except the portion representing nondeductible (after-tax) contributions. Although converted balances are taxable, the 10% early distribution tax does not apply at the time of conversion, even if the individual is under age 59½. Unlike an in-plan Roth rollover, a conversion to a Roth IRA or a rollover of Roth contributions to a Roth IRA can only be made by an employee who has a distribution triggering event such as separation from service, reaching age 59½, disability, death, or plan termination. RMD amounts are not eligible to be converted. Once converted, the formerly pretax assets will be treated as Roth IRA assets. Roth IRA assets are distributed taxfree if the distribution is qualified. A qualified distribution requires that a five-year holding period is satisfied and the distribution is made because of attaining age 59½, death, disability, or a first-time home purchase. A sideby-side comparison of pretax contributions, designated Roth contributions, and Roth IRAs including conversion options is provided in the Appendix. Why Fund a Roth IRA? Many of the same characteristics outlined for candidates for Roth contributions and in-plan Roth rollovers apply to those who are likely to establish Roth IRAs. There are a few differences, however, that you should be aware of: u No RMDs Roth IRAs are not subject to the required minimum distribution (RMD) rules that apply to Roth assets in employer plans. While current-year RMDs cannot be rolled over, rolling or converting assets from an employer plan to a Roth IRA will stop future RMDs. This feature makes Roth IRAs a popular vehicle to hold assets intended for heirs. Not only will the heir inherit the IRA taxfree, the IRA owner can allow the assets to grow without having to draw down the balance annually when reaching age 70½. The owner can even continue funding the Roth IRA past age 70½ if the IRA owner has earned income. 6

9 u Assets generally available without penalty subject to plan restrictions Employer plan assets typically require a distribution event before assets are available. For example, 401(k) deferrals cannot be distributed unless one of the following events occurs: reaching age 59½, death, disability, plan termination, qualified reservist status, severance of employment, or financial hardship. The forms of distribution (e.g., lump sum, installment payment) are also set forth by the plan document. IRA assets, on the other hand, are available at any time. The IRA owner is in complete control regarding when and how much can be distributed from the IRA. While not prohibiting distributions, the applicable federal tax rules provide some disincentives for taking Roth IRA distributions before the distribution is qualified. The taxable portion of Roth IRA assets taken prior to age 59½ may be subject to a 10% early distribution tax (unless an exception applies). However, because of special distribution ordering rules that treat non-taxable basis as the first assets distributed from Roth IRAs, a participant can withdraw his/her Roth IRA contributions at any time tax-free, even if they have not met the requirements for a qualified distribution. Roth conversion assets (dollars that were originally pretax assets in an employer plan or traditional IRA and were taxable upon being converted) that are distributed within five years of a conversion conducted prior to age 59½ will not be taxed again but may be subject to the 10% early distribution tax (unless an exception applies.) The IRA ordering rules treat Roth contributions as being distributed before conversion and before earnings on those assets, which may reduce the impact of the 10% early distribution tax rule. u Additional Qualified Distribution Event A first-time home purchase ($10,000 lifetime limit) is a qualified distribution event for Roth IRAs that is not available for Roth assets in an employer plan. In addition to the employee considerations described earlier in the guide, there are a few variables an individual should consider when designing their Roth IRA strategy. u No Loans Individuals considering rolling Roth assets or converting pretax assets from employer plans should be aware that loans are not permitted from IRAs. u Separate Five-Year Holding Periods The five-year holding period for Roth IRA assets (required for a qualified distribution) is separate from the five-year period in the employer plan. And each conversion has its own five-year clock for the 10% early distribution tax for individuals under age 59½. A conversion may not be viable if an individual will need to take a nonqualified distribution from their Roth IRA within five years, though the ordering rules discussed previously may diminish the tax and penalty impact of nonqualified distributions. Some individuals elect to establish a Roth IRA with a relatively small balance to start a five-year clock. 7

10 CASE STUDY To illustrate some of the concepts addressed in this guide, let s compare the savings decisions made by two employees. Assume Sam and Emma work for ABC Company. The plan has just been amended to allow Roth contributions and in-plan Roth rollovers. Should Sam or Emma take advantage of these new plan features? What are some of the variables they should consider? Sam Emma Age Current Plan Balance $250,000 $0 Marital Status Married Single Tax Bracket 28% Believes these are his peak earnings years; anticipates a lower tax bracket in retirement 15% Hopes to advance in her career and pay scale; anticipates higher tax bracket in the future Desired Retirement Age Other Investments and Sources of Income Savings Objectives Variety of investments with different tax structures u Spouse also has a retirement plan, saving on a pretax basis u Brokerage account stock, mutual funds u Owns home u Municipal bonds Wants to make sure he s saving enough for retirement Hopes to leave some inheritance to his three children No significant savings; still paying off student loans No other income sources Just getting started, has long savings runway Wants to retire at 67 8

11 Roth Contributions Roth In-Plan Conversions Sam Pros u Would diversify his tax savings; non-taxable income source may reduce portion of Social Security that is taxable u May leave assets to heirs tax-free u Rollover to Roth IRA would shut off RMD requirements, enabling him to leave more assets for heirs, but would allow access to assets as needed in retirement u Has been ineligible for Roth IRA contributions due to earnings level Cons u Pretax contributions reduce taxable income, a benefit given his current tax bracket Pros see above Cons Given high tax bracket, conversion could be costly u May want to reconsider conversion option when he retires if in lower tax bracket u He may want to consider converting amounts over several years to avoid triggering higher tax bracket if he wants to start positioning a portion of assets as tax-free for heirs Emma Pros u Likely paying a lower tax rate on contributions today than would in the future u Long savings period for investments to grow in value tax-free u Early start to 5-year clock Cons u Reduction in taxable income would be helpful even during these early low income years Not applicable *The persons portrayed in this example are fictional. This material does not constitute a recommendation as to the suitability of any investment for any person or persons having circumstances similar to those portrayed. It should not be assumed that an investment in any actual retirement plan was profitable or will be profitable in the future. There can be no assurance that any investment process or strategy will achieve its investment objectives. A financial advisor or attorney should be consulted regarding your specific legal, investment or tax situation. 9

12 ROTH VS. AFTER-TAX CONTRIBUTIONS Although Roth contributions are made on an after-tax basis, they are different from the After-Tax contribution feature that is offered in some retirement plans. These plans allow discretionary employee contributions on an after-tax basis. However, unlike qualified Roth distributions, which are tax-free, earnings attributable to after-tax contributions are taxable when distributed. 401(k) Contributions Comparison Before-Tax After-Tax Roth Contributions Money is contributed on a before-tax basis. Money is contributed on an after-tax basis. Money is contributed on an after-tax basis. Limits $18,000 in (Including Roth contributions.) The lesser of $53,000 or 100% of pay in (Including all other employer and employee contributions.) $18,000 in (Including before-tax contributions.) Catch-Ups $6,000 in (Including Roth contributions.) Not Available $6,000 in (Including before-tax contributions.) Taxes on Employee Contributions Contributions and their earnings are taxed when withdrawn. No taxes on contributions, but earnings are taxed when withdrawn. No tax on contributions and no tax on earnings when withdrawn.* Contributions are taxed when made. Taxes on Employer Match Any match and earnings are taxable when withdrawn. Any match and earnings are taxable when withdrawn. Any match and earnings are taxable when withdrawn. * Note: Account must be held for at least five years, employee must be at least 59½, deceased or disabled. CAN PLAN PARTICIPANTS LEVERAGE AFTER-TAX CONTRIBUTIONS TO FUND A ROTH IRA? Yes, participants can leverage after-tax contributions to fund a Roth IRA. On September 18, 2014, the IRS issued Notice , which clarified rules for allocating pretax and after-tax amounts from distributions made from a qualified plan to multiple destinations. (If a plan participant s account balance includes pretax and after-tax amounts, each distribution must include a pro rata portion of these amounts.) These rules provide plan participants with more flexibility with respect to maximizing their after-tax savings strategies and provide plan sponsors with clearer guidance on how to treat after-tax distributions from retirement plans. Under this new guidance, all eligible rollover distributions from qualified and other retirement plans (e.g., 401(k) plan, 403(b) plan, or a governmental 457(b) plan) that are made to a recipient and initiated at the same time will now be treated as a single distribution, regardless of whether the amounts are rolled over to a single destination or multiple destinations. The catch is that the distribution must be scheduled to be made at the same time in order to take advantage of the rules under the guidance. 10

13 Specifically the guidance provides that: u If the pretax amount distributed is less than the amount the participant chooses to roll over directly, the entire pretax amount is allocated to the direct rollover. If the amount will be directly rolled over to more than one destination, the participant can choose the pretax allocation between the direct rollover destinations by informing the plan administrator in advance of the request for distribution. u If the pretax amount is larger than the amount the participant chooses to roll over directly, any remaining pretax amounts are assigned to 60-day rollovers. If the pretax amounts are rolled over to two or more destinations during the 60-day time frame, the participant can choose how the pretax amounts are allocated between the multiple destinations. u Any pretax amounts remaining after any direct rollovers and 60-day rollovers must be included in the participant s gross income for the tax year of the distribution. Example B An employee has a 401(k) balance of $350,000 that consists of $280,000 of pretax amounts and $70,000 as after-tax amounts. The employee separates from service and requests a distribution of $160,000 in direct rollovers. The employee requests that $100,000 go to a new qualified plan and $60,000 to an IRA. The new qualified plan separately accounts for after-tax distributions. The direct rollovers consist of $128,000 in pretax amounts and $32,000 in after-tax amounts. The employee is permitted to allocate the pretax amounts between the new qualified plan and the IRA prior to the time the direct rollovers are made. While the new guidance takes effect January 1, 2015, taxpayers can rely on it as of September 18, 2014 the date the IRS guidance was issued. The guidance also grants special transition relief for reasonable interpretations of the law applied prior to the date the guidance was issued. The following are two examples of how the IRS guidance works: Example A An employee has a 401(k) balance of $350,000 that consists of $280,000 of pretax amounts and $70,000 as after-tax amounts. The employee separates from service and requests a distribution of $200,000. Under the pro rata rules, 80% of that $200,000 distribution is considered pretax, and 20% is considered after-tax, or basis. The employee chooses to make a direct rollover of $160,000 to a traditional IRA and $40,000 to a Roth IRA. The employee is allowed to allocate the $160,000 that consists entirely of pretax amounts to the traditional IRA so that the $40,000 rolled over to the Roth IRA consists entirely of after-tax amounts. The effect would be that the employee would generate no income tax in the current year, but has converted after-tax amounts into Roth savings. CONCLUSION No one can predict the future, and tax laws are always subject to change, but by including both pretax and Roth savings options in your plan, you can allow your employees to choose whether they want to pay taxes on their retirement savings today, or delay taxation until they start withdrawing retirement benefits. You also create an opportunity for employees to diversify the tax character of their retirement assets. Roth contributions and in-plan Roth rollovers can accommodate a variety of retirement savings and retirement income strategies, enabling employees to pursue their unique goals. Consider whether adding or expanding Roth features is a good fit based on your plan objectives and employee demographics. Calculations for Examples A and B are provided by Verisight, Inc. Verisight, Inc. is not affiliated with OppenheimerFunds Distributor, Inc. 11

14 APPENDIX Plan Comparison Pretax 401(k) Deferral Roth 401(k) Deferral Roth IRA Eligibility Earnings Limit No No Earnings limit (modified adjusted gross income) Married filing jointly Less than $193,000 (for 2015) Single Less than $131,000 (for 2015) Contribution Limit $18,000 (in 2015), plus $6,000 age 50 catch-up Aggregated with other deferrals $18,000 (for 2015), plus $6,000 age 50 catch-up Aggregated with other deferrals $5,500 (for 2015) ($6,500 if you re age 50 or older) Aggregated with traditional IRA contributions Contribution Tax Treatment Pretax After-tax After-tax Employer Matching Yes (if applicable) Yes (if applicable), as pretax contributions No Age 70½ RMDs Yes Yes No Distribution Timing Pretax deferrals available at: u Age 59½ Roth deferrals available at: u Age 59½ Available any time (tax-free if qualified) u Disability u Disability u Death u Death u Financial hardship u Financial hardship u Qualified reservist u Qualified reservist Conversion/ Rollover Options In-plan Roth rollover available without distribution trigger Conversion to Roth IRA requires distribution event (see distribution timing rules above) Rollover to Roth IRA requires distribution event (see distribution timing rules above) Not eligible to be rolled to an employer plan Eligible to be rolled or transferred to a Roth IRA any time; limited to one rollover per year (beginning 2015) Distribution Taxation Taxable in year distributed Tax-free if qualified; Nonqualified distributions: u Pro rata disbursement of contributions and earnings u Deferral portion is tax-free (basis) Tax-free if qualified Nonqualified distribution ordering rules assets deemed distributed in the following sequence u Roth contributions (tax-free) u Conversions (tax-free, possible 10% penalty tax) u Earnings (taxable) Plan Loans Yes (plan option) Yes (plan option) No 12

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16 NEXTSTEPS Visit oppenheimerfunds.com Call your financial advisor Call us, Visit oppenheimerfunds.com Call Follow us: 1. Source: Aon Hewitt, 2013 Trends & Experience in Defined Contribution Plans, April Source: Vanguard, Research note: Roth adoption and the new in-plan conversion feature, May Source: Investment Company Institute (ICI) Research Perspective, The Role of IRAs in U.S. Households Saving for Retirement, 2013; November 2013, 4. Source: Presidential Memorandum, Retirement Savings Security, Memorandum for the Secretary of the Treasury, January 28, Source: Tax Reform Act of 2014, draft proposal by House Ways and Means Committee Chairman Dave Camp (R-MI), February 26, Source: H.R. 4129, Roth Accounts for Youth Savings Act of 2014 (RAYS Act), February 28, Source: Investment Company Institute (ICI), The U.S. Retirement Market, Fourth Quarter 2013, March 2014, Investments in mutual funds are subject to market risk and volatility. Shares may gain or lose value. Federal income tax law is a highly complex area of law and is subject to change. The information contained in this material is strictly educational in nature and is not intended as legal advice. This material does not address state tax laws that may also be relevant to an individual. Clients are strongly encouraged to obtain legal advice from a qualified expert. Shares of Oppenheimer funds are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks, including the possible loss of the principal amount invested. This material is provided for general and educational purposes only, and is not intended to provide legal, tax or investment advice, or for use to avoid penalties that may be imposed under U.S. federal tax laws. Contact your attorney or other advisor regarding your specific legal, investment or tax situation. Before investing in any of the Oppenheimer funds, investors should carefully consider a fund s investment objectives, risks, charges and expenses. Fund prospectuses and summary prospectuses contain this and other information about the funds, and may be obtained by asking your financial advisor, visiting oppenheimerfunds.com or calling CALL OPP ( ). Read prospectuses and summary prospectuses carefully before investing. Oppenheimer funds are distributed by OppenheimerFunds Distributor, Inc. 225 Liberty Street, New York, NY OppenheimerFunds Distributor, Inc. All rights reserved. RPL November 6, 2014