Retirement Matters: Distributions from Retirement Plans. Slide 1

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1 Slide 1 If you re like many Americans, you ve been setting aside money for your retirement. Now that you re nearing retirement age, it may soon be time to start drawing money from your qualified retirement plans. Withdrawing money from a retirement plan is called taking a distribution, and there are a variety of ways to do it. We re going to review several approaches.

2 Slide 2 This firm provides a wide range of services, with the primary commitment of helping our clients pursue their unique financial objectives. Our firm want to help you develop a financial strategy tailored to your goals, values, and risk tolerance.

3 Slide 3 This firm is dedicated to helping individuals evaluate their financial situations. We want to provide people with the tools that can help them make informed decisions. We offer informational material on a wide range of topics because we understand that individuals have diverse financial needs. If you have any questions or concerns during the course of this presentation, we invite you to take advantage of our complimentary consultation. During the consultation, we can discuss your questions and begin the process of helping you develop a financial approach that will address your individual needs. Keep in mind that the information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult a professional for specific information regarding your individual situation.

4 Slide 4 Some retirees may have several sources of income. Among them are retirement plans, such as traditional IRAs and Roth IRAs, as well as 401(k) and 403(b) plans. Of course, you may receive Social Security benefits and some people also have other investments and savings that they intend to use during retirement. If you re nearing the age when you may consider drawing money from your qualified retirement plans, you face a number of important distribution decisions. Remember, withdrawals from traditional IRAs, 401(k)s, and other employer-sponsored retirement plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions. To qualify for the tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawal also can be taken under certain other circumstances, such as after the owner s death. The original Roth IRA owner is not required to take minimum annual withdrawals.

5 Slide 5 When it comes to taking distributions, you face a number of important decisions, including which money to use first. Should you pull money from your investment portfolio first or start taking distributions from your qualified retirement plans? How should you take distributions? It s not quite as simple as having money arrive every month; within certain limits, you get to set the terms of your withdrawal. What investment strategies should you use? How will retiring affect how you invest the rest of your money? What rules do you need to remember? It can be costly to disregard the regulations. And finally, decisions need to be made about your Social Security benefits and the beneficiaries on your retirement plans.

6 Slide 6 Generally, each source of retirement income may fit into one of three categories: taxable accounts, taxdeferred accounts, and tax-exempt accounts. And one of the first decisions you should make is what money to use first. Remember, withdrawals from traditional IRAs, 401(k)s, and other employer-sponsored retirement plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions. To qualify for the tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawal also can be taken under certain other circumstances, such as after the owner s death. The original Roth IRA owner is not required to take minimum annual withdrawals.

7 Slide 7 One approach to consider is withdrawing money from taxable accounts first, then tax deferred, then tax exempt. By using taxable money first, you avoid paying taxes as long as possible with tax-deferred investments. And your tax-exempt accounts remain tax exempt for a longer period. This approach may not be best for everyone, however. Your decision should be influenced by your asset allocation, tax considerations, withdrawal fees, surrender charges, and other costs that may be associated with each specific account. But if possible, consider using the power of tax deferral and tax exemption to your advantage.

8 Slide 8 One of the features of qualified retirement plans that makes them so attractive is tax-deferred growth. This brief video illustrates the power of tax-deferred growth and the effect it can have on long-term retirement savings.

9 Slide 9 How will you withdraw the money you have so carefully accumulated? One option is to leave it alone. That may work for a period of time and your money may continue to accumulate tax deferred. At some point, however, you may want to start taking distributions or move the money into another tax-deferred program. You also may be able to withdraw your retirement savings as a lump sum. That would put the funds at your disposal. However, most employers are required to withhold 20% when issuing a lump-sum check to pay for federal income taxes. And it s possible that you may owe more than 20% in federal income taxes. If you take an early distribution, remember withdrawals taken before age 59½ may be subject to a 10% federal income tax penalty in addition to ordinary income taxes. You may be able to rollover the funds from a qualified retirement plan into a traditional IRA, which will allow your money to continue to accumulate on a tax-deferred basis. This can enable you to unify several different qualified retirement accounts into a single place. And if done properly, it won t trigger a taxable event meaning you won t owe income taxes when you move the money. You would pay ordinary income taxes on withdrawals. If you are eligible, you also may consider transferring the assets into a Roth IRA. With a Roth IRA, you must pay current income taxes on the funds converted, but future earnings will accumulate tax free. You may be able to take distribution as an annuity that is, as a series of guaranteed payments. Depending on your retirement program, these payments could be monthly, quarterly, or even annually. Generally, the annuity payments are structured to last your lifetime or for the joint life expectancy of you and your specified beneficiary. Keep in mind that once you decide to take annuity payments, the decision is irrevocable. And with annuities, the guarantees are dependant on the issuing company s claims-paying ability. Annuities are not guaranteed by the FDIC or any other government agency. Finally, if your plan allows, you might consider a combination of distribution strategies. For example, rollover part of your funds to a traditional IRA and take the balance immediately.

10 Slide 10 One of the more popular ways to take distributions from a qualified plan is to roll them over into an IRA. In 2015, 49% of households with traditional IRAs had funded their accounts by rolling over assets from an employer-sponsored retirement plan. The most popular reasons behind rollovers included the desire to consolidate assets, remove assets from a former employer s plan, and increase investment options. Source: Investment Company Institute, 2016.

11 Slide 11 Once you have the money, what investment choices should you consider? To protect principal, money market mutual funds are one choice to consider. Money market mutual funds are not insured or guaranteed by the FDIC or any other government agency. Money market funds are investment funds that seek to preserve the value of your investment at $1.00 a share. However, it is possible to lose money by investing in a money market fund. When generating income, remember that bonds have different maturities and are subject to interest-rate, credit, and inflation risk. When interest rates rise bond prices generally will fall, which may affect a bond or a bond fund s performance. Bonds redeemed before maturity may be worth more or less than their original cost. Market conditions will affect the return and principal value of bonds and bond funds. Fixed annuities can be structured to offer a guaranteed source of regular income for a fixed term or for a person s lifetime. The guarantees of an annuity contract depend on the issuing company s claims-paying ability. The earnings component of an annuity withdrawal is taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Individual stocks and variable annuities may provide growth potential. Individual stocks will fluctuate in value and when sold, they may be worth more or less than the initial purchase price. Mutual funds and variable annuities are sold only by prospectus. You should consider the charges, risks, expenses, and investment objectives carefully before investing or entering a contract. A prospectus containing this and other information about the investment company or insurance company can be obtained from your financial professional. Read it carefully before you invest or send money. With an annuity, a surrender fee may apply if the contract owner gives up the annuity before certain time-period conditions are met. Variable annuity subaccounts will fluctuate in value based on market conditions, and may be worth more or less than the initial amount invested if the annuity is surrendered.

12 Slide 12 In this hypothetical example, an aggressive portfolio allocated 80% of its assets to stocks, 10% to cash, and 10% to bonds. The hypothetical conservative portfolio had 20% in stocks, 20% in bonds, and 60% in cash. For the 20 years ended December 31, 2015, the aggressive portfolio was more volatile. In its best year, it returned 28.9%; in its worst it lost 32.9%. Overall, it averaged an 8.9% annual rate of return for the period. In its best year, the conservative portfolio returned 12.6%; in its worst, it lost 11.1%. And for the 20 years, it averaged a 5.0% annual rate of return. The difference between an 8.9% return and a 5.0% return can add up over time. Remember, past performance does not guarantee future results. Actual results will vary. Bonds have different maturities, and are subject to interest-rate, credit and inflation risk. When interest rates increase, bond prices generally will fall, which may affect a bond or a bond fund s performance. Bonds redeemed before maturity may be worth more or less than their original cost. Market conditions will affect the return and principal value of bonds and bond funds. Individual stocks will fluctuate in value and, when sold, they may be worth more or less than the initial purchase price. Stocks are represented by the S&P 500 Composite index (total return), an unmanaged index that is generally considered representative of the U.S. stock market. Bonds are represented by the Citigroup Corporate Bond Composite Index, an unmanaged index that is generally considered representative of the U.S. bond market. Cash is represented by the Citigroup 3-Month Treasury-Bill index, an unmanaged index that is generally considered representative of short-term cash alternatives. U.S. Treasury bills are guaranteed by the federal government as to the timely payment of principal and interest. However, if you sell a Treasury bill prior to maturity, it could be worth more or less that the original price paid. Index performance is not indicative of the past performance of a particular investment. Past performance does not guarantee future results. Individuals cannot invest directly in an index. Source: Thomson Reuters, For the period December 31, 1995, to December 31, 2015.

13 Slide 13 The difference between the conservative portfolio and the aggressive portfolio was roughly 3.9%. In this example, one $100,000 portfolio generated a hypothetical 8.9%, while another generated a hypothetical 5.0% for a 20-year period. At the end of the period, the portfolio that produced the 8.9% annual rate of return was worth $434,295. The portfolio that produced the 5.0% annual rate of return was worth $257,831. That s a $175,000 difference. This is a hypothetical example used for illustrative purposes only. It is not representative of any specific investment or combination of investments. Past performance does not guarantee future results. Actual results will vary.

14 Slide 14 Mutual funds accumulate a pool of money that is invested to pursue the objectives stated in the fund s prospectus. Investors buy shares in the mutual fund, which is managed by an investment company. Mutual funds offer a number of advantages over individual investments, which take time, talent, and temperament to evaluate. Many mutual funds are diversified, which means they can invest in a range of securities. Diversification is an approach to help manage investment risk. It does not eliminate the risk of loss if security prices decline. Keep in mind that some mutual funds have more narrow investment objectives, which is why it s critical to review the prospectus before buying. Mutual funds are sold only by prospectus. You should consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money. There are some disadvantages as well. Professional management comes at a price. The charges and expenses are outlined in the prospectus. And capital gains and dividends may be taxable whether they are distributed to shareholders or reinvested in additional shares. While there are thousands of different mutual funds available, they fall into three broad types: equity funds, fixed-income funds, and money market mutual funds. Money held in money market funds is not insured or guaranteed by the FDIC or any other government agency. Money market funds seek to preserve the value of your investment at $1.00 a share. However, it is possible to lose money by investing in a money market fund. Equity mutual funds will fluctuate in value and when sold, they may be worth more or less than the initial purchase price. Bond funds are subject to interest-rate, credit, and inflation risk. When interest rates increase, bond prices generally will fall, which may affect a bond fund s performance. Market conditions will affect the return and principal value of bond funds.

15 Slide 15 Another investment strategy combines annuities in creative and potentially effective ways. One approach uses two different annuity contracts, one to generate income and one to rebuild principal. Under this approach, a retiree divides $400,000 between an immediate fixed annuity and a single-premium deferred annuity. Assuming a hypothetical 3% return on the immediate annuity, a hypothetical 4% return on the deferred annuity, and a 10-year contract, the immediate annuity would generate a $1,253 per month in income. Over the same 10-year period, the deferred annuity would grow to $400,000 effectively replacing the principal. A split annuity strategy can help you generate current income while pursuing a future income stream. Remember, the interest portion of the immediate fixed annuity is subject to taxes. You also will have to pay taxes on the growth of the deferred annuity. The guarantees of an annuity contract depend on the issuing company s claims-paying ability. Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contact. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies). Annuities are not guaranteed by the FDIC or any other government agency. This is a hypothetical example used for illustrative purposes only. It is not representative of any specific investment or combination of investments. Past performance does not guarantee future results. Actual results will vary.

16 Slide 16 Another somewhat more complex and aggressive strategy involves dividing your money into three pools. The first pool is dedicated to income, the second to safety, and the third to growth. This shifts most investment risk to the third pool. It also means the third pool has the greatest potential for growth. Retirees gradually spend down the first two relatively conservative pools, giving the third more time to grow. In this hypothetical example, the first pool is invested in an immediate fixed annuity and would generate $2,150 per month in income during years 1 through 5. The second pool is invested in conservative investments, generating an average annual return of 4%. Its objective is to replace the original five-year immediate annuity. During years 6 through 10, the second pool also would generate $2,150 per month in income. At the same time, the third pool is invested for growth to take advantage of potentially higher returns. Keep in mind that with higher potential returns comes an increased level of investment risk. If the strategy is successful, the investment would rebuild the $400,000 principal, and the process could start over again. In contrast to the split annuity strategy, this approach depends on relatively aggressive investment of the third pool to succeed. You should consider carefully whether aggressive investing fits with your tolerance for investment risk. This is a hypothetical example used for illustrative purposes only. It is not representative of any specific investment or combination of investments. Actual results will vary. The guarantees of an annuity contract depend on the issuing company s claims-paying ability. Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contact. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies). Annuities are not guaranteed by the FDIC or any other government agency.

17 Slide 17 When creating a distribution strategy, what rules do you need to remember? Generally, you must begin taking required minimum distributions (RMDs) by age 70½. The rule states that the latest you can start taking RMDs is April 1 of the year following the year in which you turn 70½. The amount of these required distributions will depend on your age, the value of the qualified retirement account, and your life expectancy. If you fail to take a distribution or the distribution you do take isn t large enough you may be hit with a 50% excess accumulation penalty on the amount that wasn t distributed as required. A federal income tax penalty also may apply. Contributions to a Roth IRA may be withdrawn tax free at any time. To qualify for the tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawals also can be taken under certain other circumstances, such as after the owner s death. The original Roth IRA owner is not required to take minimum annual withdrawals. Source: Internal Revenue Service, 2016

18 Slide 18 Not only are there penalties for taking a distribution too late, you may be subject to penalties if you start taking a distribution too early. You need to be aware of age 59½. That s the age at which you can begin taking distributions of funds from your qualified retirement plan without incurring a 10% federal income tax penalty in addition to regular income taxes. There are a number of exceptions to the age 59½ rule, including unreimbursed medical expenses. Your distribution won t be subject to penalty if it is used to pay unreimbursed medical expenses that exceed 7½% of your adjusted gross income. Also, you won t be subject to the penalty if you are disabled. And distributions taken to pay higher education expenses or to buy or build a first home (up to a $10,000 lifetime limit) are exempted as well. This quick summary provides only a brief overview of the age 59½ rule and its exceptions. Other exceptions may apply. Consider reviewing your options with a financial professional and also consulting a tax advisor regarding distributions. Source: Internal Revenue Service, 2016

19 Slide 19 Beneficiaries are another important topic. The first consideration is naming a beneficiary for your qualified retirement account. Whenever you create an IRA or enroll in a qualified retirement plan, you should anticipate being required to fill out forms that ask you to name a beneficiary. The beneficiary is the person who would receive any remaining balance in your account if you were to die before it was exhausted. Naming your spouse as beneficiary ensures that your spouse will receive the funds in the account without having to go through probate a detour that can waste time and potentially waste money. If you choose to name someone other than your spouse as beneficiary, the process gets a bit more complicated. Under the Internal Revenue Service s rules, your spouse is entitled to inherit all the money in the account unless he or she signs a written waiver consenting to your choice of another beneficiary. It s not enough just to name someone else on the beneficiary form that your employer gives you. There are any number of reasons you may want to name a beneficiary other than your spouse particularly when your spouse has significant assets and agrees that the assets in your account need to go to other heirs. But that decision needs to be made deliberately, properly, and in a way that won t backfire. Beneficiary rules are complex. During a complimentary consultation, we can review the rules and determine what choices may be appropriate for your situation. Also, we will need to consult a tax or legal advisor before any final decisions are reached.

20 Slide 20 A final issue to consider is, when should you begin taking Social Security benefits? The Social Security administration allows you to start receiving benefits as soon as you reach age 62. But monthly payments differ substantially depending on when you start receiving them. The longer you wait (up to age 70), the larger each monthly check will be. The sooner you start receiving benefits, the smaller the check. From the Social Security Administration s point of view, it s simple: if a person lives to the average life expectancy, the person will eventually receive roughly the same amount in lifetime benefits no matter when the person chooses to start receiving them. The question is, do you want to receive a reduced benefit for a potentially longer period, or a larger benefit for a potentially shorter period? If you have a spouse, the decision on when to start benefits gets more complicated particularly if one person s earnings were considerably higher than the other s. The timing of spousal benefits should be factored into a decision. When considering what age to start Social Security benefits, it may be a good idea to review all the assets you have gathered for retirement. Some may want the money sooner based on how assets are positioned, while others may benefit by waiting. Source: Social Security Administration, 2016

21 Slide 21 There are a number of criteria to keep in mind as you consider taking a distribution from your retirement plans. Here are some scenarios that might be familiar: Anthony and Selena wonder, How can we take retirement distribution in a way that will protect our children? Dave and Christine ask, How do we figure out the required minimum distribution from our traditional IRA? Rebecca is a widow who wants to know, What happens if I start taking Social Security benefits but continue working? Isaac is a business owner who likes to take a hands-on approach to his retirement plans. He asks, How do I execute an IRA rollover so I don t trigger taxes but still maintain control over how my money is invested? All of these are great questions. It s important to remember that individual recommendations will vary with each situation.

22 Slide 22 There are a number of factors to consider when taking distributions from retirement plans. Some are simple and straightforward while others require more in-depth analysis. And that s where this firm comes in. We specialize in helping people just like you assess their retirement distribution needs and pursue their goals. If you re ready to take a fresh look at your strategies, take advantage of our complimentary consultation and schedule a review today.