Lifetime retirement planning. Extending your legacy with beneficiary planning

Transcription

1 Lifetime retirement planning Extending your legacy with beneficiary planning

2 Beneficiary planning within retirement accounts The money you save for retirement makes up a large portion of the wealth you accumulate, and Individual Retirement Accounts (IRAs) can be an important vehicle for saving and passing along that wealth. Many people invest their retirement savings in IRAs because these accounts offer tax advantages, flexible options for accessing the money in retirement, and a simple way to pass wealth along to heirs. Whatever your objective, a knowledgeable approach to your retirement options is essential. As you examine your long-term estate plans, remember to consider any retirement account assets you ve accumulated over the years. Clearly establishing your beneficiaries (the people you select to inherit your retirement account savings) could significantly increase their inheritance, building wealth for generations to come. We can help you understand your retirement account options, including their corresponding beneficiary rules and requirements, so you can make informed decisions along the way. The following pages guide you through the beneficiary planning options available within various retirement accounts, as well as the beneficiary s options upon inheriting retirement account assets. While this information offers education and guidance to get you started, your financial advisor can meet with you one on one to provide personalized recommendations that will help create a plan for distributing your wealth that suits you and your legacy. The information in this brochure is provided as a general overview to investors. It is derived from the Internal Revenue Code, Treasury regulations, and IRS publications. Since Wells Fargo Advisors is not a legal or tax advisor, this information is not intended to provide tax, accounting, or legal advice of any type. Tax law is complex and subject to change. Please consult your attorney or qualified tax advisor when making decisions regarding these matters. Extending your legacy with beneficiary planning 1

3 Understanding retirement account types While retirement accounts are designed to help build savings over time, they have varying options when it comes to withdrawing the money in retirement or passing it along to your heirs. Traditional IRA A Traditional IRA 1 is a simple way to combine assets from several different retirement accounts and defer taxes until you are ready to make withdrawals, which are also called distributions. You are required by tax law, however, to take an annual Required Minimum Distribution (RMD), beginning April 1 of the year following the year you turn 70½, known as your Required Beginning Date (RBD). Distributions may be taxable as ordinary income in the year they re taken, and the Internal Revenue Service (IRS) may impose an excise tax of 50% on any required distribution you fail to take. By taking only required distributions, you won t deplete your retirement savings as quickly, and you may have remaining assets to pass on to your heirs. Roth IRA A Roth IRA is a flexible way to help build retirement savings, provide future income for your retirement, or potentially accumulate significant funds for beneficiaries. While your contributions are not tax deductible, you have the potential for tax-free distributions once you ve reached age 59½ and if the money has been in the account for at least five years. From a legacy planning perspective, Roth IRAs can be particularly useful because you are not required to take required distributions during your lifetime and you may continue to contribute to your Roth IRA after age 70½, as long as you or your spouse has sufficient earned income. This may allow for additional tax-free growth to help build family wealth. Employer-sponsored plans Your defined contribution retirement plan at work such as a 401(k), 403(b), 457(b), or profit-sharing plan could be one of your largest assets, so careful planning is critical. As with IRAs, you should designate account beneficiaries for each of your employer-sponsored plans and keep them up-to-date and consistent with your overall estate plans. In addition to defined contribution plans, you may have employer-sponsored defined benefit plans (pensions), which usually make monthly payments to retirees. Generally, monthly pension distributions are not eligible to be rolled over into an IRA. However, if a lump-sum distribution is available through your employer, you may be able to directly roll over the assets to a more flexible IRA. 2 Talk with a representative from your employee benefit plan to see what distribution options are available to you. 1 Contributions to a Traditional IRA may be tax deductible depending upon your earned income level. Traditional IRA distributions are taxed as ordinary income. Qualified Roth IRA distributions are not subject to state and local taxation in most states. Qualified Roth IRA distributions are also federally tax-free provided a Roth account has been open for at least five years and the owner has reached age 59½ or meets other requirements. Both may be subject to a 10% federal tax penalty if distributions are taken prior to age 59½. 2 If you are considering an IRA rollover as an alternative to receiving a pension, be aware that principal protection of your IRA rollover investment cannot be guaranteed. The overall return on your investments will be reduced by various fees and expenses associated with the investments, investment program or account, and the total distributions received from an IRA may be less than you would have received from your pension. 3 Although a company s retirement plan allows eligible participants to roll over, this option is purely voluntary and is not suitable for all persons. Some potential disadvantages of rolling over include the presence of account minimums for IRAs that are not present in employer plans and typically higher fees in IRAs. Please ensure this decision meets your individual needs and circumstances before making this choice. 4 A stretch (Inherited) IRA strategy is designed for investors who will not need the money in the account for their own retirement. There is no guarantee that there will be assets remaining in the account at the time of the IRA owner s death. The benefits of IRA rollovers From a legacy planning perspective, consolidating your retirement savings from a work or personal retirement account into an IRA while you are still living simplifies the inheritance process for your beneficiaries, as the IRA can be established as an Inherited IRA upon your death. 3 While nonspouse beneficiaries are generally required to take distributions from Inherited IRAs beginning the year following the death of the owner, they are permitted to stretch these distributions over their single life expectancy (as established by the IRS). 4 Spreading the distributions out over time can potentially build wealth through continued tax-deferred compounding. Another potential legacy planning benefit of rollovers is that IRAs allow you to split accounts and name several primary and contingent beneficiaries. Consolidating your retirement plan savings from former employers may provide many benefits to you: Broad range of investment choices Flexibility for beneficiaries Easier coordination with your overall retirement plan Avoidance of the tax implications of lump-sum distributions Ease in managing your complete investment strategy One monthly statement Potentially lower fees Simplified calculation of required distributions Comprehensive guidance based on your complete financial picture Because of the tax advantages offered through IRAs, rolling your retirement assets into an IRA, instead of taking a lump-sum distribution, allows your money to potentially grow faster. In addition, when you directly roll your lump-sum distribution into an IRA, you typically avoid current taxes and penalties. (Please note that any applicable taxes and penalties would apply once a distribution is taken from the IRA.) 1. Determine your age as of December 31 of the year you are required to take your distribution. 2. Find your age and your corresponding life expectancy from the uniform life expectancy table found below.* 3. Determine the previous year s balance of your IRA as of December Divide the prior year s December 31 IRA value by the life expectancy factor below. Uniform life expectancy table Attained age in year of distribution Calculating your RMD To calculate your estimated RMDs as an IRA owner, follow these four steps: Applicable divisor Attained age in year of distribution Applicable divisor and older 1.9 IRS Publication 590, February 2011 *You are allowed to use the joint life table for calculating your RMD each year if you have a spouse named as the sole primary beneficiary of your IRA the entire year, and that spouse is more than 10 years younger. 2 Extending your legacy with beneficiary planning Extending your legacy with beneficiary planning 3

4 Beneficiary designations Naming beneficiaries for your retirement plans and IRAs takes precedence over instructions made in a will or trust. Designating beneficiaries on your retirement accounts gives them the option of establishing an Inherited IRA, which offers a tax-efficient option of stretching out the distributions over their own single life expectancy. In order to pass on these assets according to your wishes, review your beneficiary designations periodically and take them into account when writing wills and doing other estate planning. Naming your spouse Naming your spouse as beneficiary may be a natural step, but there are additional reasons why this may make sense for many married couples. When an IRA passes directly to a spousal beneficiary, in most cases the assets will have the advantage of bypassing probate, which is the process of legally establishing the validity of a will before a judicial authority. In addition, spousal IRAs generally qualify for the unlimited marital deduction. However, while the IRA the spouse is inheriting is not subject to federal estate taxes under the IRA owner s estate, you should consider the impact this transfer may have on the surviving spouse s estate at the time of his/her death. Naming a nonspouse Generally, nonspouse beneficiaries may move the money to an Inherited IRA and annual RMDs will commence. The distribution options will depend on whether the IRA owner died before or after the Required Beginning Date (RBD). In addition, nonspouse beneficiaries should be aware that any lump-sum distribution from an inherited retirement plan will be included in their ordinary income for that year and cannot be rolled into an Inherited IRA (the 60-day rollover rule does not apply to nonspouse beneficiaries). And unlike spouse beneficiaries, nonspouse beneficiaries may not roll inherited assets into their own IRA. Talk with your beneficiaries so they understand your intentions and their options, and remind them to consult their tax and financial advisors because special rules apply. Naming multiple beneficiaries If you name multiple individuals as beneficiaries, consider the following rules: When calculating distributions, each beneficiary will be able to use his or her own single life expectancy, as established by the IRS, as long as separate Inherited IRAs are established by December 31 of the year following the IRA owner s year of death. In this situation, RMDs will be calculated separately for each beneficiary. If the IRA owner s account is not divided by December 31 of the year following the IRA owner s year of death, all beneficiaries RMDs will be based on the age of the oldest beneficiary s life expectancy. Understanding the difference between primary and contingent beneficiaries A primary beneficiary of an IRA is the party first in line to receive assets, while a contingent beneficiary receives assets only if the primary beneficiary disclaims the inheritance or dies before the IRA owner. Multiple primary beneficiaries and contingent beneficiaries may be designated. 4 Extending your legacy with beneficiary planning Extending your legacy with beneficiary planning 5

5 Naming a trust If you name a trust as your IRA beneficiary, it s possible the trust would pay higher taxes on the money than your heirs would because trust tax rates escalate within their tax brackets faster than individual tax rates. There are some situations, however, when a trust as an IRA beneficiary may make sense, and these typically involve control issues, not tax savings. Some examples include: Special needs trust IRA distributions may interfere with the beneficiary s ability to qualify for government assistance. Naming a special needs trust as beneficial owner of the IRA can keep the assets out of the beneficiary s name. Marital trust Funding a marital trust potentially provides lifetime income for the surviving spouse; qualifies for the estate tax marital deduction; allows the first spouse to die to control how trust assets are distributed after the death of the surviving spouse; and may allow access to principal, according to the standards that you set. Additional situations If your beneficiary needs help managing distributions from an inheritance, or potentially needs help sheltering the assets in a divorce or liability claim, a trust may be useful. Default beneficiaries A default beneficiary is treated as the beneficiary of a retirement account if the account owner did not name a beneficiary, or if the primary beneficiary dies first or disclaims the assets and there is no contingent or replacement beneficiary named. The defaults on a Wells Fargo Advisors IRA 1 are: 1. A surviving spouse 2. The surviving children under state law 3. The estate Reviewing beneficiary designations Review your beneficiary designations periodically to make sure your retirement accounts are in sync with your overall estate plan. Common situations affecting designations include death of a beneficiary, divorce, marriage, or the birth of children or grandchildren. Naming an estate Whenever possible, you may want to avoid naming an estate as your IRA beneficiary as this requires your assets to enter the probate process. Any distributions from the Inherited IRA may be taxed at the federal income tax rate for an estate, which can be significantly higher than those charged to individual taxpayers. In addition, the lifetime distribution option through an Inherited IRA would not be available to your heirs. Naming a charity Choosing charities as IRA beneficiaries may be an efficient estate planning strategy. Complications may arise when a charity and individual beneficiaries are named on the same IRA, possibly limiting the beneficiaries ability to establish Inherited IRAs and benefit from the lifetime distribution option of the balance. Discuss with your advisors the benefits of setting up a separate IRA account for assets you would like to leave to a charity. Updating your beneficiaries Generally, you can make changes to your beneficiary designations any time you wish by filing a new beneficiary designation with your IRA provider. Even if you are over age 70½, you have the flexibility to make beneficiary changes without affecting your required distributions during your lifetime. 2 IRA owners who reside in a community property state are required to name their spouse as beneficiary, unless the spouse has given written authorization to the contrary. 1 Subject to change at the discretion of Wells Fargo with 30-day notice. 2 An exception to this arises if your spouse is the sole beneficiary and more than 10 years younger than you. 6 Extending your legacy with beneficiary planning Extending your legacy with beneficiary planning 7

6 Distributing inherited retirement assets How you designate your beneficiaries will determine their options for receiving inheritance money. Although your beneficiaries will not incur a 10% early distribution penalty on the inherited assets because the distributions are taken due to death of the IRA owner, certain distribution methods preserve the account s tax-advantaged status while others do not. IRA rollover If you select your spouse as the beneficiary of your employer-sponsored retirement plan or IRA, your spouse has the right to roll the distribution into an IRA in his or her own name. This option will continue the tax-advantaged status of the account and defer income taxes until distributions are taken. Once the rollover is complete, IRA distribution rules will apply based on your spouse s age. Beneficiary distribution options 8 Extending your legacy with beneficiary planning IRA rollover Lump-sum distribution This strategy will exhaust the entire account in one distribution, with retirement assets losing their tax-advantaged status. Taxes will be due on the taxable portion of the distribution in the year received and may place the beneficiary in a higher tax bracket. Once a non-spouse beneficiary chooses to take a lumpsum distribution it cannot be undone, so be sure to speak with a tax advisor before choosing this option. In this situation, a spouse beneficiary would have 60 days to roll over the inherited assets into his or her own IRA. Five-year distributions With the five-year distribution option, the beneficiary distributes the entire amount of the Inherited Roth or Traditional IRA no later than five years from the end of the year in which the IRA owner died. This option is available only if the owner died before the RBD. Because pretax employer-sponsored plan and Traditional IRA distributions are generally included in taxable income for the year of withdrawal, distributions taken during these five years could move your Lump-sum distribution Disclaim Life-expectancy distribution Five-year distributions Spouse beneficiary Owner dies before required beginning date Spouse beneficiary Owner dies after required beginning date Nonspouse beneficiary Owner dies before required beginning date Nonspouse beneficiary Owner dies after required beginning date Look through trust beneficiary Owner dies before required beginning date * Look through trust beneficiary Owner dies after required beginning date * Estate Owner dies before required beginning date * Estate Owner dies after required beginning date * ** Charity Owner dies before required beginning date Charity Owner dies after required beginning date ** The required beginning date (RBD) is the date you are required by the IRS to begin taking required minimum distributions (RMDs): April 1 of the year following the year you turn 70½. * In some instances for a trust and estate beneficiary ** Required minimum distributions based on owner s age in year of death beneficiary into a higher tax bracket. Yet the biggest disadvantage may be the loss of tax-advantaged growth offered by life expectancy distributions. Life-expectancy distributions This option stretches distributions from an Inherited Roth or Traditional IRA over the beneficiary s single life expectancy. Spreading the distributions over a longer period of time enables the inherited money to continue its growth potential in a tax-advantaged account and only requires beneficiaries to take annual RMDs. Because RMDs are smaller in the beginning, this strategy can help beneficiaries manage the taxes owed on distributions. Life-expectancy distributions for a nonspouse beneficiary are term certain, meaning the entire account will be emptied during the term. As such, beneficiaries use the IRS single-life expectancy table divisors when calculating the first year s RMD, and then subtract one from the original divisor for subsequent years. Spouse beneficiaries are permitted to recalculate, meaning they obtain a new divisor each year. Beneficiaries may always withdraw more than the required distribution, but allowing the funds to grow as long as possible may build a substantial legacy. Disclaim A beneficiary who does not need or want the IRA assets can disclaim, or refuse, all or a portion of the IRA assets within nine months after the IRA owner s death. The disclaiming beneficiary cannot select who receives their disclaimed portion of the assets. Instead, the assets are passed to the remaining primary beneficiary(ies), contingent beneficiary(ies), or default beneficiaries. In some instances, the estate or trust named as beneficiary may also disclaim. Because a disclaimer may affect the federal and state income and estate tax situation, it is important to consult a tax advisor concerning your individual situation. Power of attorney (POA) for your IRA Keeping your will and living will current Although most people understand the importance of preparing and maintaining a will, many people do not have a written one. If you die without a will, the probate court intervenes and a judge decides how your assets are to be distributed. And if you re a single parent of minor children, the same judge will decide with whom they will live. On the other hand, if you take the time to prepare a will, you ll be the one who determines how your property is distributed and who will care for your minor children. Simply put, a will can help provide peace of mind and the immense satisfaction of knowing that you have taken the necessary steps to pass on the fruits of your life s labor to your loved ones. Remember, a will does not supercede your beneficiary designations on insurance accounts and retirement plan assets. With these types of accounts, beneficiary planning is extremely important due to the special tax treatment and payout options associated with these assets. Your tax and legal advisors and Wells Fargo Advisors financial advisor can help you understand your options and take the steps necessary to name your intended beneficiaries. A common financial planning strategy is to create a power of attorney (POA), which authorizes someone to represent you and make decisions on your behalf. This allows for the smooth transition of decision making to your named representative should you become ill or otherwise incapacitated. Remember that power of attorney requirements vary by state and should be discussed thoroughly with your financial advisor and attorney. Extending your legacy with beneficiary planning 9

7 Strategies for asset distribution As you think about passing your wealth along to your heirs, consider the benefits of converting your taxable retirement accounts into tax-free assets, the rules governing surviving beneficiaries, and the methods of extending tax-free benefits to the next generation. Roth conversion strategy In a Roth IRA conversion, an existing retirement plan, such as a Traditional IRA or 401(k), is converted to a Roth IRA. As a result, money that had been treated as tax-deferred is converted into an account that potentially grows tax-free. 1 In order to make such a conversion, however, you must pay taxes on the taxable amount you convert. Learning more about Roth IRA conversions may be a sensible step whether you are designing a comprehensive estate plan, trying to maximize your legacy, or seeking tax-free savings opportunities. This is one financial strategy that is often overlooked when evaluating estate planning options. A spouse beneficiary who inherits an employer-sponsored retirement plan can convert the assets to a Roth IRA or an an Inherited Roth IRA. A nonspouse beneficiary who inherits an employer-sponsored retirement plan can make a direct trustee-to-trustee transfer and convert the retirement plan assets into an Inherited Roth IRA. Nonspouse beneficiaries of Traditional, SEP, or SIMPLE IRAs are not allowed to convert to an Inherited Roth IRA, but may establish an Inherited Traditional IRA. A Roth conversion of after-tax amounts will not be taxable income. Any pretax amount converted will usually be included in the beneficiary s gross income for the year. Please consult your tax and financial advisors for more details about how a Roth conversion may be a possible strategy for your situation. Hypothetical example Linda has $200,000 in an employer-sponsored 401(k) retirement plan. The account holds $50,000 in after-tax amounts and $150,000 in before-tax amounts. Linda wishes to leave her granddaughter Ella a tax-free IRA inheritance by converting the assets to a Roth IRA. Because Linda has assets outside the IRA to pay taxes, she converts the full $200,000. Linda lives another 15 years, during which the account grows tax-free and no distributions are required. Ella must begin required minimum distributions in the Inherited Roth IRA the year after Linda s death. But because she is inheriting a Roth IRA, she has the option of exercising the stretch IRA strategy, which allows her to calculate distributions over her own, single-life expectancy, term-certain. This would provide the account the opportunity to compound with tax-free earnings over her lifetime. Linda has achieved her goal of leaving Ella a tax-free inheritance. If Linda had decided to pass on the unconverted 401(k) instead, she would have been required to take distributions once she turned 70½, reducing the amount available for Ella s inheritance. In that case, Ella could have converted the 401(k) to an Inherited Roth IRA, paying the taxes due when she converted. She would still begin distributions the year following Linda s death to take advantage of the stretch IRA strategy. Converting and immediately beginning distributions might not be advantageous, though, as the account would not have had a chance to compound with tax-free earnings. As a result, she would have potentially paid more tax than if she had left the account in an Inherited Traditional IRA and simply paid tax on each distribution. By converting the account and paying the taxes while she was still alive, Linda left a Roth IRA with tax-free potential growth and increased the value of Ella s inheritance. Inherited Roth conversion strategy scenario 2 401(k) account Inherited Roth IRA $50,000 in after-tax assets $50,000 in after-tax assets transfer to the Inherited Roth IRA directly with no additional taxes due. Linda leaves $200,000 in her 401(k) to Ella. This includes: $150,000 in pretax assets $150,000 in pretax assets x.28 (for 28% tax rate) = $42,000 in federal income taxes due. If taxes are paid from another source of funds, the full $150,000 converts to the Inherited Roth IRA. = $200,000 in Inherited Roth IRA with tax-free growth potential The chart above demonstrates the process for converting a 401(k) account to an Inherited Roth IRA. Taxes will be due upon conversion for any pretax assets held in the 401(k) in this case $150,000. However, there is no additional taxation for the $50,000 in after-tax assets. In the example at the left, Linda would convert her 401(k) assets to a Roth IRA so that her granddaughter would benefit from additional years of potential tax-free growth. 1 Qualified Roth IRA distributions are not subject to state and local taxation in most states. Qualified Roth IRA distributions are also federally tax-free provided a Roth account has been open for at least five years and the owner has reached age 59½ or meets other requirements. Withdrawals may be subject to a 10% federal tax penalty if distributions are taken prior to age 59½. 2 The solutions discussed may not be suitable for your personal situation, even if it is similar to the example presented. Investors should make their own decisions based on their specific investment objectives and financial circumstances. It should not be assumed that the recommendations made in this situation achieved any of the goals mentioned. This example is hypothetical and does not represent any specific investments or strategies. 10 Extending your legacy with beneficiary planning Extending your legacy with beneficiary planning 11

8 Standard vs. per stirpes strategy How your assets pass to your heirs is, to some extent, governed by whether you choose a standard or per stirpes option on your beneficiary designation. In the standard option, your primary beneficiaries must survive you in order to inherit your assets. For example, you have designated your two children, Mary and John, to inherit your IRA assets equally 50% to Mary and 50% to John. With a standard designation, if Mary dies before you, her 50% would also go to John upon your death. With a per stirpes designation, if your primary beneficiary dies before you, the share of what he or she would have inherited is divided equally among his or her heirs. 1 So, if Mary died before you as in the previous example, her heirs would inherit her 50% share equally. Standard vs. per stirpes strategy scenario You leave $200,000 to your two children, Mary and John. However, Mary dies before you. Standard option John inherits the full amount. Upon your death, the full $200,000 passes to John, since Mary has died. Per stirpes option Mary s children inherit her portion. Upon your death, $100,000 passes to John. Mary s $100,000 passes to her children, since Mary died before you. Inherited IRA stretch strategy Inherited IRAs, whether Traditional or Roth, enable beneficiaries to stretch distributions over their single life expectancy, maximizing the tax-efficient benefits of IRA assets by leaving them in the IRA for as long as the law permits. Unlike lump-sum or five-year distributions, life-expectancy distributions may be stretched over the beneficiary s single life expectancy, potentially spreading the assets over one or possibly two generations. 2 With an Inherited IRA, your beneficiary also has the option to: Experience potentially enhanced wealth through tax-advantaged compounding of earnings Distribute more than the minimum, if needed Name a successor beneficiary to receive the remaining assets at the time of the first beneficiary s death Hypothetical example Joan, age 72, has a Traditional IRA with a balance of $100,000. Her daughter Susan, age 51, is named as primary beneficiary and her granddaughter Jennifer, age 24, as contingent beneficiary. Joan dies at age 75, after her Required Beginning Date (RBD), and the IRA balance has grown to $107,688. As primary beneficiary, Susan, now age 55, has three options available to her: 1. Take the balance as a lump-sum distribution. Because Susan inherits this money as a result of her mother s death, there is no 10% premature distribution penalty, but the distribution will be taxed as ordinary income to Susan in the year distributed. 2. Establish an Inherited IRA. Taking distributions over Susan s single life expectancy of 29.6 years allows for further tax-deferred growth potential and could result in total distributions of over $304,761. Again, distributions are taxed to Susan as ordinary income but are not subject to the 10% early distribution penalty, as they are due to the account owner s death. These distributions could help Susan supplement her own savings and income in retirement. 3. Disclaim her interest in the IRA. Let s say Susan has enough assets for her own retirement and does not need this money. By disclaiming her interest in the IRA, the contingent beneficiary, her daughter Jennifer, inherits the IRA at age 28. As a nonspouse beneficiary, Jennifer must either take a lump-sum distribution or begin life-expectancy distributions. Jennifer chooses to begin life-expectancy distributions to hopefully reap the benefits of potential tax-advantaged growth. And because her single life expectancy is 55.3 years, life-expectancy distributions in the beginning are small, and she benefits from potential tax-deferred growth over many years. Assuming a 6% rate of return, Jennifer could receive distributions of more than $800,000 during her lifetime. This strategy could create a legacy for Joan and her family. Inherited IRA stretch strategy 3 Assumptions: 6% annual rate of return, annual compounding and annual RMDs $107,688 Lump-sum distribution $304,761 Taken over Susan s life $870,741 Taken over Jennifer s life 1 Obtain a complete explanation from your legal advisor. 2 A stretch (Inherited) IRA strategy is designed for investors who will not need the money in the account for their own retirement. There is no guarantee that there will be assets remaining in the account at the time of the IRA owner s death. 3 This information is hypothetical and is provided for informational purposes only. It is not intended to represent any specific return, yield, or investment, nor is it indicative of future results. 12 Extending your legacy with beneficiary planning Extending your legacy with beneficiary planning 13

9 Age-based strategies Insurance strategies The age at which you die, as well as your spouse s age, both have an important impact upon distribution options. If your spouse beneficiary is under age 59½ and needs distributions, he or she may be best served by transferring the assets into an Inherited IRA rather than assuming them into his or her own account. Because distributions from Inherited IRAs avoid the 10% early distribution penalty, your spouse will have immediate access to the funds or can choose to let them grow. By contrast, if a spouse beneficiary moved the money into his or her own IRA, distributions before age 59½ would incur the 10% penalty. When your spouse turns age 59½, he or she could roll over the Inherited IRA into his or her own name to simplify recordkeeping. Another situation where it may make sense for a spouse to use an Inherited IRA is when the surviving spouse is over age 70½ and the deceased spouse did not reach his or her RBD. By moving the funds to an Inherited IRA, the surviving spouse can delay required distributions from the account until the deceased spouse would have reached age 70½. This provides flexibility to delay the distributions and manage the taxes that would be due. You should be cautioned that if you die with an Inherited IRA, your successor beneficiaries will not be able to use their own life expectancy for distributions. Insurance can be an important estate-planning tool, providing liquidity and financial security. Long-term care insurance In a recent survey, worker confidence in having enough money to pay for medical and long-term care expenses reached record lows. 1 While it may be possible to use accumulated assets to pay expenses for long-term health care, a potentially more effective alternative is an insurance policy that would provide the dollars needed to cover long-term health care expenses. A tax deduction may be available, so ask your tax advisor if you qualify. Life insurance Life insurance helps ensure your surviving spouse will have adequate retirement funds. Those already in retirement often don t realize that certain sources of retirement income may dwindle or end upon death. For example, income from sources such as pensions, Social Security, and annuity payments may be significantly reduced or end upon your death, but life insurance can replace income lost from such sources, and is free of income taxation and withholdings for the beneficiaries. Stretch IRA strategy and life insurance The benefit of stretching can be reduced or lost when lump-sum distributions are to pay for immediate expenses such as estate taxes or other estate settlement expenses. To help pay for those immediate expenses and avoid dipping into retirement assets, consider purchasing life insurance for the retirement account owner. Life insurance proceeds provide income-tax-free liquidity for these immediate expenses, and can help ensure your wealth is passed on to your beneficiaries. Tax benefits While most people are aware of costs during retirement such as housing and health care, they often overlook the fact that taxes may have the greatest impact on their assets. For example, someone receiving a $100,000 annual retirement income for 25 years would lose $375,000 of income over that time frame due to taxes, assuming only a 15% income tax rate. Such losses can be detrimental to a healthy retirement. A cashvalue life insurance policy can help minimize the tax loss, as any earnings growth within a policy accumulates tax deferred and potentially tax-free. In addition, investment transfers within a cash-value policy can be made tax-free, and withdrawals can be made through loans tax-free, following specific guidelines. And upon death, the policy pays proceeds to beneficiaries income-tax free. RMDs on Inherited IRAs Nonspouse beneficiaries who want to take advantage of the stretch IRA strategy must generally begin taking required distributions annually from the Inherited IRA no later than December 31 of the year following the death of the IRA owner. Regardless of whether the IRA assets pass to the beneficiaries before or after the IRA owner s RBD, they can stretch the remaining assets over their own single life expectancy. 1 Employee Benefit Research Institute, The 2009 Retirement Confidence Survey, April Extending your legacy with beneficiary planning Extending your legacy with beneficiary planning 15

10 Inheriting retirement plan assets Important dates a beneficiary should consider Nine months after the IRA holder s death Deadline for beneficiaries to disclaim assets September 30 of the year following the IRA holder s death Deadline for beneficiaries to be determined December 31 of the year following the IRA holder s death Deadline for first distribution if lifeexpectancy distributions are chosen Five years after the IRA holder s death December 31 deadline for entire IRA balance to be distributed if the owner died before the RBD (unless the beneficiary is receiving life-expectancy distributions) Inheriting retirement plan assets can raise many different questions, but your ultimate goal is to maximize the value of the assets you ve received and determine which options are best for you. While you may be able to distribute inherited retirement balances without an early distribution penalty, taking a lump-sum distribution may not be your best choice as two important factors come into play loss of tax-advantaged growth and taxes. Loss of tax-advantaged growth Upon receiving retirement assets, you may be tempted to spend the money or invest in a taxable account. Paying taxes on the growth of the investments means less money is available to compound over time, and spending the money may eliminate the opportunity to create a long-term legacy. Taxes Because pretax 401(k) and Traditional IRA distributions are generally included in your taxable income during the year of distribution, taking a lumpsum distribution could increase your tax rates. This is true not only on the distributed amount, but also for the rest of your taxable income that year. And, remember, once distributed to a nonspouse beneficiary, there is no opportunity to roll over the assets. Beneficiaries of Roth 401(k) and Roth IRA balances enjoy tax-free distributions if certain conditions are met. Consider an Inherited IRA where any potential growth continues to accumulate tax-advantaged. And, although you are required to take annual RMDs, stretching them over a longer period of time minimizes your annual tax burden and enables your money to continue to enjoy taxdeferred growth. In addition, you are able to designate a successor beneficiary to receive any remaining assets at the time of your death, a potentially tax-efficient method. Account titling is critical If you inherit an IRA from anyone other than your spouse, you can t treat it as your own. Instead, you need to have the account re-titled as an Inherited IRA. According to the IRS, the IRA must be established in a manner that identifies it as an IRA with respect to a deceased individual and also identifies the beneficiary; for example, Tom Smith as beneficiary of John Smith. In other words, make sure your financial institution includes the name of the deceased IRA owner in the account title, along with an indication that it s for the benefit of the person who inherited it. As a reminder, beneficiaries are not able to make annual IRA contributions or roll over outside funds into an Inherited IRA. Moving inherited assets As a beneficiary, you may move inherited money from an employer plan to an Inherited IRA or an Inherited IRA between providers, but beware of special rules that apply to avoid costly mistakes. Nonspouse beneficiaries are not allowed to use the 60-day rule to roll over money to an Inherited IRA. Instead, the funds must be moved as a direct rollover or trustee-to-trustee transfer. To further clarify, if you are a nonspouse beneficiary and receive a distribution check made payable to yourself, you may not roll the money into an Inherited IRA. Instead, you will have taken a lump-sum distribution and the funds will be added to your ordinary income that year. Because the funds are no longer in an IRA, you would lose the benefit of future tax-deferred growth. A spouse would be allowed to roll that money into an IRA in his or her own name, but not into an Inherited IRA. 16 Extending your legacy with beneficiary planning Extending your legacy with beneficiary planning 17

11 Distribution requirements for inherited retirement plan assets Lifetime retirement planning with Wells Fargo Advisors The rules for taking required distributions are similar whether you inherit a Roth IRA or Traditional IRA. Any RMD that should have been taken by the retirement account owner in the year of death must be distributed by the beneficiaries from their Inherited IRAs by December 31 of that same year. The beneficiaries are only responsible for their portion of the RMD based on the portion of the IRA inherited and they will owe ordinary income tax on any taxable portion of the distribution. Surviving spouses who transfer the inherited money into their own IRAs can satisfy the deceased spouse s RMD for the year of death from their own accounts. Nonspouse beneficiaries of employer-sponsored retirement plans must be permitted to make a direct trustee-totrustee transfer of the inherited plan assets to an Inherited IRA. The beneficiaries will need to contact their financial advisor to establish an Inherited IRA, and then contact the employer plan sponsor for help in executing the transfer of assets to the Inherited IRA. It s important to remember that only a direct transfer is allowed, as indirect rollovers are treated as lump-sum distributions and cannot be moved into an Inherited IRA. Wells Fargo Advisors offers strategies and guidance to help see you to and through retirement. As we meet with you to understand your specific needs, we consider your total relationship with our company as well as your broader financial picture. Working with you, we ll discuss where you are today, where you want to be, and the most suitable strategies for helping you pursue your goals. Approaching retirement with Wells Fargo Advisors, you will have the reassurance of our neighborhood presence, which America has come to trust through the Wells Fargo name for more than 150 years. As one of the country s leading providers of retirement services, we combine lifetime retirement planning with an engaged and enduring interest in the future you hope to achieve. Our commitment to you Building an ongoing relationship Helping you reach your financial goals is our priority. And to do that, your financial advisor starts by taking the time to understand who you are, what you care about, and what a realistic financial strategy looks like for you. By taking the time to engage with you, we re better equipped to develop a plan that fits into your life. Fully invested in your success Achieving your unique vision of financial success requires a strategy tailored to your personal goals. Allow us to provide personalized recommendations you can follow to help you get there. We can meet with you one on one and use a step-by-step approach that helps you analyze your goals, understand your financial challenges, and then create an income stream that will support your lifestyle both now and for years to come. With you every step of the way A truly realistic approach to planning doesn t just allow for changes in your personal and financial circumstances. It takes them as a given. That s why your financial advisor will work with you to rebalance your current needs and future goals as life continues to change. As you meet together, key issues to discuss concerning legacy planning include: Do I want to create a legacy for my family? Can my IRA be left to a charity? Is a Roth IRA conversion appropriate for me at this stage? How is my RMD calculated, how is it taxed, and which accounts require me to take RMDs? What if I need income before I turn 59½? Does it make sense to delay my Social Security payments? How can consolidating my retirement accounts benefit me? 18 Extending your legacy with beneficiary planning Extending your legacy with beneficiary planning 19

12 Glossary of terms 60-day rollover rule: The IRS-established time frame for making indirect rollover contributions. Generally, account owners must make the rollover contribution by the sixtieth day after the day they receive the distribution from a Traditional IRA or employer-sponsored plan. Beneficiary: A person or other legal entity designated to receive money or other benefits from a benefactor. Primary beneficiary: The party first in line to receive assets or benefits. Contingent beneficiary: The party that receives assets or benefits only if the primary beneficiary disclaims the inheritance or dies before the IRA owner. Default beneficiary: The party that receives assets or benefits if the account owner did not name a beneficiary, or if the primary beneficiary dies first and there is no contingent beneficiary named. Non-natural beneficiary: Any nonliving entity designated to receive assets or benefits (e.g., charity, look-through trust, estate). Community property states: The nine states that view all property acquired by couples during marriage to be communal, and require it to be divided equally in the event of divorce. These states are sometimes also referred to as marital property states. The remaining states enforce equitable distribution laws, which do not require an equal split of marital property, but take into account the financial situation of each spouse. Defined contribution plan: An employer-sponsored retirement plan that companies offer to their employees. The employer s annual contribution amount is specified and employees may make pretax contributions. Certain plans also allow employees to make after-tax contributions. Common plan types include 401(k), 403(b), and 457(b) plans. Defined benefit pension plan: An employer-sponsored retirement plan that promises to pay a specified amount to each employee who retires after a set number of years of service. Distribution: The removal or withdrawal of assets from a retirement account. Five-year distribution rule: Upon inheriting retirement account assets, this rule allows a beneficiary to take up to five years to withdraw the entire value of the IRA and is available only if the IRA owner died before the required beginning date. Lump-sum distribution: Removing the entire account balance in one withdrawal. Required minimum distribution (RMD): The minimum amount, as mandated by the IRS, that a retirement plan account owner and beneficiary must withdraw annually to avoid penalty. Employer-sponsored retirement plan: Retirement plans that are established and maintained by companies (e.g., defined contribution, defined benefit pension plans, SEP IRAs, SIMPLE IRAs). Life-expectancy distributions: The IRS-mandated required minimum distribution amount (RMD) to be withdrawn annually from qualified retirement plans, IRAs, and certain annuities. The amounts are calculated using IRS formulas and divisors that are published in three life expectancy tables. Uniform life expectancy table: Includes divisors to determine RMDs for account owners age 70½ and older and is the most commonly used table. 20 Extending your legacy with beneficiary planning Joint life and last survivor expectancy table: Includes divisors that may only be used by account owners who have named a spouse as the sole primary beneficiary of that account and that spouse was born more than 10 years after the account owner. Single life expectancy table: Includes divisors that beneficiaries of Inherited IRAs may use to determine their annual RMD. The table is only used the first year a RMD is due, as the calculation method is term certain. Term certain means that instead of using a new divisor from the single life expectancy table each year (when taking RMDs for Inherited IRAs), you subtract one from the original divisor. Life insurance: A contract between the policyholder and the insurer, where the insurer promises to pay a sum of money (death benefit) to a designated beneficiary upon the death of the policyholder. Term: A type of life insurance that provides coverage at a fixed payment amount for a specified period of time (i.e., term). If the insured dies during the term, the death benefit is paid to the beneficiaries. If the insured does not die during term, the policy expires. Cash-value (also known as permanent): A type of life insurance that remains in effect until the policyholder dies and the death benefit is paid. The policy cannot be canceled by the insurer, unless fraud is proven or the policyholder fails to pay the agreedupon premiums. Probate: The process of legally establishing the validity of a will before a judicial authority. Required Beginning Date (RBD): The date by which qualified plan participants or IRA owners must begin receiving Required Minimum Distributions from their retirement accounts. Rollover: The process of moving retirement savings from (1) a retirement plan at work to an Individual Retirement Account (IRA), (2) another employer-sponsored retirement plan to an IRA, or (3) an IRA to an employer-sponsored retirement plan, if the plan accepts. The rollover process maintains the money s tax-deferred status. Direct rollover: Account assets are distributed from an employer-sponsored plan and made payable to the receiving IRA provider. The company plan administrator may either provide the participant with a distribution check payable to the IRA provider (and the participant deposits that check directly into the IRA) or distribute the assets electronically to the IRA. This is a tax-reportable event to the IRS. Indirect rollover: Employer-sponsored plan assets are distributed in the form of a check made payable to the participant, which can then be deposited into an IRA within the 60-day period. This rollover method requires a mandatory 20% federal tax withholding and can result in taxation and penalty on any taxable amount not rolled over. This is a tax-reportable event to the IRS. Trustee-to-trustee transfer: The process of moving IRA assets to an IRA held by another trustee, or account provider. This is not considered a tax-reportable event. Unlimited marital deduction: This IRS provision permits the unlimited transfer of assets between spouses, during life or at death, without federal estate or gift taxes. A heritage of client service Wells Fargo Advisors is one of the nation s premier financial services firms. Headquartered in St. Louis and represented by more than 15,000 financial advisors, it was born out of Wells Fargo s 2009 acquisition of Wachovia Securities. Wachovia Securities, which traces its roots to 1879, grew over the years by combining with some of the industry s most respected regional and national firms, including the 2007 acquisition of A.G. Edwards, Inc. by Wachovia Corporation. Throughout their histories, Wells Fargo Advisors predecessors were known for exceptional service based on trust and knowledge and for corporate cultures that put client needs above all else. Wells Fargo Advisors is a non-bank affiliate of Wells Fargo & Company, one of the nation s largest and strongest financial institutions. In business since 1852 and named on Fortune magazine s World s Most Admired Companies list for 2009, 2010, and 2011, Wells Fargo is known and respected for its responsible stewardship of its clients assets. Extending your legacy with beneficiary planning 21

13 INVESTMENT AND INSURANCE PRODUCTS: NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE This brochure was created for informational purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. The topics discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives, financial circumstances, and tolerance for risk. Past performance is not a guarantee of future results. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. This brochure is intended to provide a general overview of the topics covered. The accuracy and completeness of this information is not guaranteed and is subject to change. It is based on current tax information and legislation as of October It is not intended to provide tax, accounting or legal advice of any type since Wells Fargo Advisors is not engaged in rendering tax, accounting or legal advice. Investors need to consult their own tax and legal advisors before taking any action that may have tax or legal consequences. All calculations are hypothetical and are provided for informational purposes only. They are not intended to represent any specific return, yield, or investment, nor are they indicative of future results. Wells Fargo Advisors is not a legal or tax advisor. However, its financial advisors will be glad to work with you, your accountant, tax advisor, and/or lawyer to help you meet your financial goals. Wells Fargo Advisors is the trade name used by two separate registered broker-dealers: Wells Fargo Advisors, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, nonbank affiliates of Wells Fargo & Company Wells Fargo Advisors. All rights reserved. ECG Printed on 10% Post-Consumer Recycled Paper Rev 01 (1 ea)