IRA Rollover Guide. to lump-sum distributions

Transcription

1 IRA Rollover Guide to lump-sum distributions May 2009

2 Table of Contents Section 1 IRA Rollovers: What Distributions Are Eligible?... 4 $100,000 Lump-sum Distribution: Four Scenarios... 8 Your IRA... 9 Section 2 Preferential Tax Treatments for Retirement Plan Distributions Retirement plan portability Guide Financial Planning Services IRA Rollover Guide

3 Today, most employers offer departing employees the choice of a lump-sum distribution from their retirement plans when they retire or otherwise terminate employment. For employees, a lump-sum distribution represents years of hard work and carries with it the hope of a long-awaited, well-financed retirement. Just as a company is wise to help employees plan ahead for retirement by offering the opportunity to participate in various retirement plans, you would do well to map out a strategy for what you will do when these funds are distributed to you. Even if the amount of the distribution is small, carefully considered decisions at this juncture can help you protect and potentially enhance the value of your lump-sum. This guide s purpose is to provide up-to-date information about the complicated financial and tax issues that come along with a lump-sum distribution. We recommend that you consult with your tax and investment advisors before making any irrevocable decisions. Morgan Stanley Smith Barney, a leader in the financial community, can make one decision very easy your choice of financial advisor. We can give you the benefit of our years of experience advising and managing retirement assets for individuals with wide-ranging goals and risk profiles. We are confident we can help you meet your needs and look forward to welcoming you as a valued client. IRA Rollover Guide 3

4 Section 1 IRA Rollovers: What Distributions Are Eligible? In a nutshell, what are my options when I get a retirement plan distribution? Your choices boil down to deferring any immediate tax liability by depositing your distribution into another tax-deferred investment vehicle, such as an Individual Retirement Account, or an employer-sponsored plan. Or, you may elect to receive any part of the retirement plan distribution in cash and/or stock. Personal receipt of your plan balance will trigger an immediate tax liability. With certain exceptions, however, you may be eligible to determine the tax due using favorable rates only available to lump-sum distributions. When am I eligible to take a distribution from my employer s retirement plan? Generally, you are eligible to take a distribution from your employer s plan when you separate from service. Your plan may contain provisions, however, that will allow you to elect an in-service distribution. In-service distribution provisions may be subject to certain criteria such as minimum age or years of service requirements. If you qualify for an in-service distribution, you may elect to roll over all or a portion of these funds, while continuing to participate in your employer s plan. You should check with your human resources department for information specific to your employer s retirement plan distribution options. Why should I roll over my retirement plan distribution? You can retain the tax-deferred status of your retirement plan by rolling your distribution into an IRA. This will help assure that the full value of your accumulated benefits will continue to grow sheltered from annual taxation and be available for your retirement years. If you do not roll your distribution into an IRA or another qualified retirement plan, you will owe taxes immediately. Your employer is required to withhold 20% of your distribution as a prepayment of federal income taxes. And, if you are under age , you will probably incur a 10% early withdrawal penalty on your funds. The only exception to the penalty is if you terminate employment during the year you attain age 55 or later, or you are disabled. Also any gains that you have on the balance of your funds will be taxed every year, much like any other investment account you may have. Are all retirement plan distributions eligible for rollover to an IRA or other taxdeferred plan? 2001 legislation significantly expanded the retirement account distributions that are eligible for a rollover to an IRA. Before-tax and after-tax contributions made to any of the plans listed on page 5 could be rolled to an IRA. 4 IRA Rollover Guide

5 Which distributions qualify for a rollover to an IRA? Distributions from the following plans qualify for a rollover to an IRA: defined benefit pension plans money purchase and target benefit pension plans profit-sharing plans 401(k) plans stock ownership plans keogh plans 403(b) plans section 457(b) governmental deferred compensation plans tax-deferred savings plans Which distributions do not qualify for a rollover to an IRA? The following distributions do not qualify for a rollover to an IRA: required minimum distributions received after age 70½ installments made over a specified period of ten years or more installments in a series of substantially equal periodic payments made over the life or life expectancy of the participant, such as annuity payments or penalty-free withdrawals before age 59½ (Section 72(t) payments). n hardship distributions CAN I ROLL OVER MY DISTRIBUTION TO AN EXISTING IRA OR SHOULD I OPEN A SEPARATE IRA? For most individuals it makes sense to roll over a distribution to an existing IRA, since there are no longer any advantages to opening a separate Rollover IRA. Liberalized portability rules allow you to transfer distributions between many different types of plans. Please refer to the Retirement Plan Portability Guide on page 15, which charts all the permissible rollover options, and flags the few limitations. One reason you may consider opening a separate Rollover IRA is if you plan to convert the account to a Roth IRA. It is not mandatory to do so, but it may be more convenient. Please see the next question for more information about Roth IRA conversions. Please note that if you receive a lump sum distribution that includes both before-tax and aftertax contributions, and roll over only part of that distribution to an IRA, the amount you roll over is treated as coming first from the taxable part of the distribution. In essence, this gives you the opportunity to recapture your after-tax contributions. Individuals born on or before January 1, 1936, will want to consider the special tax treatments that are only available to them before committing to an IRA Rollover. These tax treatments are detailed in Section 2. IRA Rollover Guide 5

6 What if my distribution includes after-tax contributions? After-tax contributions may be transferred directly into an IRA or into another qualified retirement plan. After-tax contributions must be transferred via a direct rollover; they cannot be distributed to you. There is no 60-day rollover option for after-tax contributions. Also, your IRA custodian or plan trustee must be able to account for these after-tax amounts separately. Your Citigroup Global Markets Inc ( CGMI ). IRA is able to account for after-tax rollover distributions. Preserving after-tax contributions in an IRA continues their tax-deferred growth until withdrawn at a later date. However, you may be eligible for one or more special tax treatments for some or all of your after-tax contributions only at the time they are distributed from your employer s retirement plan. You will lose these special tax treatments if you elect the IRA rollover. Special rules for after-tax amounts contributed before 1987 If you contributed after-tax amounts to any of your employer s retirement plans before 1987, you should ask your employer for a breakdown of this amount. Based on previous law, pre-1987 aftertax contributions are eligible for tax-free distribution from your qualified plan. You may withhold this amount from your IRA Rollover and deposit it into a non-retirement account with no taxes due. Further growth will be taxed annually. If, instead, you roll over pre-1987 after-tax amounts, or any other later after-tax contributions, you will need to use the pro-rata tax calculation each year to determine the portion of each distribution that is tax-free. This annual calculation is the same as would be used to determine the taxable portion of distributions from a non-deductible Traditional IRA. Example: Distribution OF After-Tax ConTRIBUTIONS Linda Spring takes a $10,000 distribution. Her account currently has: 6 IRA Rollover Guide Pre-1987 after-tax contributions come out first and are tax-free: $8,000 Pre-1987 after-tax contributions, exclusive of earnings $5,000 Post-1986 after-tax contributions, exclusive of earnings $1,250 Earnings on after-tax contributions $8,000 The next distribution is partially taxable. Taxes are prorated based on post-1986 after-tax contributions and earnings on after-tax dollars: Step One: How much are post-1986 after-tax contributions plus the earnings on all after-tax contributions? $6,250 ($5,000+$1,250) Step Two: What is the percentage of after-tax contributions remaining in the account? $5,000 / $6,250= 80% Step Three: 80% of the next $2,000 distribution will be tax-free. $1,600 (.80 X $2,000) Step Four: Taxable amount of the total distribution. $400 ($2,000 - $1,600) For illustrative purposes only. Contact your plan administrator for a breakdown and summary of your contribution history and current account balance. Contact your tax advisor for assistance with your tax liability.

7 What if my distribution includes company stock? Company stock may be deposited into your IRA either through a direct rollover or, if none of the stock represents after-tax contributions, within 60 days of receiving a certificate registered in your name. If you receive a stock certificate, and the stock represents your entire distribution, no mandatory withholding will apply. If you receive a combination of cash and company stock, mandatory withholding at the 20% rate will apply to the cash, and insofar as possible, to the stock up to the dollar amount of the cash portion of the distribution. You may also want to consider another way of handling a stock distribution called net unrealized appreciation. See Section 2 of this guide for more information about this special tax treatment. CAN I ROLL MY DISTRIBUTION TO A ROTH IRA? A Roth IRA permits the accumulation of retirement benefits that can be distributed income-tax-free once you reach age 59½ and the Roth IRA has been established for at least five calendar years. Assets from a qualified plan can be directly rolled into a Roth IRA. This transaction will be treated as a conversion, so applicable conversion rules, including the $100,000 Adjusted Gross Income limit (not including the value of the lump-sum distribution) will apply. However, for those eligible, this provision eliminates the need to open a Traditional or Rollover IRA prior to converting the distribution. To preserve the maximum value of your retirement assets, you may wish to pay the income taxes due at the time of conversion from other savings. There is no premature distribution penalty tax if you convert under the age of 59½. If, on the other hand, you choose to pay the taxes from the rollover itself, you will also owe income tax and premature distribution penalties, if under age 59½, on the amount that is not actually rolled over to the Roth IRA. Your Financial Advisor can prepare a complimentary Roth IRA Conversion Analysis that will quantify the immediate and longerrange implications of a Roth conversion. Beginning in 2010, the $100,000 Adjusted Gross Income limit will be eliminated, and all plan participants will be eligible to elect a direct rollover subject to current taxes to a Roth IRA. Can I leave my accumulated account balance in my employer s plan? In some cases, your employer may allow your funds to remain in the plan even though you are eligible to receive a distribution. Some plans may allow you to defer receiving a lump-sum distribution indefinitely or until a specific age, such as 65 or 70½. Please check with your plan administrator, usually in the human resources department, to determine if this choice is available to you. You should also inquire as to the rights and options that will be available to your beneficiaries if you leave assets in your company s plan. A Financial Advisor can help you review all your alternatives. If your balance in your employer s plan is less than $5,000, this option may not be available to you. IRA Rollover Guide 7

8 $100,000 Lump-sum Distribution: Four Scenarios As you can readily see, you can keep as much as $100,000 of your distribution or less than two-thirds that amount (assuming you are in the tax bracket used in these examples), depending on the decision you make. Choice One: Direct Rollover into an ira If you transfer your distribution to a Traditional IRA or a qualified plan, your entire distribution will continue to grow tax-deferred. $100,000 Plan distribution 0 Taxes withheld 0 Taxes owed $100,000 Total rolled over into an IRA Choice Three: Partial Rollover If you roll over part of your distribution and take the remainder, you will defer taxes on the portion you roll over, and pay taxes (and possibly incur a penalty for early with drawal if you are under age 59½) on the portion you take. $100,000 Plan distribution (20,000) 20% mandatory withholding $80,000 Distributions rolled over within 60 days (7,600) Income and penalty tax owed on $20,000 withheld and not rolled over** $12,400 Potential refund after filing income tax return (refund cannot be rolled over) ** Assumes 28% tax bracket with 10% early withdrawal penalty Choice Two: 60-day Rollover If you take your distribution and roll it over within 60 days, you will have to add back the 20% your employer was required to withhold in order for your entire distribution to continue growing tax-deferred. $100,000 Plan distribution (20,000) 20% mandatory withholding* $80,000 Distribution received $20,000 Withheld amount replaced with your own funds $100,000 Total rolled over within 60 days *$20,000 may be refunded at tax time choice four: No Rollover If you take your entire distribution in cash, you will pay ordinary income taxes on the distribution (unless you qualify for a preferential tax treatment) and will probably pay a 10% tax penalty if you are under age 55 when you separate from service. $100,000 Plan distribution (28,000) Income tax (including 20% mandatory withholding)*** (10,000) Early withdrawal penalty (under 55)*** $62,000 Amount of after-tax distribution ***Assumes 28% tax bracket with 10% early withdrawal penalty (For illustrative purposes only.) 8 IRA Rollover Guide

9 Your CGMI IRA What are the advantages? Establishing an IRA opens up a wide range of investment opportunities and benefits. Consider the following advantages: Increased investment flexibility. Choose from a variety of investments designed to help you meet your pre-retirement and post-retirement objectives. A comprehensive IRA account statement. Our statement allows you to monitor your investment performance. Unique IRA sections keep track of deductible and nondeductible contributions, distributions, rollovers and the method and amount of any required minimum distributions. You will receive at least four statements each year at the end of each calendar quarter. If there has been activity in your account, you will receive a statement for that month as well. You may also elect to receive your statements electronically via and to monitor your account any day, any time through our secure web site. smithbarney.com. With smithbarney.com you can review your IRA activities and receive up-to-date information on the companies that interest you all on our web site at smithbarney.com. For information about other free services available through smithbarney. com, please contact your Financial Advisor. Free dividend reinvestment service. Making your equity investments work harder is easy with our dividend reinvestment service. You can elect to reinvest your dividend payments automatically in additional shares of the same stock. Thousands of listed and overthe-counter equities are eligible for dividend reinvestment. Personal attention. You are in charge of your investments, but you are not alone. Backed by investment specialists, your Financial Advisor will keep you informed about current market trends and will assist you in making decisions concerning your retirement plan assets, regardless of whether you elect an IRA rollover or a preferential tax treatment. How to open AN IRA It is easy to open an IRA. Your Financial Advisor will provide an Account Application and a Client Agreement for your signature. Once your account is opened, you can contact your benefits administrator to arrange for a direct rollover of your retirement plan into your IRA. Ask your Financial Advisor for our brochure on IRAs: Powering Your Retirement (PS2022). Automatic investment of cash balances. Cash credited to your account is automatically swept daily into interest-bearing, FDIC-insured savings deposit accounts through our innovative Bank Deposit Program sm for substantial account protection. IRA Rollover Guide 9

10 How to withdraw funds Distributions from your IRA are available at any time; however, if you are not yet age , you may incur a 10% premature distribution penalty tax, as required by IRS regulations, unless your distribution is for one of the following specific exceptions: disability medical expenses exceeding 7.5% of adjusted gross income college tuition expenses for yourself or family members purchase of a first home ($10,000 lifetime maximum) payment of medical insurance premiums after receiving unemployment compensation for more than 12 weeks death distributions paid to a beneficiary Substantially Equal Payments as outlined below substantially equal payments The following rules apply to Substantially Equal Payments: payments must be made at least once a year until age , or for five years, whichever period is longer. For example, if you are age 50 when you initiate a Substantially Equal Payments program, you must receive distributions at least annually until age However, if you are age 57 when you begin, you will need to take payments for five years until age 62. if you have more than one IRA, you may elect Substantially Equal Payments from one or more accounts. Or, if you have one large IRA, you may wish to divide the account and receive Substantially Equal Payments from one account only. you may not discontinue payments, except in the case of death or disability. If you would like to reduce the amount of your payments, you may exercise a one-time, irrevocable election to switch from one calculation method to another. (Not all possible changes are permitted.) if you begin Substantially Equal Payments in the middle of the year, you may prorate the first year s distribution amount. you must use reasonable interest rate assumptions (defined as any interest rate that is not more than 120% of the federal mid-term rate from the previous two months) and IRS-approved life expectancy factors. For more detailed information about Substantially Equal Payments, including the specific ways that payments may be determined, request a copy of The IRA Distribution Manual (PS2055). Upon request, your Financial Advisor can prepare a custom Distribution Analysis that calculates the permissible distribution amounts under the three substantially equal payment methods. The Analysis shows the number of years you must receive the payments and highlights their impact on your long-term retirement finances. We recommend that you consult with your own tax advisor before initiating a distributions program from your IRA. 10 IRA Rollover Guide

11 How can I access distributions From my CGMI IRA? If you would like to tap into your retirement nest egg, your IRA offers several convenient distribution options: funds can be sent directly to you or transferred into your existing Morgan Stanley Smith Barney brokerage account based on your written or telephoned request. Transfers or withdrawals can be made in cash or in securities you are holding in your IRA. specific amounts can be systematically sent to you, another financial institution or your Morgan Stanley Smith Barney brokerage account on a predetermined schedule. you can upgrade your IRA to an IRA/FMA which allows you to write checks against available funds anytime. IRA Rollover Guide 11

12 Section 2 Preferential Tax Treatments for Retirement Plan Distributions What are preferential tax treatments? If you receive a distribution that is eligible to be rolled over to an IRA but you elect not to, you will need to pay income taxes on the pretax portion of the amount you receive. Your employer is required to withhold 20% of the distribution as a prepayment of personal income taxes. However, current tax laws include three specific methods that may help you reduce the tax bite on certain retirement plan distributions that meet the definition of a lump-sum distribution. These methods are called: Ten-year averaging long-term capital gains net unrealized appreciation on employer stock If you meet the eligibility requirements for any of these special tax treatments, you will want to consider the immediate and longterm impact of paying tax at the time of distribution rather than deferring tax with an IRA rollover. WHICH RETIREMENT PLAN DISTRIBUTIONS ARE CONSIDERED LUMP-SUM DISTRIBUTIONS? A distribution of company securities will qualify as a lump-sum if it is distributed within one taxable year from all of your employer s qualified plans of one kind (401(k), pension, profit-sharing, or stock bonus plans) on account of: n death of the plan participant n in-service withdrawal, if permitted by plan provisions, after age 59½. If you receive a distribution before age 59½ you will be subject to a premature distribution tax of 10%. n separation from service. If you leave before the year you are 55 you will be subject to a premature distribution tax of 10%. n disability, but only if you are a selfemployed individual, and you are totally and permanently disabled. What is ten-year income averaging? Ten-year income averaging is a once-in-a-lifetime election that allows you to pay tax on a lumpsum distribution as if the amount had been received over a period of ten years, rather than all at once. The tax on the averaged amount is figured at a lower marginal tax rate, resulting in a smaller tax bill. The tax liability computed using income averaging is separate from and in addition to any regular income tax due for the year. The tax calculated on averaged amounts is due in its entirety in the year the distribution is received. It is not paid over a ten-year period. Ten-year averaging uses 1986 tax rates. 12 IRA Rollover Guide

13 Who is eligible for ten-year averaging? Ten-year income averaging is available to you if you meet the following requirements: born January 1, 1936 or earlier. received a lump-sum distribution from a qualified plan within one calendar year (403(b) and 457 plans are not eligible) participated in the plan for at least five years. What are the taxes due when I use ten-year averaging? The following table illustrates the tax that would be due applying ten-year averaging tax treatments to various lump-sum distributions: Amount of Lump-Sum Distribution Ten-Year Averaging $ 20,000 $ 1,100 50,000 5,874 75,000 10, ,000 14, ,000 24, ,000 36, ,000 66, , ,682 1,000, ,210 For illustrative purposes only. WHAT ARE THE DETAILS OF LONG-TERM CAPITAL GAINS TREATMENT? Before 1974, distributions from employersponsored plans were taxable as long-term capital gains. Amounts accumulated in retirement plans prior to 1974 continue to be eligible for a 20% capital gains tax rate, subject to the following requirements: n your date of birth is January 1, 1936 or earlier. n your distribution includes plan contributions made before You can choose to use the capital gains tax treatment only once after Long-term capital gains treatment may be combined with ten-year income averaging for the portion of the distribution that is attributable to contributions made in 1974 and later. If you make this choice, you cannot use either the ten-year tax averaging or capital gains tax treatments for any future distributions. Complete IRS Form 4972 to compute this tax. What is net unrealized appreciation? A lump-sum distribution that includes employer stock gives you the unique opportunity to convert taxable income into a longterm capital gain. Net unrealized appreciation represents the gain on company stock while it was held within your employer s retirement plan. Your employer is required to provide a final plan statement that includes both the actual cost basis of your shares and their market price at the time of distribution. The difference between the two amounts is called net unrealized appreciation. IRA Rollover Guide 13

14 What are the tax consequences of electing net unrealized appreciation for company stock? If you elect not to roll over your company stock to an IRA, you will owe income taxes and possibly a 10% premature distribution penalty tax, payable in the year of distribution. You may use preferential tax treatments to calculate your tax liability: net unrealized appreciation, ten-year averaging or long-term capital gains, depending on your eligibility. If you opt for net unrealized appreciation tax treatment, your immediate tax liability can be calculated using either the price of your company s stock when distributed or the actual (lower) cost basis of the shares purchased by the qualified plan. When you sell your shares, an additional tax liability is incurred on the untaxed net unrealized appreciation. Any gain is a long-term gain up to the amount of the net unrealized appreciation. This is true no matter how long you held the securities. Any gain that is over and above the net unrealized appreciation amount is treated for tax purposes as a short-term or long-term capital gain, depending on how long you held the securities after the distribution. For a more complete discussion of the pros and cons of holding company stock outside an IRA, contact your tax professional. Case Study How NUA Works Joan Winters, age 60, receives a lump-sum distribution of 10,000 shares of employer stock on January 15 of this year with an average cost basis of $20 per share, and a current market value of $50 per share. All shares were purchased with employer contributions and are eligible for the NUA tax strategy. Ms. Winters will pay ordinary income tax (35%) on the average cost basis of the shares (10,000 x $20 = $200,000) rather than the current value (10,000 x $50 = $500,000). By making this election, she has created $300,000 of NUA ($30 per share) that will be subject to capital gains tax (currently 15% maximum) at the time the shares are sold. What will be her tax liability if she sells all 10,000 shares at $60 per share two years later? How does this compare to an IRA Rollover that she liquidates at the same time? (A) Current value of shares Net Unrealized Appreciation $500,000 (10,000 x $50) (B) Cost basis of shares $200,000 (10,000 x $20) (C) Unrealized Appreciation (D) Additional Appreciation (E) Tax due on distribution (F) Tax due on subsequent sale $300,000 (A - B) $100,000 (10,000 x $10) $70,000 (200,000 x.35) $60,000 (10,000 x $40 x.15) IRA Rollover $500,000 $100,000 0 $210,000 ($600,000 x.35) (G) Total tax (E + F) $130,000 $210,000 (This case study is for illustrative purposes only and may not be representative of your situation.) 14 IRA Rollover Guide

15 Retirement Plan Portability Guide Today, you can transfer your retirement assets between many different types of plans. You can also roll both before-tax and after-tax money between plans to further boost your ultimate retirement nest egg. Rollover Chart To From Traditional IRA Qualified Plan 6 403(b) Plan Traditional IRA All before and after tax amounts eli- are eligible for gible for a rollover eligible for a rollover a transfer to an to a Qualified to a 403(b) IRA 1 Plan 1,4 plan 1,4 Qualified Plan 6 457(b) Plan (governmental plans only) Roth IRA SEP IRA SIMPLE IRA eligible for a rollover to a 457(b) plan 1,4 eligible for a rollover to a 457(b) plan 3,4 eligible for a rollover to a 457(b) plan 3,4 eligible for a rollover to a 457(b) plan 3,4 Ordinary income taxes are due on the taxable portion of a Roth conversion 1 Ordinary income taxes are due on the taxable portion of a Roth conversion 1,3 Ordinary income taxes are due on the taxable portion of a Roth conversion 1,3 Ordinary income taxes are due on the taxable portion of a Roth conversion 1,3 All before and after tax amounts are eligible for a rollover to an IRA 3,5 All before and after tax amounts are eligible for a rollover to a Qualified Plan 3,4,5 All before and after tax amounts are eligible for a rollover to a 403(b) plan 3,4 403(b) Plan All before and after All before and All before and tax amounts after tax amounts after tax amounts are eligible for are eligible for are eligible for a rollover to an a rollover to a a rollover to a IRA 3,5 Qualified Plan 3,4,5 403(b) plan 3,4 457(b) Plan (governmental eligible plans only) eligible for a for a rollover eligible for a roll- rollover to an to a Qualified over to a 403(b) IRA 1 Plan 3,4 plan 3,4 Roth IRA Not allowed Not allowed Not allowed Not allowed Allowed. May be transferred anytime, or rolled over once every 12 months 2 SEP IRA SIMPLE IRA All before and after tax amounts are eligible for a rollover to an IRA 1 eligible for a rollover after two years of participation 1 eligible for a rollover to a Qualified Plan 1,4 eligible for a rollover after two years of participation 1,4 eligible for a rollover to a 403(b) plan 1,4 eligible for a rollover after two years of participation 1,4 eligible for a rollover to a 457(b) plan 3,4 eligible for a rollover after two years of participation 1,4 Ordinary income taxes are due on the taxable portion of a Roth conversion 1 eligible for a rollover after two years of participation. Ordinary income taxes are due upon the conversion of a SIMPLE IRA 1 All before and after tax amounts are eligible for a rollover to a SEP IRA 1 All before and after tax amounts are eligible for a rollover to a SEP IRA 3,5 All before and after tax amounts are eligible for a rollover to a SEP IRA 3,5 eligible for a rollover to a SEP IRA 3 Not allowed All before and after tax amounts are eligible for a transfer to a SEP IRA 1 eligible for a rollover after two years of participation 1 Designated No No No No Yes 3 No No Roth Account 7 Not allowed Not allowed Not allowed Not allowed Not allowed Not allowed Allowed. May be transferred anytime, or rolled over once every 12 months 1 1 Distributions for a) required distributions, b) substantially equal periodic payments and c) distributions to nonspouse beneficiaries are not eligible to be rolled over or converted. 2 Roth IRA distributions that are a) substantially equal periodic payments and b) distributions to nonspouse beneficiaries are not eligible to be rolled over. 3 Company retirement plan distributions that are a) required distributions, b) substantially equal periodic payments or distributions over another specified period of ten years or more and c) hardship distributions are not eligible to be rolled over. Distributions to nonspouse beneficiaries, if permitted by the company plan, may be directly rolled to an inherited IRA. 4 Retirement plan sponsors are not required to accept rollover contributions. 5 After-tax amounts must be moved via a direct rollover. 60-day rollovers are not permitted. 6 Qualified plans consist of profit sharing, employee stock ownership, money purchase and 401(k) plans. 7 Designated Roth accounts consist of salary deferrals under Roth 401(k) and Roth 403(b) arrangements. Rollovers into Designated Roth accounts are not permitted. Source: Morgan Stanley Smith Barney IRA Rollover Guide 15

16 Financial Planning Services Before you can make retirement planning decisions or determine how much you need to save, you need to analyze your individual situation. Our complimentary financial planning analyses can help you do this. Relying on this analysis, your Financial Advisor can create a plan aimed at reaching your particular financial goals. The following are two services that may help you decide which IRA is best suited for your needs: The Retirement Accumulation Analysis compares annual contributions to an IRA, with contributions to a taxable savings account and a tax-exempt account. This program also illustrates how tax-deferred compounding will affect the growth of a lump-sum distribution from a prior employer s retirement plan that is rolled over to an IRA, even if there are no further contributions added to the account. The Roth IRA Analysis compares the amount available at retirement if saving through a Traditional IRA versus saving through a Roth IRA. It will also demonstrate the effects of converting an existing IRA to a Roth IRA by calculating the potential growth and tax implications. The following analysis can help you determine if your current and future savings will fund the retirement you envision: The Retirement Planning Analysis can answer the all-important questions of how much you will need to support yourself during retirement and how much you will have to save to help you reach that goal. Charts showing where your retirement funds will come from, including Social Security, pensions and savings, will help you see any gaps in income you might have to fill with additional savings. Many investors find themselves saving for their children s education and their own retirement at the same time. This analysis can show you if your children s educational funds will be enough to pay their college expenses. The Education Funding Analysis projects the college expenses for a particular educational institution or type of school. The analysis shows how your present funds for college might grow at a particular rate, and what you have to put aside monthly, or in a lump sum to potentially reach the goal of funding a college education. How should your funds be invested? The following analysis can give you the answers you need in today s financial environment. The Asset Allocation Analysis can help you assemble a portfolio that might best meet your financial goals, whether they are retirement, education or home ownership. Your time to reach your financial goals, your risk parameters and the market conditions are some of the variables taken into consideration. Based on recommendations from our investment professionals, a portfolio of individual securities that might meet your goals is presented for your review. A Financial Analysis comes with a Financial Advisor. Regardless of the savings program you select, you will receive the attention of a highly trained Financial Advisor. Your Financial Advisor will be responsible for keeping you abreast of current market trends, offering investment ideas and assisting you in allocating your IRA assets. Morgan Stanley Smith Barney LLC and its affiliates do not provide tax or legal advice. You should seek advice based on your particular circumstances from an independent tax advisor. To the extent that this material or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law Morgan Stanley Smith Barney LLC. Member SIPC JV PS /09