457 Plan Roth Contributions & Conversions New Opportunities

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1 457 Plan Roth Contributions & Conversions New Opportunities Date: Presented by: AC: This presentation is the property of ICMA-RC and may not be reproduced or redistributed in any manner.

2 Disclosures ICMA-RC does not offer specific tax or legal advice. ICMA-RC recommends that you consult with a qualified financial and/or tax professional prior to implementing any financial strategy. 2

3 Agenda 457 Plan Roth Provisions Elective Deferrals In-Plan Conversions Plan Rules Contributions Withdrawals Loans Rollovers Roth Assets: Employer Plans vs. IRAs Additional Information 3

4 Summary of New Roth Provisions Roth Elective Deferrals Designate a portion (or all) of the contributions to your 457 plan as Roth In-Plan Roth Conversions Convert pre-tax assets to Roth assets Must be eligible to withdraw assets from your plan 4

5 Qualified Distributions Distributions of Roth Assets are Qualified (tax-free) if Five years have passed since January 1 of the year of your first Roth contribution (including rollovers) and You are at least 59½ (or disabled or deceased) Example: Roth Analyzer Tool If you make your first Roth contribution in October of 2011, you will have met the five year requirement as of January 1,

6 Roth Benefits Tax-free distributions Higher after-tax contribution limits than Roth IRAs Eligibility at all income levels Tax planning 6

7 What is a Roth Account? Exists within your current 457 plan Similar to a rollover account used to track assets you roll-in from a previous employer s plan Tax reporting differences for pre-tax vs. Roth assets No such thing as a Roth 457 Plan 7

8 Roth Elective Deferrals After-tax no reduction to current taxable income Initiating Roth contributions Amount of Deferral Change Form Enrollment Form Contribution limits Apply to the combination of Roth and pre-tax deferrals Roth Analyzer Tool To help illustrate the potential benefit of Roth contributions 8

9 In-Plan Roth Conversions You must be eligible to withdraw assets Assets are taxable in the year of the conversion Outstanding loan balances are excluded Requests In-Plan Roth Conversion Form Evaluating Roth Conversions In-plan conversions cannot later be reversed (recharacterized), as with Roth IRA conversions Consult with a qualified tax professional 9

10 Plan Rules

11 Changes? Not as Many as You May Think Contribution limits Apply to combination of pre-tax and Roth deferrals Investments One single allocation for pre-tax and Roth contributions Withdrawal eligibility Same rules as pre-tax assets Most of the standard 457 plan rules apply 11

12 Withdrawals of Roth Assets Pro-rata distribution of contributions and earnings Qualified: Tax-free Non-Qualified: Earnings only are subject to taxes Example Roth Account Balance $100,000 Roth Contributions (basis) $60,000 (60% of total balance) Roth Earnings $40,000 Roth Withdrawal Request $10,000 Roth Contributions (basis) $6,000 (60% of total withdrawal) Roth Earnings $4,000 Required minimum distribution (RMD) rules apply Unlike Roth IRAs, which are not subject to RMDs 12

13 Loans and Roth Assets Not directly available for loans Unless elected by plan sponsor Are included when determining how much you are eligible to borrow Example Balance = $5,000 $2,000 pre-tax $3,000 Roth Maximum Loan = $2,000 50% of $5,000 = $2,500 limited to $2,000 (by pre-tax balance) 13

14 Rollovers and Roth Assets Other retirement plans Can be rolled to/from other 457, 401(k), or 403(b) plans that accept and provide recordkeeping for Roth assets May impact 5-year rule for qualified distributions from the receiving plan Roth IRAs Roth assets can be rolled from 457 plan to a Roth IRA Date of first Roth IRA contribution used to determine whether distributions from the IRA are subject to taxes Roth IRA assets cannot be rolled to a 457 plan 14

15 Roth Assets: Employer Plans vs. IRAs

16 Summary Comparison vs. Roth IRA Maximum contribution Eligibility to contribute Can contributions be recharacterized*? Can conversions be recharacterized*? Do RMD rules apply? 457 Higher All plan participants No No Yes Roth IRA Lower (although, if married, can also contribute to spouse s IRA) Must have income less than IRS limits Yes, up until mid-oct. of following year Yes, up until mid-oct. of following year No, other than non-spouse inherited accounts *Recharacterization The movement of a contribution or conversion amount from one IRA type to another (e.g., Roth IRA contributions being recharacterized as Traditional IRA 16contributions).

17 Contribution Rules vs. Roth IRA 457 Roth IRA What is the Maximum Contribution? (2011) Do Contributions Reduce Taxable Income? Do Earnings Accumulate Tax-Deferred? Roth No Yes Pre-Tax $16,500 or 100% of compensation Age 50 Catch-Up: $5,500 ($22,000) Pre-Retirement Catch-Up: $16,500 ($33,000) Limits apply to the combination of pre-tax and Roth contributions Yes Yes Roth $5,000 Age 50 Catch-Up: $1,000 ($6,000) Pre-Retirement Catch-Up: N/A No Yes 17

18 Withdrawal Rules vs. Roth IRA 457 Roth IRA Roth Pre-Tax Roth Are Earnings Taxed Upon Withdrawal? No, if distribution is qualified Yes No, if certain criteria are met 2 Are Contributions Taxed Upon Withdrawal? No Yes No Might the 10% Early Withdrawal Penalty Apply? No 1 No 1 Yes 2 Do IRS RMD Rules Apply? Yes Yes No 1 Exception: non-457 plan assets rolled over and subsequently withdrawn prior to age 59½ 2 Roth withdrawals are tax-free if individual has owned a Roth IRA for a 5-year holding period and either a) is over the age of 591/2; b) qualifies for a first-time home purchase; c) is disabled; or d) his/her beneficiaries receive assets after his/her death. Otherwise, ordinary income taxes apply. Penalty taxes may apply also unless qualifies for an exception. See IRS Publication

19 Get More Information! ICMA-RC website Q&A Roth Analyzer Summary Start Contributing! Enrollment Form Amount of Deferral Change Form 19

20 Questions? Investor Services