Retirement Savings Plan Roth Option Q&A for Foreign Missionaries

Transcription

1 Retirement Savings Plan Roth Option Q&A for Foreign Missionaries On January 1, 2015, the Retirement Savings Plan of the Presbyterian Church (U.S.A.) (RSP) added a new Roth contribution feature. Eligible RSP participants can now make contributions to the RSP through: pretax elective deferrals, Roth after-tax elective deferrals, and after-tax contributions. Foreign missionaries should carefully consider the types of contributions available because current income may not be subject to tax under the Foreign Earned Income Exclusion. The Board does not provide tax advice to its RSP participants and you may want to review this information and your RSP contribution options with a tax adviser. 1. What types of contributions are available in the RSP? Participants in the RSP may now: Contribute pretax contributions and defer paying taxes now. Pretax contributions are subject to federal income tax when they are distributed from the RSP, unless they are rolled over to another qualified plan or an individual retirement account (an IRA ). Contribute after-tax contributions. After-tax contributions are subject to federal income tax at the time they are earned and contributed to the RSP, and are not subject to federal income tax when they are distributed from the RSP. However, earnings on after-tax contributions are taxed at distribution, unless they are rolled over to another qualified plan or an IRA (or, if a minister, excluded from income as a housing allowance). Contribute Roth after-tax contributions, which are also subject to federal income tax at the time they are contributed to the RSP. If you meet certain criteria (see question #3), all distributions from Roth accounts, including on savings and earnings are not subject to federal income tax. 2. What considerations do Roth after-tax deferrals pose for foreign missionaries? Prior to 2015, foreign missionaries usually contributed after-tax contributions to the RSP because the compensation of many foreign missionaries was not taxed under the Foreign Earned Income Exclusion. The Foreign Earned Income Exclusion provides that a certain amount ($100,800 in 2015) of income earned while working abroad in most countries is excluded from federal income taxes. As a result, foreign missionaries whose compensation is not taxed under the Foreign Earned Income Exclusion do not pay federal income tax and make their contributions into the RSP on an after-tax basis. As a foreign missionary, you may want to consider making future RSP contributions in the form of Roth after-tax contributions instead of after-tax contributions because distributions from Roth after-tax Page 1

2 contributions can be free from federal income tax, if the requirements described in question #3 are satisfied. When reviewing your options, if you are a minister, keep in mind that RSP distributions are eligible for a housing allowance exclusion even after retirement. You can also choose to save a combination of pretax contributions, Roth after-tax contributions and after-tax contributions. You also may convert certain existing savings in your RSP account to Roth savings called an in-plan Roth conversion. You can find more information on in-plan Roth conversions in questions #8 and #9 below. 3. What s the difference between pretax contributions and after-tax Pretax, non-roth after-tax, and Roth after-tax contributions all offer tax advantages. With traditional pretax contributions, you lower your federal taxable income now and won t pay federal income tax on your savings or investment earnings until you retire and/or begin withdrawing your savings. Foreign missionaries do not typically make pretax contributions because the Foreign Earned Income Exclusion causes a substantial portion of their income to not be subject to U.S. federal income tax, so the immediate tax benefit for making pretax contributions tends not be beneficial to foreign missionaries. With non-roth after-tax contributions, you pay taxes on your contributions now instead of when you withdraw them. Earnings on those contributions are taxable at withdrawal (unless excluded under the housing allowance exclusion available to ministers). With Roth after-tax contributions, you pay taxes on your contributions now instead of when you withdraw them, so they are tax-free at withdrawal. Earnings on Roth contributions from the RSP also are tax-free at withdrawal, as long as you are 59-1/2 or older (or disabled or die) and your withdrawal is made at least five tax years after your first Roth contribution to the RSP (This holding period begins on the first day of the year in which you make your first contribution to your Roth account. Fidelity will record and track this Roth holding period requirement for you). If you do not satisfy the conditions for earnings on Roth after-tax contributions to be free from federal income tax, the earnings on those distributions are subject to federal income tax. You may split new contributions between a combination of traditional pretax contributions, non- Roth after-tax contributions, or Roth after-tax contributions. You may convert your eligible existing RSP funds to your Roth account through an in-plan conversion. (Contact your personal tax adviser, or a Fidelity Representative at for help evaluating Roth as a savings option and making informed choices about whether an in-plan conversion is right for you). Page 2

3 4. What s the difference between non-roth after-tax, and Roth after-tax Non-Roth after-tax contributions are non-taxable because they are taxed going into the plan; however, earnings on those contributions are taxable when distributed (unless otherwise excluded as housing allowance). Roth after-tax contributions and their earnings can be distributed tax-free if your withdrawal meets the Roth holding requirement. A withdrawal from the RSP meets the Roth holding requirement if you are 59-1/2 or older (or disabled or die) and the withdrawal is taken at least five tax years after your first Roth contribution to the RSP. If, after living in a country where you qualify for the Foreign Earned Income Exclusion (up to $100,800 in 2015) you return to the U.S. during retirement, Roth after-tax deferrals in the RSP will be tax free on distribution as long as you have satisfied the Roth holding period requirement. Any earnings on the non-roth after-tax money will be taxable at the time it is distributed from the RSP (if it is not rolled over), unless it is excluded under the clergy housing allowance provision. 5. Then, what s the advantage of contributing through the Roth option? The advantage to the Roth after-tax contribution option is that you pay taxes on your contributions now, in exchange for favorable tax treatment of your earnings later, as described above. Generally, you may want to consider Roth contributions if you: are a foreign missionary who is eligible for the Foreign Earned Income Exclusion ($100,800 in 2015); are making or have made pretax deferrals and want to diversify your tax risk by having both pretax and after-tax funds available during retirement; will not be eligible to exclude the taxable earnings on after-tax contributions from income tax under the minister's housing allowance exclusion; are in a lower tax bracket now than you think you will be at retirement; want Roth savings and earn more than the allowable income limit for contributing to a Roth IRA (Individual Retirement Account); and/or want to protect retirement assets to pass on tax-free to your heirs. 6. Are Roth after-tax contributions and earnings kept separate from my other Yes. Fidelity, the RSP record keeper, will track and differentiate your Roth after-tax contributions from your pretax contributions and your after-tax contributions. 7. If my current RSP balance is pretax but I begin Roth after-tax deferrals now, will I still be able to draw on my pretax balance during retirement even if future contributions are Roth and subject to the five-year rule? Yes, you may still receive a distribution of pretax contributions from the RSP when you retire even if your account also holds Roth after-tax contributions. Your pretax distribution will be taxable when Page 3

4 received. When distribution of pretax savings is made, if you are in a lower tax bracket than when the contributions went into the RSP, this results in tax savings. Also, under current tax law, ordained participants can exclude a distribution as Housing Allowance if they can document that the funds were used for Housing Allowance purposes. 8. Can I convert part of my pretax savings in the RSP to a Roth account? If so, I assume that any amount I convert to Roth must be declared as income on my tax returns for the year in which it is converted. Is this correct? Yes. You may convert pretax salary deferral amounts in your RSP account into your Roth account using the plan s In-Plan Roth Conversion feature. These funds will be subject to the same rules as Roth aftertax contributions and also the same potential benefits federally tax-free earnings and withdrawals. The full amounts of any conversion of pretax savings will be considered taxable income in that calendar year, subject to your applicable income tax rate. 9. Can I convert part of my after-tax savings to a Roth account? Yes. You may convert after-tax amounts in your RSP account into your Roth account using the plan s In-Plan Roth Conversion feature. These funds will be subject to the same rules as Roth after-tax contributions and also the same potential benefits federally tax-free earnings and withdrawals. In a conversion of after-tax amounts, any amounts you contributed in after-tax contributions (i.e., your basis ) are not subject to federal income taxation. The earnings on after-tax contributions are subject to federal income tax. 10. Are there any additional tax rules applicable to in-plan Roth conversions? Although you pay taxes on an in-plan Roth conversion, the 10 percent early distribution penalty for participants who are under age 59-1/2 is waived at the time of the conversion. If any amount converted to a Roth account is withdrawn within five years of the conversion and the individual is under age 59-1/2, the 10 percent penalty that was waived at the time of the conversion will apply on the amount withdrawn, unless the amount withdrawn is rolled over to another qualified plan or an IRA. You should review with your tax adviser other exceptions that may apply to the 10 percent penalty on distributions to participants who are under age 59-1/2. For More Information Consider the tax implications or speak with a tax adviser about what types of contributions you should make to the RSP. You also can discuss any of the three RSP contribution options or whether the Roth contribution option makes sense for you with Fidelity by calling (mention plan no ). Fidelity has an extensive team of phone-based Workplace Planning and Guidance Consultants that can help you any time, Monday through Friday between 8 a.m. and midnight ET. They will work with you to evaluate all your savings options and help you create a retirement savings strategy that is right for you Page 4

5 and your needs so that you can make informed choices and invest with confidence. If you speak with Fidelity be sure to remind them that you are a foreign missionary working outside of the United States and, if you are ordained, that you may be able to exclude RSP distributions from income as a Housing Allowance distribution. To elect Roth contributions, download and complete the Retirement Savings Plan Salary Deferral Agreement: After-Tax (Missionaries only) form ORS-003 and return it to your employer. Investment elections you have made through Fidelity will apply to your entire account balance, including pretax, non-roth after-tax, and Roth after-tax contributions (excluding any rollover funds). To redirect your investments, log in to NetBenefits at fidelity.com/atwork, or call Fidelity at (mention plan no ). Important Notes: Please consult a professional tax adviser as you move forward with planning for your future. In addition, Fidelity representatives are also available at to help you evaluate your options. Employees working for an employing organization in Puerto Rico are not eligible to make RSP contributions. Page 5