The Advantages of TSAs

Transcription

1 TAX-SHELTERED ANNUITIES The Advantages of TSAs??? Tax-Sheltered Annuities? Frequently Asked Questions about?

2 Table of Contents How a TSA works Starting a TSA Advantages of a TSA Who is eligible? Participating in a TSA Contribution limits Distributions Types of payouts Access before retirement Early withdrawal penalty Taxes on a TSA Choosing ING Finding out more

3 403(b) Providing for retirement is a challenge these days, and meeting it takes more than good intentions. It takes knowing what financial tools are at your disposal and making the most of them. For public educators, certain health care professionals, and other employees of various 501(c)(3) nonprofit organizations, one of the best retirement funding tools you can have is a 403(b) tax-sheltered annuity, or TSA. This brochure will review some of the most commonly asked questions about the 403(b) TSA and give you an idea of its many advantages and benefits, as well as its costs.

4 T S A What is a TSA? A 403(b) tax-sheltered annuity, or TSA, is a contract with an insurance company that is designed to help members of the public educational community, health care professionals, and those employed by nonprofit 501(c)(3) organizations, accumulate funds for retirement on a pre-tax basis. How does a TSA work? A TSA is employersponsored and is usually funded by salary reduction contributions. That is, the contributions for the TSA are taken from your paycheck before federal income taxes by your employer, who sends them directly to the company that issued the annuity contract, according to your directions in a salary reduction agreement. Subject to limitations discussed below, you determine the amount of the contributions. Furthermore, since it is virtually automatic and regular, among other benefits, this process makes it easy to keep your retirement funding program on track. How do I start a TSA? It s a very straightforward process. You simply enter into a salary reduction agreement with your employer. The insurance company s representative will provide the necessary forms and applications to set up your TSA. What are the Advantages of a TSA? The main advantages are: Contributions are made on a pre-tax basis. With a TSA you pay no federal income taxes on your 1

5 contributions or the interest they earn until you actually make withdrawals. That leaves more of your money to accumulate, and your earnings may grow year after year. A TSA reduces your current income taxes. If your income is $40,000 and you put $4,800 into a TSA, you pay taxes on only $35,200. At a 27% federal tax rate, that would mean a $1,296 reduction in income taxes. And again, since you don t pay federal taxes on the earnings on the amounts paid into your TSA until you receive distributions, the value of your TSA may grow faster than an investment where earnings are currently taxed. You can put away more with a TSA than in an investment whose earnings are currently taxable and have the same disposable income. As the table below illustrates, you would have $1,296 more disposable income if you contributed $4,800 to a TSA than you would if you contributed $4,800 to an investment whose earnings are taxable. You could spend that $1,296 any way you want. But if you want to increase the amount you save for retirement, you could add that $1,296 to your regular $4,800 TSA contribution. By the time you retire, the difference in accumulation could be substantial. The TSA Advantage Without With TSA TSA * Income $40,000 $40,000 Pre-Tax Contribution $ 0 $ 4,800 Taxable Income $40,000 $35,200 Less Federal Income Taxes (@ 27%) $10,800 $ 9,504 After-Tax Income $29,200 $25,696 After-Tax Savings Deposit $ 4,800 $ 0 Take-Home Pay $24,400 $25,696 TSA Advantage +$1,296 *Annuities are not FDIC insured. 2

6 A TSA is systematic and convenient. Because TSA contributions are usually made on a regular schedule through salary reduction, you don t have to worry about forgetting to put money away or procrastinating. Who is eligible??? 403(b) TSAs were designed for people employed in?? the public education field and by 501(c)(3) nonprofit organizations. Examples of eligible institutions may? include: Public elementary schools Public secondary schools Public or 501(c)(3) colleges and universities Public or 501(c)(3) medical schools Private 501(c)(3) colleges and universities Public or 501(c)(3) trade schools Public or 501(c)(3) correspondence schools The following must be 501(c)(3) organizations to be eligible: Parochial schools Zoos Adult education schools Hospitals Humane societies Religious organizations United Way and all member agencies Museums Literary groups Research foundations Scientific foundations 3

7 Who should participate in a TSA? It s an excellent idea for almost anybody who is eligible to start a TSA. The reasons for participation are particularly strong for people in the following situations: Those who want to plan ahead for retirement Those who pay a substantial amount of income tax Members of a double-income family Those who are single with dependents Those investing or saving after-tax money to fulfill long-term retirement goals Those who have adequate emergency funds Does participation in a TSA affect Social Security? No. Social Security taxes and benefits are unaffected by TSA participation. Can I have a TSA in addition to other retirement and savings plans? Yes, you may participate in any other retirement plan your employer may offer. (Keep in mind, however, that your pre-tax contributions to the TSA and any 401(k), Simplified Employee Pension, or SIMPLE plan cannot cumulatively exceed the Internal Revenue Code s annual elective deferral limits.) Because the contribution limits for TSAs are higher than those for 4

8 IRAs, financial professionals generally agree that it s best to maximize TSA contributions before starting an IRA. What happens if I get a new job? If you change employers, you have the following options: Continue to make contributions to the contract if the new employer is eligible to sponsor a TSA and the contract is available with that employer. Leave your TSA contributions in your policy to continue your opportunity for income tax-deferred interest or growth until retirement. Start receiving annuity payments from your TSA.* Withdraw some or all of the value of your TSA.* *A 10% federal tax penalty may apply on withdrawals prior to age Surrender penalties may also apply. For information on your own tax situation, please consult your tax advisor. What happens to my TSA if I die? Your beneficiary(ies) will receive the account value of your TSA, minus the balance of any outstanding loan. This distribution is subject to federal income tax. You or your beneficiary(ies) may specify how benefits are distributed in a lump-sum payment, monthly or annual payments, or a combination, subject to IRS restrictions and contractual provisions. How much money can I contribute to a TSA each year? Calculating your maximum allowable contribution is complicated and should be done by a qualified individual, such as an experienced TSA professional. Your ING representative would be happy to perform the calculation for you. Here are the general guidelines. 5

9 After January 1, 2003 After January 1, 2003, maximum contributions will be the lesser of two limits: The Section 402(g) limit, $12,000 in 2003, increasing in $1,000 increments until it reaches $15,000 in If you have at least 15 years of service with your current employer and have put an average of less than $5,000 per year into your TSA, you may be able to use a special catch-up provision to increase your Section 402(g) limit to $15,000. The Section 415 limit, which is the lesser of 100% of your includible compensation, or $40,000 (subject to annual cost of living adjustments). You may use the catch-up provision if you re 50 years of age or older in 2003, regardless of your years of service, to exceed the 402(g) and 415 limits by $2,000. Thereafter, the extra older worker catch-up amount will increase by $1,000 per year until it reaches $5,000 in Again, these calculations are complex. To be safe, it s best to leave them to a qualified professional. Can I change the amount of my contribution? Yes. The IRS allows you to change the amount of your contribution or to stop your contribution at any time, subject to the terms of the annuity contract. What happens if I stop making contributions? If you stop making contributions to your TSA, your account value will have the opportunity to earn taxdeferred interest or growth until you make withdrawals. 6

10 Is it worthwhile to start a TSA if I m retiring in a few years? In many cases, yes. If you have savings available for current living expenses, you may wish to use a TSA s special catch-up provisions and divert a large part of your salary (to the extent permitted by tax laws) to take advantage of a TSA s substantial income taxdeferred benefits. This is an individual decision, however, about which you should seek competent financial planning or tax advice. No ING life insurance company or its agents give tax or legal advice. For complete details regarding your individual situation, consult with your financial, tax, and legal advisors. When can I begin taking distributions from my TSA? Generally speaking, you may begin taking distributions from your TSA anytime after you reach age There are certain exceptions to this general guideline. If you die, become disabled, or sever from employment with your employer before you reach age , you or your beneficiary may begin taking distributions from your TSA. If you separate from service before the year of your 55th birthday and if you take distributions prior to age , your distributions may be subject to a 10% federal tax penalty in addition to your regular income tax rate. Do I have to take distributions at retirement? No. You have until April of the year after you turn before the IRS requires you to begin receiving income from your TSA. At that time, if you wish, you may use the Life Expectancy Retirement Option (see LERO on page 8) to calculate and receive the minimum distribution required by the IRS. If you are still employed after you turn , you may delay distributions until your later retirement, and you may continue to contribute to your account. 7

11 What types of payouts are available to me upon retirement? You can choose from a variety of options. Systematic Withdrawals If your policy has a 10% free withdrawal provision, you may be able to use Systematic Withdrawals to take out up to 10% of your annuity s accumulation value per year as income on a monthly, quarterly, semiannual, or annual schedule (minimum withdrawal is $300). Of course, you can discontinue the withdrawals at any time. In addition, your account balance is payable for emergencies or to your beneficiary at death. And after you turn , systematic withdrawals work automatically with the LERO to make sure your withdrawals meet IRS distribution requirements. Keep in mind that if you use Systematic Withdrawals under some circumstances before age , you may incur a 10% federal tax penalty. Minimum Distributions/Life Expectancy Retirement Option (LERO) When you reach age , or upon your retirement if you retire after you reach age , you must, by law, begin to take at least a certain minimum amount from your annuity contract as income. Under the LERO, if you provide the necessary information, ING will calculate your minimum distribution for you. And, based on the accuracy of your information, we will guarantee that your payouts will comply with IRS requirements, or we will pay any penalties. The advantage of the LERO option is that it prevents you from taking a larger distribution than necessary and leaves as much money as possible in your annuity to grow income tax deferred. 8

12 Annuitizations You can choose from the following basic annuity options: Lifetime Annuity This option pays you an income for the rest of your life. It generally gives you the highest annual income of the guaranteed lifetime annuity options. Upon your death, the payments cease. Period Certain Payments are guaranteed over a minimum, or certain time period for instance, 5, 10, or 20 years. Payments cease at the end of the period. If you die before the period certain ends, your beneficiary(ies) will continue to receive payments until the end of the period. Life and Period Certain This option pays a fixed lifetime income and guarantees payments over a period certain. As with the standard period certain, if you die before the period certain ends, payments will continue to your beneficiary(ies) until the end of the period. Joint and Survivor This option pays a fixed income for the lifetime of you or your surviving beneficiary. The income under this option varies depending upon your age and the age(s) of your beneficiary(ies). Payments continue until both you and your beneficiary are deceased.??? With the partial annuitization option, you annuitize? Partial Annuitization only a portion of your annuity at any one time.? After this time, the annuity s remaining balance can continue to grow income tax deferred, and can potentially grow back to its original level. You can repeat the partial annuitization a number of times, subject to contract provisions. Upon your death, 9

13 the remaining annuity balance is payable to your beneficiary. Lump-Sum Payments Even if you elect one of the payout options already described, you can withdraw the rest of your annuity in one or more lump-sum payments. For example, you could take a partial lump-sum payment for cash when you first retire. After that, you could take planned withdrawals to meet living expenses. Finally, you could withdraw the remainder in a single lump-sum payment. Do I have access to my TSA money before retirement? Yes, under certain circumstances and subject to IRS restrictions, you may take money from your TSA in two ways: Income Tax-Free Loans If you have sufficient value in your annuity contract and have not exceeded loan maximums under federal law, you can take an income tax-free loan using your TSA as collateral. The loan remains tax free as long as repayments are timely. The minimum loan amount depends on the type of TSA. Generally, total loans must not exceed the lesser of $50,000 or 50% of your TSA s value. Generally, you must repay your loan within five years on a monthly (or at least a quarterly) schedule. However, the term of a loan may be extended up to 20 years if its purpose is to acquire your principal residence. Failure to repay a loan in a timely fashion will result in its default. The IRS then considers the outstanding loan balance a distribution and taxes it accordingly. Depending on your individual circumstances, you may be subject to a 10% federal tax penalty in addition to any income tax on the defaulted loan. 10

14 Full or Partial Withdrawals Depending on the provisions of the annuity contract and satisfaction of IRS requirements, you may be eligible to withdraw a certain percentage of your account value each year without withdrawal charges. To be eligible to make a withdrawal, the IRS states that you must satisfy one of the following requirements before making a full or partial withdrawal from your TSA: You have severed your employment with your employer; You are disabled; You are ; You have an account value of funds accumulated before 1989; You ve already exercised your TSA s loan provision and are experiencing one of the following financial hardships: Uninsured medical expenses for yourself or a dependent Tuition for yourself or a dependent for postsecondary education Preventing eviction from a primary residence Purchase of a primary residence; You are transferring your account to another 403(b) qualified account; You have died, in which case your beneficiary would receive the funds in your TSA; or The withdrawal is to a former spouse, child, or other dependent pursuant to a divorce settlement (under certain circumstances). When are TSA withdrawals subject to a federal tax penalty? Even though a distribution may be permitted under 11

15 federal tax law, a full or partial withdrawal before you reach age will be subject to a 10% federal tax penalty as a premature distribution unless the withdrawal is: Made to your beneficiary(ies) or your estate after your death; Attributable to your disability; Part of a series of substantially equal periodic payments, made not less frequently than annually, based upon your life or life expectancy or the joint lives or life expectancies of you and your beneficiary(ies) (certain conditions apply); Made to you because you separate from service in the same year you attain age 55, or later; Made to an alternate payee under a divorce settlement; Made to you for certain medical expenses (certain conditions apply); Made to correct an excess aggregate contribution; Made to reduce an excess elective deferral; or Made to satisfy a federal levy. When do I have to pay ING withdrawal charges? ING imposes a contractual withdrawal (or surrender ) charge on withdrawals that exceed the contract s stated free-withdrawal provision. The surrender charge decreases to zero over a specified number of years called the surrender period. For instance, the surrender charge of a TSA might start at 7% of the withdrawal in the first policy year and gradually decrease to zero after the tenth policy year. Why do TSAs have withdrawal charges? Through contractual early withdrawal charges, insurance companies try to protect themselves from 12

16 premature or excess withdrawals so that they can, over a period of time, realize enough earnings from the investments made with the policyholders money to pay expenses and make a profit. As explained previously, penalties usually reduce to zero over a predetermined time period. That s why annuities should be viewed as long-term contracts. Insurance companies select investments that match up with the long-term nature of an annuity. These investments have longer maturities and traditionally provide higher yields than the typical six-month or one-year maturity. So when a company has to liquidate long-term investments in order to cover excessive withdrawal activity, it can t realize the gains as originally planned. Contractual withdrawal charges are used to offset any potential losses from the early liquidation of those investments, as well as potential reductions in credited rates to other policyholders. Do I have to pay income taxes on the money I take from my TSA? Except in the case of a tax-free loan, withdrawals and distributions are subject to federal (and, if applicable, state) income taxes. Keep in mind, however, that if you receive the withdrawals after retirement, you may be in a lower tax bracket than you are now. Current federal tax laws require ING s insurance companies to withhold 20% 13

17 ? on certain TSA withdrawals to the extent you receive the withdrawal directly and the withdrawal is rollover-eligible. Any distributions and withholding will be reported to you and the IRS on a 1099R form. In addition, as discussed, the IRS may assess a 10% federal tax penalty on certain withdrawals made before you reach age Why should I choose ING? Expertise ING s insurance companies have been providers for 403(b) plans of public education institutions, hospitals, and other not-for-profit organizations for more than 30 years. Innovation We are constantly striving to provide you with innovative products and superior customer service to help you meet your objectives. Financial Strength The ING insurance companies have a history of displaying outstanding financial performance. Our performance, well-conceived marketing strategy, and astute investing policy have been recognized consistently by strong ratings from the major independent rating agencies. Commitment to High Standards We are proud to be among the first companies to have achieved membership in the Insurance Marketplace Standards Association (IMSA). Companies belonging to this market conduct organization subscribe to a rigorous set of standards and demonstrate commitment to honesty, fairness, and integrity in customer service and the sale of life insurance and annuities. 14

18 To find out more Contact your ING representative, who will be happy to meet with you, discuss your financial goals, and help you put together a strategy for retirement that is right for you. About ING ING is a leading tax-deferred retirement plan provider one that services retirement plans in the U.S. for Education, Healthcare, Not-for-Profit, Government, and Corporate employers and employees. We're clearly an industry leader, with millions of participants choosing ING to help them prepare for retirement, protect families, and pursue dreams. With more than 80 million customers worldwide, ING is ranked among the top 25 global financial institutions one of the largest and most respected financial services organizations in the world. The ING family of companies seeks to provide a full range of integrated financial services through a variety of distribution channels, giving customers the freedom to choose the option which best suits their individual needs. 15

19 Annuities have limitations. For costs and complete details of the coverage, call or write your representative or the company. The IRS imposes a 10% penalty on withdrawals of taxable funds before age unless specifically exempted. If you are purchasing an annuity through a tax-favored arrangement, including IRAs and Roth IRAs, you should carefully consider the costs and benefits of the annuity (including annuity income benefits) before purchasing the annuity, since the tax-favored arrangement itself provides for tax-sheltered growth. Consult your tax attorney or qualified tax professional for details. For more complete information, including charges and expenses, contact us or ask your representative for a prospectus. Read the prospectus completely before you invest. 16

20 THE ING COMPANIES FINANCIAL SOLUTIONS FOR TODAY S WORLD Retirement Plans Mutual Funds Annuities Insurance Direct Banking Financial Planning Asset Management The ING family of companies in the United States provides financial solutions for individuals, organizations and companies. Through a network of wholly owned, indirect subsidiaries, we help Americans plan for and build a secure future. Your goals are our business. Annuities are issued by ReliaStar Life Insurance Company, 20 Washington Avenue South, Minneapolis, MN All guarantees are based on the financial strength and claimspaying ability of ReliaStar Life Insurance Company, which is a member of ING. Products and services may not be available in all states. This brochure is intended to respond to commonly asked questions regarding TSAs. It is not intended to provide legal or financial planning advice. Please consult an attorney, accountant, or qualified financial planner for such advice. Refers to the following TSA policies: T-218, 03501, 03801, 03803, 03804, 04201, 13076, 13078, 15187, 15218, 15248, 15255, and ING North America Insurance Corporation cn (02/03) 2003 ING North America Insurance Corporation FORM NO R02-03 N.P.MS.30 (02/03)