MFS. Retirement Strategies Stretch IRA & distribution options. Ready, set, retire. Taking income distributions during retirement

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1 MFS Retirement Strategies Stretch IRA & distribution options Ready, set, retire Taking income distributions during retirement

2 ASSESS YOUR NEEDS Income when you need it Choosing the right income distribution strategy for your retirement savings is so important today. Especially when you consider that today s retirees can look forward to much longer retirements than ever before. In fact, for a couple retiring at age 65, there s a 72% probability that at least one spouse will live beyond 90 years of age. 1 Talk to your investment professional today about developing a flexible income plan for your retirement years with the help of your Individual Retirement Account (IRA). MFS does not provide legal, tax, or accounting advice. Any statement contained in this communication (including any attachments) concerning U.S. tax matters was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code. This communication was written to support the promotion or marketing of the transaction(s) or matter(s) addressed. Clients of MFS should obtain their own independent tax and legal advice based on their particular circumstances. 1 Source: Kiplinger s Retirement Report, 2004 This material is not intended to replace the advice of a qualified professional. Before making any financial commitment regarding the issues discussed here, consult a professional adviser. NOT FDIC INSURED MAY LOSE VALUE NO BANK OR CREDIT UNION GUARANTEE NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF

3 66% of retirees report that their expenses remained the same in retirement compared with immediately before retirement. Source: LIMRA International, Managing Retirement and Financial Status, 2006 You ll find that IRAs offer smart, flexible distribution strategies that can help you address financial needs in retirement, such as receiving a regular stream of income keeping the balance of your retirement savings growing tax deferred minimizing taxes avoiding IRS tax penalties on income distributions taken during early retirement for an emergency or layoff leaving a legacy By taking time now to map out an income distribution plan, you ll be working toward maximizing your retirement savings, making your money last throughout retirement, and leaving a legacy. 1

4 CONSIDER YOUR OPTIONS Early distributions with 72(t)s Can I draw income from my IRA and avoid IRS early-withdrawal penalties? If you are retiring early, get laid off, need emergency income, or plan on taking retirement distributions early, a 72(t) withdrawal from IRAs may be a smart source of income. Internal Revenue Service Code Section 72(t), also known as substantially equal period payments, enables individuals if they are under age 59 1 /2 to draw money from retirement assets without a 10% penalty tax protect remaining assets from current taxes preserve the tax-deferred status of earnings How 72(t)s work The easiest way to take advantage of 72(t) penalty-free withdrawals is to roll over your various retirement plans into new and/or existing IRA accounts. Here s how it works: Withdrawals must be made at least annually for five years or until age 59 1 /2, whichever is later. For example, if you start withdrawals at age 56, the earliest you can stop is age 61, or five years. The withdrawal amount is based on one of three standard IRS formulas: life expectancy, annuity, or amortization. Once you choose a formula, you ll use it as long as your withdrawals continue. 2 Changes in the formula or dollar amount may trigger a 10% federal tax penalty on all you ve withdrawn. However, if you initially choose the amortization or annuity formula and decide to reduce your annual withdrawal, you have a one-time option to switch to the life expectancy formula without incurring penalties. After the required withdrawal period, you may stop or change the withdrawals. Once you reach age 70 1 /2,distributions are required. Generally, these required minimum distributions are far easier to calculate as they use just one formula and one published life expectancy table. 2 2 Certain exceptions may be made; please see your tax adviser.

5 Find the IRS formula right for you Generally, if your early retirement income needs from your IRA aren t sizable, the life expectancy formula may be the simplest formula for you. And, if you plan on drawing a larger amount of annual income, the two other formulas may better fit your needs, as the example below demonstrates. Your investment professional can help you choose the formula right for you. Elizabeth 54-year-old early retiree with $500,000 in IRA account wants to take between $25,000 and $30,000 annually from her IRA to cover some expenses during the first five years of retirement Life expectancy formula Annual withdrawal $16,393 to $19,654 Remaining balance Under this formula, the calculation is made each year. The first-year amount is $16,393 and gradually rises to the fifth-year amount of $19,654. $513,851 Annuity formula Annual withdrawal Remaining balance Amortization formula Annual withdrawal Remaining balance $28,490 $28,667 $443,687 $442,513 Assumptions: calculated as an individual life expectancy investment return of 4%, compounded annually reasonable rate of return of 4% under the annuity and amortization formulas, the amount is calculated one time only Hypothetical results are for illustrative purposes only and are not meant to represent the future performance of any MFS product. The principal value and investment return of investment products will fluctuate with changes in market conditions, and shares, when redeemed, may be worth more or less than their original cost. Taxes are due upon withdrawal from the tax-deferred account. 3

6 CONSIDER YOUR OPTIONS Legacy planning with a Stretch IRA Can I use my IRA to leave a legacy for my family? The Stretch IRA is a simple strategy that can help you to stretch out your retirement distributions across generations. Designed for investors who will not need the money for their own retirement needs, it allows your beneficiary to take distributions over his or her own life expectancy. This minimizes the income taxes due and keeps more assets potentially growing in a tax-deferred account. How the Stretch IRA works The named beneficiaries, who are usually younger than the original IRA owner, may be able to take distributions based on their own life expectancies. This can potentially lower annual income tax liability and allows assets to remain growing tax deferred in the IRA. The younger the beneficiary, the longer the IRA assets have to grow tax deferred. Stephen retires at age 65. After participating in his plan for 20 years, he has accumulated $100,000 in assets. He establishes an IRA rollover and names his wife Eliza, age 58 1 /2, as beneficiary. Eliza turns 70 1 /2 and starts to take the required minimum distributions based on the Uniform Distribution Table. Eliza passes away at age 80 having netted, after taxes, $92,950. Anne, age 50 1 /2, maintains the account as a beneficiary IRA, names her son Sean as her beneficiary, and continues to receive distribution payments. $250,000 Stephen passes away at age 68. Eliza rolls Stephen s IRA into an IRA in her name and makes her daughter Anne, age 31, her beneficiary. $200,000 $150,000 $100,000 $50,000 '11 '22 '33 '44 '55 '66 '77 '88 ''99 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22 '23 '24 '25 '26 '27 '28 '22 FIRST GENERATION ACCUMULATION DISTRIBUTION Stephen Eliza Initial investment $100,000 $0 Distribution received $0 $104,493 Federal tax paid $0 $11,543 Total after taxes $0 $92,950 Years in distribution 0 11 SECOND GENERATION 4

7 Assumptions: 6% annual return on account, compounded quarterly based on 2006 income tax rates for a single taxpayer does not include standard deduction or personal exemptions Hypothetical results are for illustrative purposes only and are not intended to represent the future performance of any MFS investment product. Investments in mutual funds will fluctuate and may be worth more or less than their original value. Keep in mind this illustration is based on a 57-year time period and current tax laws. There is no assurance that the current tax laws will remain in effect for the entire period. Anne passes away at age 77. Throughout the 26 years, she received $372,473 net after taxes. Sean starts to receive Anne s remaining distributions. He receives $316,344 net after taxes. $300,000 $300,000 $250,000 $200,000 One IRA three generations of income $150,000 Over time, Stephen s $100,000 provided more than $780,000 after taxes as a legacy for his family. Initial investment $100,000 Total distribution $913,628 Federal tax paid $131,860 Total after taxes $781,768 Total years in distribution 46 $100,000 $50,000 9 '30 '31 '32 '33 '34 '35 '36 '37 '38 '39 '40 '41 '42 '43 '44 '45 '46 '47 '48 '49 '50 '51 '52 '53 '54 '55 '56 '57 Anne Initial investment $0 Distribution received $426,905 Federal tax paid $54,432 Total after taxes $372,473 Years in distribution 26 THIRD GENERATION Sean Initial investment $0 Distribution received $382,230 Federal tax paid $65,886 Total after taxes $316,344 Years in distribution 9 5

8 CONSIDER YOUR OPTIONS Income distribution options and RMDs What s the most efficient way to take my retirement income? If you re like many Americans today, your retirement assets may consist of several retirement accounts IRAs, 401(k)s, taxable accounts, and others. You should consider meeting your income needs in retirement by first drawing down taxable accounts rather than your tax-deferred accounts. This may help your retirement assets to last longer as they continue to grow tax deferred, as the chart to the right shows. You ll also need to plan to take the required minimum distributions (RMDs) from traditional or Rollover IRA accounts. That s because the IRS requires that you begin taking distributions from these two types of IRAs when you reach age 70 1 /2. If you don t, the IRS will assess a 50% penalty on the amount you should have taken. Two flexible distribution options When you need to draw on your IRA for income or take your RMDs, you ll find two flexible options. Please note that distributions from your IRA are subject to income taxes, and any contribution taken prior to age 59 1 /2 may be subject to a 10% early withdrawal penalty. Partial withdrawals. Withdraw any amount from your IRA at any time. Systematic Withdrawal Plans. Structure regular, automatic withdrawals from your IRA; choose the amount and frequency to meet your retirement income needs. Your investment professional can help you understand distribution options, determine RMD requirements, calculate RMDs, and set up a Systematic Withdrawal Plan. Also, check out the Required Minimum Distribution Calculator on mfs.com to calculate your RMD needs. 6

9 Calculate your RMD online with the Retirement Calculator, available on mfs.com in Retirement Planning/Calculators & Planners. Create a tax-efficient income plan Take a look at the different income distribution choices Sharon and Bill selected. Then take a look at the outcome 15 years later. By relying on taxable assets first and drawing on IRA assets only for the required minimum distributions (RMDs), Bill depleted much less of his retirement assets. That s because the assets in his IRA were able to grow longer tax deferred. Tax-deferred growth has its advantages: Both investors are age 70 1 /2 and need to take RMDs from their IRAs. Both investors have $500,000 in an IRA and $200,000 in a taxable account. To meet annual retirement income needs, both need to take $30,000 in after-tax income. They start taking withdrawals on 12/31 and continue to do so for 15 years. Sharon takes $46,154 annually from the IRA to yield $30,000. Bill takes only the required minimum distribution from his IRA annually. He draws from his taxable account to make up the difference. $700,000 $700,000 $698,531 ($489,714 after taxes on IRA) $200,000 Taxable account $200,000 Taxable account $101,912 Taxable account $500,000 IRA account $502,228 ($446,044 after taxes on IRA) $341,702 Taxable account $500,000 IRA account $596,619 IRA account ($387,802 after taxes) $160,526 IRA account ($104,342 after taxes) 15 years later Bill has $196,303 more ($43,670 after taxes) than Sharon. Assumptions: 6% annual rate of return on all accounts and a flat 35% combined flat tax assumption federal and state income tax. Earnings in the taxable accounts were taxed each year. This tax was paid by netting the tax against its respective earnings and therefore was not included in the gross distribution calculations needed to reach an after-tax income of $30,000. Distributions from the IRAs were taxed in the year they were distributed. Taxes on the IRA distributions were paid by grossing up the distribution amounts from the IRAs or taxable accounts as applicable. RMDs were calculated using the Uniform Lifetime Table under the 2002 IRS final regulations and were taken starting in the year each investor turned 70 1 /2. All distributions were taken on 12/31 of each year. 7

10 TAKE ACTION Three simple steps See Education & Planning/ Asset Allocation Strategies on mfs.com STEP 1: Talk to your investment professional today Start your conversation with the simple question that fits your retirement income needs: What s the most efficient way for me to take my retirement income? Can I use my IRA to leave a legacy for my family? How can I draw income from my IRA and avoid IRS early-withdrawal penalties? Your investment professional can help you develop an income distribution plan tailored to your specific financial needs in retirement. STEP 2: Take control of your retirement savings Your investment professional will also analyze your current retirement savings. He or she will suggest the best way for you to consolidate retirement plan assets and to build a solid asset allocation strategy so you can take control of your retirement savings. STEP 3: Document your beneficiaries Make sure you designate your primary and contingent beneficiaries on all of your IRA accounts. Once you have made the designation, be sure that you document it. If not, your assets could end up going to your estate and not your intended beneficiary. 8 8

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12 The value of advice Whether you are accumulating assets, realigning your portfolio, or planning your retirement distribution strategy, we believe you will benefit from working with an investment professional. An investment professional gives your retirement portfolio the full-time focus it deserves and provides the ongoing perspective to help you build and maintain a retirement strategy that works for you. When you and your investment professional select MFS products, you can benefit from the experience of a firm that has helped generations of investors pursue their financial goals. For more details on investing with MFS, contact your investment professional or visit mfs.com. Before investing, consider the fund s investment objectives, risks, charges, and expenses. For a prospectus containing this and other information, contact your investment professional or view online at mfs.com. Read it carefully. MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA IRAE-DIST-BRO-12/06 28M