Leaving your employer? Options for your retirement plan

Transcription

1 Leaving your employer? Options for your retirement plan

2 Contents Evaluating your options 1 The benefits of tax-deferred investing 4 Flexibility offered by an IRA rollover 6 How to get started 9

3 Evaluating your options Leaving an employer is a time of transition one in which you may be facing many changes. Often, the last thing you want to think about is what to do with the assets you have accumulated in your employersponsored retirement plan. It can be a daunting task, leading many to delay addressing the issue at all. This is something that should not be put off, however, as it may be one of your most important financial decisions. Exploring your distribution alternatives The assets that you have accumulated in your employer s retirement plan(s) may represent your largest sum of savings. Therefore, it is important to carefully evaluate all the options available to determine which best supports your long-term goals. Your first step is to confirm the value of your retirement plan assets, the type of plan(s) in which they are held and what distribution options each specific plan offers. Typically, 401(k) plans allow employees separated from service to receive a lump-sum distribution 1 of the assets held in the plan. Pension plans allow for either lump-sum distributions or periodic payments that will begin at retirement age. Leaving your retirement assets in your former employer s plan Generally, your former employer is required to allow you to leave balances of over $5,000 in the plan. If you do so, your assets will retain their tax-deferred status and you can continue to invest the assets in your account in the investment vehicles offered by your employer in the plan. If you are considering leaving your retirement assets in your former employer s plan, you should thoroughly review the features of the plan to determine whether it offers the flexibility and the types of investments you need to meet your long-term retirement goals. In addition, you should evaluate the quality of the investments to determine how they have performed relative to comparable investments and review the fees and investment expenses associated with your assets remaining in your former employer s plan. Remember, until now, you have been limited to investing these assets in the choices available in the plan. Now that you are leaving your employer, you have the ability to invest your assets elsewhere. If your employer s plan does not meet your investment needs, you should consider taking a lump-sum distribution. 1 A lump-sum distribution is defined as the total balance of employer-plan assets that are fully distributed within the same taxable year due to separation from service, attainment of age 59½, disability or death. 1

4 Taking a distribution If you elect to receive a lump-sum distribution, you may roll over the assets into an individual retirement account (IRA). If you elect to receive a distribution and you do not roll over the assets, you will generally be subject to income taxes. In addition, if you haven t reached age 55 in the year you terminate service with your employer, you may also be subject to a 10% early distribution penalty. (Taking a distribution and not rolling it over to an IRA generally should be considered only if the value of the distribution is not very large, or if you will need all or most of the money in the near future.) Special tax treatment for employer stock If you meet the requirements for a lump-sum distribution and all or part of your lump-sum distribution consists of employer stock, you may be eligible to defer taxes on the portion of your distribution that constitutes net unrealized appreciation (NUA); that is, the gain on the shares while they were held in the plan. If you transfer the employer stock in kind into a taxable investment account (i.e., not an IRA), you would be subject to tax on the cost basis of the stock only. The tax on the NUA is then deferred until you eventually choose to sell the stock and, at that time, it would be taxed as a long-term capital gain. The remaining assets from your plan (non-employer stock) can still be rolled over into an IRA. The availability of this special tax treatment is often an important consideration if the employer stock held in your plan has appreciated significantly. Depending upon your circumstances, it may not be advantageous from a tax standpoint for you to roll these assets into an IRA. You should evaluate the percentage of your employer stock relative to your overall financial assets to determine whether your assets are properly diversified based on your financial goals and tolerance for risk. Your Financial Advisor can discuss ways that you can avoid the risks involved with being overly concentrated in just one stock. 2

5 Taking a distribution tax considerations Cashing out the plan If you do not directly roll over your distribution to an IRA or other employersponsored retirement plan, your employer is required to withhold 20% of the taxable portion of your distribution as a prepayment of your federal income taxes. Further, depending upon your individual circumstances, you may still owe additional federal and state income taxes at your ordinary income tax rates when you file your taxes for the year. If you haven t reached age 55 in the year you terminate service with your employer, you may also be subject to an additional 10% early distribution penalty. Indirect rollover Alternatively, you can receive the distribution and then roll it over to an IRA or eligible retirement plan within 60 days, but again, since the assets will go to you before being deposited into the IRA, your employer will withhold 20% of the amount includable in income, and you will need to make up that amount in order to complete a full rollover within the 60-day period. If you only roll over the 80% you receive from your employer, the 20% will generally be included as income for that year. Direct rollover If you have your distribution directly rolled over to an IRA or other employersponsored retirement plan, you will avoid the 20% mandatory withholding and defer taxes on the amount you roll over. You may choose to roll over your entire lump-sum distribution or a portion of it. Any portion includable in income and not directly rolled over would be subject to the 20% withholding, income taxes and an early distribution penalty, if applicable, as described above. By rolling your lump-sum distribution to an IRA, your assets will continue to receive tax-deferred status. In addition, you will have control over where and how you invest your money. Depending on the financial services firm you use, you may have access to a full range of investment selections, including, but not limited to, stocks, bonds, mutual funds, annuities and managed account programs. 3

6 The benefits of tax-deferred investing When evaluating whether to roll over a lump-sum distribution into an IRA, you should consider more than just the immediate tax consequences. Given that Americans today are living longer and will be expected to shoulder more of the responsibility for their 4 retirement income needs, the importance of developing a long-term investment plan cannot be ignored. Implementing such a plan in an IRA, rather than a taxable investment account, provides additional benefits, as your assets can grow on a tax-deferred basis.

7 The benefits of tax-deferred investing The chart below illustrates a $100,000 distribution from an employer retirement plan in which taxes are paid on the distribution and the balance is invested in a taxable account, versus rolling over the entire distribution to an IRA where it will grow on a tax-deferred basis. This illustration assumes a 6% growth rate and a 28% tax rate. Investing through an IRA enables your assets to grow at a greater pace, as deductions for taxes are deferred. After 20 years, the taxable account is worth $163,366 and the IRA is worth $311,790. However, the IRA distributions are subject to income taxes, so the after-tax value of the IRA, assuming the same 28% tax rate, is $224,489, over 60,000 more than the taxable account. Growth of a $100,000 rollover after 10 years* $350k $300k $311,790 $250k $200k $150k $163,366 $100k $50k Pre-Tax After-Tax * This hypothetical illustration does not represent the results of any specific investment, and assumes the investor is age 59½ or older at the time of the original distribution. The returns listed above assume monthly compounding. Withdrawals from tax-deferred accumulations are subject to ordinary income taxes, and, in addition, a 10% penalty tax may apply if distributions are taken prior to age 59½. 5

8 Flexibility offered by an IRA rollover In addition to potentially providing more investment choices than your employer s plan, an IRA may provide greater flexibility with distributions and beneficiary designations. Taking distributions Your employer s plan may limit the frequency with which you can request distributions from the plan. With an IRA, you control when you want to take distributions. For example, if you would like to take distributions prior to age 59½ and do not qualify for any of the other IRS exceptions to the 10% early distribution penalty,2 you can 2 avoid the penalty by taking 72(t) substantially equal periodic payments. Your employer s plan may not allow for this 72(t) payout option. With 72(t) substantially equal periodic payments, the Internal Revenue Code permits distributions prior to age 59½ based on one of three IRSapproved life expectancy calculations. The requirement is that you take only the amount determined from the calculation, no more and no less, and you take it for five years or until you reach age 59½, whichever is later. Altering the payment schedule Death, disability, first-time home purchase, higher education expenses, unreimbursed medical expenses over 7.5% of AGI, health insurance premiums if unemployed, withdrawals of excess contributions, IRS levy. 6

9 generally results in a retroactive 10% penalty and interest on all distributions taken. You may want to consider this option if you need an annual income stream from your IRA assets. There are three IRS-approved methods for calculating the life expectancy payments: the required minimum distribution (RMD) method, fixed amortization method and fixed annuitization method. Since each method results in a different annual 72(t) amount, you should determine how much income you need from your account and then have your Financial Advisor show you 72(t) payment illustrations to help you decide which method is best for you. Beneficiary designations and payouts An IRA may offer you greater flexibility in designating beneficiaries. Your employer s plan may only allow you to name individuals as your beneficiaries. For estate planning purposes, you may want to designate a nonperson, such as a trust or charity, as your beneficiary. By rolling your employer-sponsored retirement plan balance into an IRA, upon your death, your beneficiaries can take payments over their life expectancies, thereby stretching the period of time the assets stay tax-deferred in the IRA. Traditional IRA or Roth IRA pay taxes now or later Traditional IRA By rolling your employer-sponsored retirement plan assets directly into a traditional IRA, you can defer paying income taxes until you take a distribution. Roth IRA You can also convert employer-sponsored retirement plan assets or roll over designated Roth contributions directly into a Roth IRA. A Roth IRA conversion requires that you pay income tax on the portion of the assets being converted that is includable as income. 7

10 Unlike a traditional IRA, where distributions from the account are subject to ordinary income tax, distributions of both contributions and earnings from a Roth IRA are tax-free for you (and eventually your heirs) once the assets have been 8 held in the account for five years and are made because of attainment of age 59½, disability, death or a first-time home purchase. Also, there are no RMDs after age 70½ as there are with a traditional IRA.

11 How to get started 1. Confirm with your employer the types of company-sponsored retirement plans in which you participate and determine the balance in each plan. The plan administrator is required by law to give you a written notice describing your options prior to you taking a distribution. Your Financial Advisor can assist you when you contact your plan. 2. After evaluating your choices, decide whether you will leave the money in the plan, take a lump-sum distribution or take installment payments (if available). You should consult your tax advisor regarding this important decision. 3. When taking a lump-sum distribution, you will be required to complete documentation and request a check or in-kind transfer to the financial institution you designate. If you wish to rollover the assets and you don t already have an IRA, your UBS Financial Advisor can help you establish one. If you establish the account prior to submitting paperwork to your employer s plan, it will help facilitate the rollover process. Your employer will require your IRA account number and contact information and will send your IRA custodian either the cash or assets from your distribution as you direct. 4. You can work with your UBS Financial Advisor to explore your retirement goals and objectives and discuss the investment options available to you in the IRA. Your Financial Advisor will have access to a variety of tools and resources to help you evaluate your needs and make informed decisions. If you would like to further examine your retirement distribution alternatives, contact your Financial Advisor. 9

12 Important information about Advisory & Brokerage Services As a firm providing wealth management services to clients, UBS is registered with the U.S. Securities and Exchange Commission (SEC) as an investment adviser and a broker-dealer, offering both investment advisory and brokerage services. Advisory services and brokerage services are separate and distinct, differ in material ways and are governed by different laws and separate contracts. It is important that you carefully read the agreements and disclosures UBS provides to you about the products or services offered. For more information, please visit our website at ubs.com/workingwithus Neither UBS Financial Services Inc., nor any of its employees provide tax or legal advice. You must consult with your tax and legal advisors regarding your personal circumstances. Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter UBS Financial Services Inc. All rights reserved. Member SIPC. UBS Financial Services Inc. ubs.com/fs UBS Financial Services Inc. is a subsidiary of UBS AG.