ROTH 401(k) For ITT Corporation, Systems Division Retirement Savings Plan Questions and Answers

Transcription

1 ROTH 401(k) For ITT Corporation, Systems Division Retirement Savings Plan Questions and Answers As indicated on the December 1 notice, effective January 1, 2009, ITT Systems Division is adding a Roth 401(k) option to the Retirement/Savings Plan administered through Prudential. Following are a list of Questions and Answers pertaining to the new Roth option. Please feel free to ask if you have additional questions. Q1. What is a Roth 401(k)? A1. A Roth 401(k) is an alternative to your current pre-tax deduction. Contributions to the plan via a Roth 401(k), are after-tax. Earnings on a Roth 401(k) are non-taxable once they have been in the plan for five years (this is called a Qualified Distribution and is explained in Q/A 15 below). The benefits of Roth contributions may be different for each person depending on your circumstances. You may want to consult with a financial/tax advisor before making Roth contributions. Roth 401(k) After Tax 401(k) Pre Tax Eligible Income Limits None None Taxation on Contributions After-tax Pre-tax Contribution Limits (2009) Catch-Up Contributions (2009) $16,500* combining both 401(k) pre-tax and Roth 401(k) after-tax elective deferral contributions. $5,500* combining both 401(k) pre-tax and Roth 401(k) after-tax catch-up contributions Qualified Tax-Free Distributions Earnings are not taxable after the 5 year period beginning with first day of the taxable year in which the first Roth 401(k) contribution is made by the participant to a plan accepting Roth elective deferral contributions and is made after: Age 59½ Death, or Disability There are no tax free distributions from the 401(k) pre-tax account Distribution Taxation Contributions and earning tax-free if qualified Distribution** Contributions and earnings taxable in year received*** Outbound Rollovers permitted Distributions After Age 70½ May roll to another 401(k) plan that allows Roth 401(k) contributions or to a Roth IRA Subject to required minimum distribution rules**** May roll to another 401(k) plan or a traditional IRA. If rolled to a traditional IRA, may convert to a Roth IRA if the individual meets the Roth IRA income limits. *2009 tax year

2 ** Distributions not meeting the Qualified distribution requirements may be subject to an additional IRS 10% premature distribution penalty tax. ***May be subject to additional IRS 10% premature distribution penalty tax. ****May be delayed if still employed and not a greater than 5% owner or owner due to family attribution Q2. How much can I put in my Roth 401(k) account each year? A2. The Roth 401(k) annual limitations are the same as the annual limitations on your 401(k) tax deferred account. For 2009 the limit is $16,500. The limit applies to the combined amount in both your tax-deferred contributions and your Roth 401(k) contributions. If you are age 50 or older by the end of the taxable year you are also eligible to make catch-up contributions of up to $5,500 for The limit applies to the combined amount of both your tax-deferred contributions and your Roth contributions. Q3. How are earnings applied on my Roth 401(k) account? A3. You have your choice of 14 funds to choose from for your investment election. The investment elections you make will be applied the same to the funds in both the pre-tax source and the Roth 401(k) source. The default funds for the Roth 401(k) will be the same as that for the tax-deferred account--the Retirement Goals Fund accounts. An important difference between earnings on a 401 pre-tax account and earnings on a Roth 401(k) accounts is that the earnings on a pre-tax account are taxable on distribution, but the earnings on Roth 401(k) contributions are tax-free once you have had your Roth 401(k) account for a period of 5 years. See Q&A 15 for further details. Q4. When am I vested in the Roth 401(k)? A4. You are 100% vested in the Roth 401(k) immediately. Likewise, you are 100% vested in any earnings in the account, but the earnings are not tax-free until you have had your Roth 401(k) account for 5 years. Q5. If my contract supports a company match, will there be a company match on my Roth 401(k) contributions? A5. Yes, if your contract supports a company match on your tax-deferred contribution, any contributions to your Roth 401(k) would be matched at the same amount. Note that the match will be a percentage of your eligible compensation regardless of whether you contribute only pre-tax, only Roth or a combination of the two. Q6. Since my Roth 401(k) contributions are post-tax, will any match be considered to be post or pre-tax? A6. Any matching funds on your Roth 401(k) contributions will be pre-tax contributions and therefore not subject to the five year tracking requirement for Qualified Distributions. Q7. Can I make a catch-up contribution to my Roth 401(k)? A7. Yes, the IRS allows the same catch-up contribution for employees who will be 50+ years of age by the end of the year (2009). The amount is the same as that for the pre-tax deferral plan ($5,500 for 2009). The same rules apply to the catch-up contribution; the maximum is a combination of catch-up dollars for the pre-tax and the Roth 401(k). After your salary deferrals

3 reach $16,500 whether pre-tax, Roth or a combination of the two your remaining deferrals up to $5,500 will be considered catch-up contributions. Q8. Are my earnings from the catch-up contributions on the Roth 401(k) treated the same as my earnings on the Roth 401(k) contributions? A8. Yes, the earnings are considered taxable income until they have been in the account for 5 years, at which time they become non-taxable income. See Q&A 15 below. Q9. Can I contribute to an individual Roth that I set up myself and still contribute to the Roth 401(k)? A9. Yes, if you are eligible to contribute to a Roth IRA, you may still contribute to a Roth 401(k). Q10. Can I take a Hardship distribution from the Roth 401(k)? A10. Yes, hardship distributions are available from your Roth 401(k) account under the same rules as under the tax-deferred account. Q11. Does the Age 59-1/2 rule apply to Roth 401(k) as it does to the tax-deferred account? A11. Yes, once you attain the age of 59-1/2 the IRS allows you to take a distribution from the 401(k) plan without penalty. Refer to the Prudential website or to your Summary Plan Description (SPD) booklet for additional information. Q12. Can I use the funds in my Roth 401(k) for a loan? A12. No, the plan does not allow for the funds in your Roth 401(k) account to be used for loans. Q13. Can I take funds from my Roth 401(k) account while I am still an active employee with ITT? A13. The funds in your Roth 401(k) account must remain in the plan until you terminate employment. The exceptions are through a hardship withdrawal or a distribution after age 59-1/2. Q14. If I terminate employment with ITT, what options do I have with my Roth 401(k)? A14. You may take a distribution of any of your funds at the time of your termination of employment. a. Funds in the Roth 401(k) may be rolled over into another qualified plan that has a Roth 401(k) feature and permits rollovers into it, or into an individual Roth IRA. NOTE: If you elect to directly rollover your Roth deferral account to another eligible 401(k) plan with a Roth feature, the five-year holding period in the new plan will be measured from the first day of the taxable year you made your first Roth deferral into your old plan (assuming the tracking period has been continuous). b. You may also choose to leave the funds in the company s plan if your account balance is greater than $5,000. c. You may also take a cash distribution, but a 10% penalty will likely apply before age 59 ½, and any earnings on your account will be taxable income if they are not considered a qualified distribution.

4 d. If your account balance is less than $5,000 at the time of your termination you must roll the funds out of the plan, or take a cash distribution. If you do not elect to remove your account balance that is less than $5,000, your account balance will automatically be transferred into a Millennium Trust Fund IRA account in your name after a period of 90 days Q15. What is a qualified distribution from a Roth deferral account? (Refer to Chart below). A15. Assuming a distributable event has occurred, a qualified distribution from a Roth aftertax account occurs when both of the following requirements are met: Requirement #1 Roth deferral account has been existence for at least five taxable years ( 5-year tracking requirement ), and Requirement #2 The distribution requested is (1) due to death, (2) due to disability, or (3) after the participant has reached age 59 ½. Only one of these three events is necessary to satisfy Requirement #2. If both of these requirements are met, then the earnings portion of the distribution is tax free and is not subject to the additional 10% premature distribution penalty (distribution of Roth after-tax contributions are always tax-free). Is this a qualified distribution? Has the Roth account been in existence for at least five taxable years AND is the distribution due to death, disability or because the participant has reached age 59½? YES This is a qualified distribution which means: No tax on earnings No additional 10% premature distribution penalty (Distribution of Roth after-tax contribution are always tax free) No This is a non-qualified distribution which means: Tax on earnings (Distribution of Roth after-tax contribution are always tax free) Does the additional 10% premature distribution penalty apply? YES If the participant has not attained age 59 ½ and is still employed, or If the participant does not meet another exception No If the participant is 59½ or older, or: If the participant separates from service with the employer after Q16. How is the 5-year tracking requirement calculated? A16. The five taxable year period begins on the first day of the taxable year during which the individual made their first designated Roth deferral. The period ends when five consecutive taxable years have been completed.

5 Q17. How is the 5-year tracking requirement affected when a direct rollover of a designated Roth deferral account to a Roth IRA occurs? A17. If the distribution is considered a qualified distribution, the total amount rolled in the Roth IRA is considered after-tax investment in the Roth IRA contract, or basis. While the individual receives a qualified distribution from the retirement plan (maintained the Roth deferral account for 5 taxable years, and had a qualifying distributable event death, disability, or age 59-1/2) a new five year clock begins in the Roth IRA account. Future withdrawals from the Roth IRA would come first from the basis (amount rolled in) and future contributions secondly from the earnings that accrue in the Roth IRA. Q18. What happens if I transfer from one ITT contract to another? A18. When you transfer to another ITT Systems Division contract, your account will remain in the Prudential plan and you will be eligible to participate under the benefit plan design of the contract you join. Q19. What happens if I transfer from Systems Division to another ITT division? A19. Should you transfer to another ITT division, your funds in the ITT Systems Division plan will become frozen. This means that while you are employed in any other division of ITT Corporation you will not be able to contribute to your Systems Division plan, nor will you be able to roll the funds over to the new Division s plan, or take a distribution, other than hardship and age 59-1/2 (and loans on the 401 pre-tax portion of your account (if any). You will be able to continue to manage your funds. When you terminate employment with any ITT company, you would then be able to elect to leave the funds in the plan, roll the funds out of the plan, or take a cash distribution. Q20. What if I have more questions than have been covered under this Q&A regarding the Roth 401(k)? A20. We have set up an box for questions from employees. The address to that box is [email protected]. Please feel free to send any questions you may have to that box. We will assemble the questions and provide feedback through another Q&A no later than January 15, 2009.