Your Retirement Plan Distribution. How Your Decisions Today Affect Your Future. Retirement Plans

Transcription

1 Your Retirement Plan Distribution How Your Decisions Today Affect Your Future Retirement Plans

2 About Stifel Nicolaus Stifel Nicolaus is a full-service Investment firm with a distinguished history of providing securities brokerage, investment banking, trading, investment advisory, and related financial services to individual investors, institutions, corporations, and municipalities. Established in 1890 and headquartered in St. Louis, Missouri, Stifel Nicolaus is one of the nation s leading firms. Stifel, Nicolaus & Company, Incorporated is a wholly owned subsidiary of Stifel Financial Corp. Stifel Financial Corp. s publicly traded stock is listed on the New York Stock Exchange under the symbol SF. Retiremen

3 Receiving a Lump-Sum Distribution Becoming eligible to receive a lump-sum distribution from your employer s retirement plan can present one of the most important financial decisions you ll ever have to make. You ve worked hard to accumulate your retirement assets, and now you are required to make informed and prudent choices about how best to handle the money you ve accumulated in your plan. Whether you ve changed jobs, retired, or your plan has been terminated, you now must give careful consideration to issues that you may never have had to think about before. In fact, some important questions must be answered, including: Does your retirement plan require a lumpsum distribution? Or, are you eligible to take a monthly or annual payout? t How Plans is your distribution going to be taxed? And, are you eligible for special tax treatment? - 1 -

4 Will there be any penalties upon withdrawal? Does a rollover to a traditional or a Roth Individual Retirement Account (IRA) make sense? How should you invest your distribution in preparation for your retirement years? Where can you find the help you need in making the right decisions? This guide will explain the options available to you for your retirement plan distribution. You will also discover how a direct rollover to a Stifel Nicolaus Self-Directed IRA offers you an attractive way to continue building your retirement nest egg on a tax-deferred basis. Understanding Your Choices. The money contributed to and accumulated in your company s retirement plan has enjoyed the advantage of tax-deferred growth. Now, several options are available to you. You can take a cash distribution and pay taxes immediately. You can continue to defer taxes by rolling your distribution directly into a tax-deferred account. Or, you can take a partial cash distribution and roll over the remaining funds. Stifel Nicolaus can help you make the right decision. Following is a summary of each of your options, including their tax consequences and penalties. Cash Distribution. You ll pay federal income tax at ordinary rates on any amounts not previously taxed. Most distributions, which are payable to you, are subject to a mandatory 20 percent tax withholding as prepayment of estimated taxes due. You may be eligible for forward averaging, in which case special taxation formulas apply. Retiremen - 2 -

5 Generally, you ll pay an additional 10 percent penalty if you are under age 59 1/2. However, for individuals age 55 who are separated from service, this penalty is waived. Roll Over Your Distribution Into an IRA. Your taxes will be deferred until you begin making withdrawals from your IRA. So, all of your money keeps working for you. You ll avoid any penalties, regardless of your age. Your investment earnings in your IRA will compound tax-deferred. You may be eligible to convert your IRA to a Roth IRA. Roll Over (Convert) Your Distribution Into a Roth IRA. Taxes will be due on all pre-tax assets you convert. You ll avoid penalties if you pay the taxes due from other than the retirement plan assets. Your investment earnings in the Roth IRA will potentially compound tax-free. t Plans - 3 -

6 Partial Cash Distribution/ Partial Rollover The portion you receive in cash will be subject to the same tax and penalty implications as described in the Cash Distribution section. The amount you roll over will avoid taxes and penalties as described in the Roll Over Your Distribution Into an IRA section. This summary provides you with a general idea of the options available to you. Going forward, you ll find more complete and detailed information about each one. Contact your Benefits Administrator to inquire about the options available in your plan. More On Cash Distributions... Forward Averaging. Individuals born before 1936 may be eligible for a reduced tax rate. Ask your Financial Advisor for details and consult with your tax advisor regarding your particular situation. Retiremen - 4 -

7 Employer Stock. If your retirement plan contains employer securities that can be distributed in-kind, you should carefully consider a special option available to you. If you distribute the stock from the plan and do not roll it to an IRA, you may make a special NUA election that could result in a tax savings to you. The difference between the fair market value of the company stock on the date of the distribution and the fair market value as of the date(s) it was contributed to the plan (the basis) is known as net unrealized appreciation (NUA). If an NUA election is made, only the basis will be taxed at ordinary income tax rates at the time of the distribution. The NUA will not be taxed until you sell the stock, and is then taxed as a capital gain at the rate of 20% (or 10% for those in a 15% tax bracket) rather than as ordinary income. The difference in the two tax rates could be substantial, particularly if you are in the 35% tax bracket. If your company stock is rolled over into an IRA, any potential for long-term capital gains treatment on the appreciation is foregone. You may elect to roll over only the portion of your distribution not consisting of the employer stock, and there will be no current tax on the portion rolled over. It is also important to note that the 10% penalty still applies for withdrawals of stock prior to age 59 1/2 (or 55 and separated from service), and any dividends received while the stock is held outside of the plan will be taxable. t Plans - 5 -

8 More On Rollovers... Your Rollover Options. If you decide to roll over your distribution to an IRA, there are two ways to go about it and knowing the best way could save you tax dollars. But you ll need to choose your course of action before receiving your distribution. With that in mind, here s a closer look at the alternatives. Direct Rollover to Traditional IRAs. Most people choose this option and for good reason. A direct rollover moves your retirement plan savings directly into your Rollover IRA and avoids unnecessary taxes. Direct rollover simply means authorizing your employer to make your distribution check payable directly to the new custodian for the benefit of your IRA. Your employer will either send your distribution check directly to your new IRA custodian or mail it to you. If it is sent Retiremen to you, simply deliver the check to the IRA custodian for deposit into your IRA account

9 That s all there is to it. And, best of all, there is no withholding, no taxes, and no penalties. Note: You may also roll over securities in kind if your plan allows. Indirect Rollover. With an indirect rollover, you instruct your employer to make your distribution check payable to you. You then have 60 calendar days from the time you receive the check to deposit the money into an IRA. What s the downside? Your employer will be required to withhold 20 percent of your distribution and send it to the IRS as advanced payment of taxes, and you ll receive only 80 percent of your distribution. What if you intend to roll over 100 percent of the money? You can still do that, but you ll have to make up the 20 percent withheld for taxes out of your own pocket. You would then treat the 20 percent previously withheld as a tax credit toward your current year s tax return. What if you roll over only the 80 percent you received? The IRS will treat the 20 percent withheld as if you had taken a distribution in cash. You would then be liable for tax on that 20 percent, plus the cash distribution would be subject to a 10 percent penalty tax if you are under the age of 59 1/2 (or 55 and seperated from service). When you file your return, you will receive a credit for the difference between the 20 percent withheld from your distribution initially and what you actually owe in taxes and penalties. t Plans - 7 -

10 Direct Rollover (Conversions) to Roth IRAs. If you are single, or married and filing a joint return, and have adjusted gross income (AGI) of under $100,000 (2009), you are eligible to do a direct rollover (conversion) to a Roth IRA. To accomplish a conversion, the same guidelines that are stated in Direct Rollover to Traditional IRAs are followed. One big difference between rolling your retirement plan assets into a traditional IRA vs. converting to a Roth IRA is that taxes will be due on all pretax assets converted to a Roth in the year of the conversion. In addition, if you intend to pay the tax from assets in the plan, and you are under 59 1/2 (or 55 and seperated from service), a 10% penalty tax will be due on the taxable portion you keep to pay the tax. In order to avoid this, it is beneficial to pay the taxable portion of the conversion with assets from outside the plan. The AGI limitation and married filing a joint return restriction are eliminated for conversions in 2010 and beyond, and generally everyone will be eligible to do a conversion. Taxes for 2010 conversions may be split between 2011 and 2012 tax returns.

11 The Consequences of Direct Versus Indirect Rollovers The following reflects the outcome of three different methods for rolling over a $100,000 distribution: Direct Check is paid directly to your IRA Distribution Amount: $100, Percent Withholding: None Taxes Due: None 10 Percent Penalty: None Tax Credit at Tax Filing: None The Bottom Line: If you elect a direct rollover, there is no withholding. One hundred percent of your money goes to work for you without having to pay anything out of our own pocket. Indirect (Option 1) Check is paid to you; you make up the withholding Distribution Amount: $100, Percent Withholding: $20,000 Taxes Due: None 10 Percent Penalty: None Tax Credit at Tax Filing: $20,000 The Bottom Line: If you take the money, but intend a full rollover, the IRS will withhold taxes you do not need to pay. You have to use $20,000 of your own savings, and the $20,000 withheld is applied to your tax return. Indirect (Option 2) Check is paid directly to you; you do not make up the withholding Distribution Amount: $100, Percent Withholding: $20,000 Taxes Due: $6, Percent Penalty: $2,000 Tax Credit at Tax Filing: $11,400 The Bottom Line: If you take the money and roll over only the 80 percent you receive, you ll pay taxes and a penalty on the 20 percent that was withheld. Only 80 percent of your money goes to work for you.

12 Rollovers to a Stifel Nicolaus IRA It s a simple process to roll over your plan assets from a company-sponsored retirement plan or from another financial institution into a Stifel Nicolaus IRA, and it can be accomplished in a few easy steps. To establish your Stifel IRA, just complete the Stifel Nicolaus IRA Simplifier account application with the assistance of your Stifel Financial Advisor. Then, contact your Benefits Administrator or IRA custodian and request a direct rollover of your plan assets into your Stifel rollover account. Your plan administrator or IRA custodian should send you a form that you simply complete and return to them for processing. Remember, direct rollovers eliminate taxation, withholding, and penalties

13 Choosing the Right Investment Strategy Careful consideration should be given to how your rollover will be invested. With a Stifel Nicolaus Self-Directed IRA account, your retirement assets can be invested according to a plan designed specifically for you. A Stifel Self-Directed IRA provides you with the versatility and freedom to choose the investment vehicles that meet your financial needs. Your goals and how long you have until you start taking distributions will determine whether you choose CDs, mutual funds, bonds, money market instruments, stocks, or annuities in your IRA. With over a century of knowledge and service, Stifel Nicolaus can assist you in developing a plan that meets your individual needs. Stifel Nicolaus does not provide legal or tax advice. You should consult with your legal and tax professionals

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