The Roth Contribution Option. Is It Right for You?

Transcription

1 The Roth Contribution Option Is It Right for You?

2 Agenda What is Roth? How are Roth contributions different? Taxes (how Roth affects your take-home pay) Contribution limits What is a qualified distribution? Fees to participate Loans Investments Rollovers Which option is best for you? Roth Contribution Analyzer tool

3 What Is Roth? Roth 457 Basics for Governmental 457(b) Plans Contribute to the Texa$aver 401(k) and 457 Plans with after-tax dollars Pay taxes on your contributions now, instead of at distribution Designate all or a portion of your contributions as Roth contributions No taxes withheld from Roth contributions or their earnings when a qualified distribution is taken

4 How Are Roth Contributions Different? Roth 457 Basics for Governmental 457(b) Plans How are Roth contributions different from traditional contributions? Roth contributions are made with after-tax dollars. Traditional contributions are made with before-tax dollars.

5 2012 Contribution Limits Roth 457 Basics for Governmental 457(b) Plans 2012 contribution limit for both before-tax and Roth contributions: $17,000 to each of the 401(k) and 457 Plans If you are participating in both plans, you can contribute a maximum of $34,000 Age 50 and Over additional contributions:» Maximums for each plan (401(k) and 457) are $22,500 Special 457 Catch-up contributions: The maximum contribution is $34,000 Age 50 and Over and Special 457 Catch-up options cannot be used in the same year

6 Taxes Roth 457 Basics for Governmental 457(b) Plans Roth reduces your take-home pay Pay taxes now rather than at retirement Before-Tax Roth After-Tax Annual Salary $40,000 $40,000 Minus Before-Tax Contribution $1,200 n/a Taxable Pay $38,800 $40,000 Minus Estimated Income Tax Minus After-Tax Roth Contribution $5,820 $6,000 $0 $1,200 Take-Home Pay $32,980 $32,800 FOR ILLUSTRATIVE PURPOSES ONLY. This hypothetical example assumes a 15% federal income tax rate. It does not account for Social Security, Medicare or other taxes. Source: Great-West Retirement Services, 2011

7 What Is Considered a Qualified Distribution? Roth 457 Basics for Governmental 457(b) Plans 401(k) qualified distribution:» Made after five taxable years of Roth participation and is either: Made on or after the date the employee attains age 59½; Made after the employee s death; or Attributable to the employee being disabled. 457 qualified distribution:» Made after five taxable years of Roth participation and is either: Made on or after the date the employee attains age 59½ and has separated from employment; Made after the employee s death; or Attributable to the employee being disabled.

8 What Is Considered a Qualified Distribution? Roth How does 457 the Basics Roth five-taxable-years for Governmental holding period 457(b) work? Plans Five-taxable-years period begins effective January 1 of the calendar year in which you make your first salary contribution for Roth. Example: If your first Roth contribution from your pay occurs July 1, 2012, then calendar year 2012 will count as the first taxable year. Following this example, the five-taxable-years holding period will end on December 31, 2016 (2012, 2013, 2014, 2015, and 2016). If you make a direct rollover from a designated Roth contribution account with another plan, the five-taxable-years period for the recipient plan begins on the first day of the taxable year in which you made designated Roth contributions to the other plan if that date is earlier than the date that you started making Roth contributions to your current plan.

9 Administrative Fees Administrative fees apply separately to before-tax and Roth contributions

10 Roth Fees Monthly flat $5 fee for Roth contributions Administrative fees apply separately to before-tax and Roth contributions Charged because the Program is not State-funded; fees pay for the Program administration Monthly Roth Flat Fee Monthly Administrative + Roth Fee Annualized Administrative + Roth Fee Monthly Roth Balance Administrative Fee $10.00 or less No Fee No Fee No Fee No Fee Between $10.01 and $1, $5.00 $1.18 $6.18 $74.10 Between $1, and $16, $5.00 $3.99 $8.99 $ Between $16, and $32, $5.00 $6.32 $11.32 $ Between $32, and $48, $5.00 $9.49 $14.49 $ Between $48, and $64, $5.00 $12.65 $17.65 $ $64, or more $5.00 $15.81 $20.81 $249.72

11 Loans Can I take a loan from my Roth contributions in my Texa$aver Plan account? Yes. Distributions are prorated from before-tax and Roth contributions. Repayments are prorated back to each money type. In other words, as you repay your loan, the money goes back into your account exactly as it was taken out. How is a Plan loan from Roth contributions taxed? Roth loans are treated just like traditional loans. Let s say you have money in before-tax and Roth contributions. The loan will be prorated by the amounts of money you have in before-tax and Roth contributions. As long as the loan is repaid in full pursuant to the terms of your plan and loan policy, you will pay no additional taxes. Taxes and penalties may apply on a loan default.

12 Rollovers Can I defer my annual leave as a Roth contribution to my Texa$aver account? Yes, as long as it doesn t exceed the current 2012 annual limit of $17,000 or $22,500 for employees age 50 or older. Can I roll over Roth dollars from other accounts to my Texa$aver account? Yes, the Texa$aver account accepts rollovers from other qualified 401(k), 457, or 403(b) plans with Roth contributions. Can I roll over an existing Roth IRA to my Texa$aver account? No. You cannot roll over an existing Roth IRA to your Texa$aver account. Roth IRAs can only be rolled into other Roth IRAs. Can I roll over a Roth IRA from a prior employer-sponsored Roth IRA to the Texa$aver account as a Roth contribution? No. You cannot roll over a Roth IRA from a prior employer-sponsored Roth IRA to the Texa$aver account as a Roth contribution.

13 Investments Can I select different investment options for my before-tax and Roth contributions? No. All contributions are allocated to the same investments you selected for your Texa$aver account.

14 At-a-Glance Comparison*: Before-Tax (Traditional) vs. After-Tax (Roth) Is my contribution taxable in the year I make it? Is my contribution taxed when distributed? Are the earnings on my contributions taxed when distributed? Before-Tax (Traditional) No Yes Yes After-Tax (Roth) Yes No, provided the distribution occurs after age 59½, death or disability and at least five years after your first contribution No, provided the distribution occurs after age 59½, death or disability and at least five years after your first contribution * Source:

15 Making the Best Choice for You After-Tax Roth Contributions Locks in today s tax rates on all contributions Suitable for higher tax bracket at retirement Before-Tax Traditional Contributions Contributions and earnings on contributions are tax-deferred until you take a distribution Suitable for lower tax bracket at retirement

16 Online Tool: Roth Contribution Analyzer FOR ILLUSTRATIVE PURPOSES ONLY.

17 Online Tool: Roth Contribution Analyzer FOR ILLUSTRATIVE PURPOSES ONLY.

18 Online Tool: Roth Contribution Analyzer FOR ILLUSTRATIVE PURPOSES ONLY.

19 Bottom Line: Participate! Regardless of which type of contributions, participate!

20 Thank You For more information about the Roth option, please contact a Texa$aver representative. Phone: (800) texasaver@gwrs.com Facebook: Employees Retirement System of Texas Core securities, when offered, are offered by Texa$aver Program through GWFS Equities, Inc. GWFS Equities, Inc. is a wholly owned subsidiary of Great-West Life & Annuity Insurance Company. Representatives of GWFS Equities, Inc. are not registered investment advisers and cannot offer financial, legal, or tax advice. Please consult with your financial planner, attorney, and/or tax adviser as needed Great-West Life & Annuity Insurance Company. Form# CB1110RS (12/2011) PT139454