Comparison Chart: Pre-Tax Deferrals, Designated Roth Deferrals, In-Plan Roth Rollovers, & s Caution: Please note that some of the items included on this grid are the result of Lincoln National Corporation s* current interpretation of the Final Roth Regulations, the Small Business Jobs Act of 2010, and IRS Notice 2010-84. Others may reasonably have a different interpretation of that material. In addition, this area of the law has been and continues to be subject to significant change. Question Pre-Tax Deferral Designated Roth Deferral In-Plan Roth Rollover Who is eligible to establish a plan? as described below for 2011: Who may benefit? 401(k) Any eligible employee 403(b) Any eligible employee 457(b) Governmental Any eligible employee There are no income restrictions Employees who expect to be in a lower tax bracket at retirement Employees who want to avoid current taxation on deferrals and earnings The plan document may permit designated Roth deferrals, as they are an optional provision 401(k) Any eligible employee 403(b) Any eligible employee 457(b) Governmental Any eligible employee (effective for plan years beginning January 1, 2011) There are no income restrictions Younger employees in lower tax brackets with a long time horizon until retirement Employees who expect tax rates to increase by their retirement date Employees interested in estate planning opportunities The plan document must first permit designated Roth deferrals and also allow for the in-plan Roth rollover 401(k) Any eligible employee 403(b) Any eligible employee 457(b) Governmental Any eligible employee (effective for plan years beginning January 1, 2011) There are no income restrictions Younger employees in lower tax brackets with a long time horizon until retirement Employees who expect tax rates to increase by their retirement age Employees interested in estate planning Amounts converted in 2010 are eligible to have the tax liability spread equally over the 2011 and 2012 tax years An individual s ability to make contribution is determined by single or married filing status and Adjusted Gross Income (AGI) Filing status Adjusted Gross Income (AGI) Single <$110,000 $110,000 - $124,999 >$125,000 Married Filing Jointly Married Filing Separately <$173,000 $173,000 - $182,999 >$183,000 $0 $1 - $9,999 >$10,000 Full/Partial Contribution Full Partial None Full Partial None Full Partial None Younger individuals in lower tax brackets with a long time horizon until retirement Individuals who expect tax rates to increase by their retirement date Individuals interested in estate planning opportunities What are the contribution limits? Contributions are made on a pre-tax basis Pre-tax deferrals are combined with Roth deferrals for the purpose of the contribution limits (as indexed) Contributions are limited to the lesser of 100% of includible compensation or the maximum dollar limit (as indexed) Contributions are made on an after-tax basis (not deductible) Pre-tax deferrals are combined with Roth deferrals for the purpose of the contribution limits (as indexed) Contributions are limited to the lesser of 100% of includible compensation or the maximum dollar limit (as indexed) Tax years: 2009-2011 Deferral limit: Up to $16,500 Tax year: 2012 Deferral limit: Up to $17,000 N/A Contributions are made on an after-tax basis (not deductible) contributions are combined with traditional IRA contributions for the purpose of the contribution limits (as indexed) Contributions are limited to the lesser of 100% of includible compensation or the maximum dollar limit (as indexed) Tax years: 2009-2011 Deferral limit: Up to $16,500 Tax year: 2012 Deferral limit: Up to $17,000 Deferral limit: Up to $5,000 *Affiliates of Lincoln National Corporation include, but are not limited to, The Lincoln National Life Insurance Company, Lincoln Life & Annuity Company of New York, and Lincoln Retirement Services Company, LLC. 1 of 7
Are age 50 Available to participants who attain age 50 Available to participants who attain age 50 N/A by the end of the taxable year by the end of the taxable year catch-up Pre-tax catch-up deferrals and Roth catchup deferrals are combined for the purpose up deferrals are combined for the purpose Pre-tax catch-up deferrals and Roth catch- contributions of the catch-up limit of the catch-up limit permitted? Deferral limit: Up to $5,500 Deferral limit: Up to $5,500 Available to participants who attain age 50 by the end of the taxable year catch-up contributions are combined with traditional IRA contributions for the purpose of the catch-up limit Deferral limit: Up to $1,000 What are distributable events? Are hardship withdrawals available? Severance from employment Retirement Plan termination Other in-service withdrawals (see in-service withdrawal section) Hardship withdrawals may be permitted The amount available for hardship is limited to pre-tax deferrals Earnings on pre-tax deferrals after January 1, 1989, are not available for distribution For 457(b) Governmental plans, hardship withdrawals are allowed in the event of an unforeseeable emergency Severance from employment Retirement Plan termination Other in-service withdrawals (see inservice withdrawal section) Hardship withdrawals may be permitted The amount available for hardship is limited to Roth deferrals The withdrawal is pro-rated between Roth deferrals and earnings non-qualified section), the For 457(b) Governmental plans, hardship withdrawals are allowed in the event of an unforeseeable emergency Severance from employment Retirement Plan termination Other in-service withdrawals (see in-service withdrawal section) Hardship withdrawals may be permitted The withdrawal is pro-rated between the inplan Roth rollover amount and earnings non-qualified section), the For 457(b) Governmental plans, hardship withdrawals are allowed in the event of an unforeseeable emergency Distributions are available any time from a Individuals do not need to experience a distributable event Distributions are available any time from a Individuals do not need to experience a hardship event Are in-service withdrawals available? For 401(k) and 403(b) plans, in-service withdrawals for active participants are NOT permitted prior to age 59½ Plans may permit in-service withdrawals of pre-tax deferrals after attainment of age 59½ For 457(b) Governmental plans, in-service withdrawals for active participants are not permitted prior to 70½ For 401(k) and 403(b) plans, in-service withdrawals for active participants are NOT permitted prior to age 59½ Plans may permit in-service withdrawals after attainment of age 59½ The withdrawal is pro-rated between Roth deferrals and earnings non-qualified section), the For 457(b) Governmental plans, in-service withdrawals for active participants are not permitted prior to 70½ Plans may permit in-service withdrawals of the in-plan Roth rollover account The withdrawal is pro-rated between the inplan Roth rollover amount and earnings non-qualified section), the Distributions are available any time from a Individuals do not need to experience an in-service withdrawal event 2 of 7
Are loans Loans are not available permitted? A plan may offer loans up to certain limits (generally 50% of the participant s vested account balance) from the pre-tax deferral account as well as other sources If a loan default and deemed distribution occurs, the entire outstanding loan balance becomes taxable A plan may offer loans up to certain limits (generally 50% of the participant s vested account balance) from the designated Roth deferral account as well as other sources If a loan default and deemed distribution occurs, the loan amount represents a nonqualified distribution A plan may offer loans up to certain limits (generally 50% of the participant s vested account balance) from the in-plan Roth rollover account as well as other sources If a loan default and deemed distribution occurs, the loan amount represents a nonqualified distribution Are required minimum (RMD) at age 70½ necessary? Generally, the RMD must be withdrawn by April 1 following the end of the year in which the participant reaches age 70½, or, if later, by April 1 following the end of the year in which the participant retires For 5% owners, the RMD must be withdrawn by April 1 following the end of the year in which the participant reaches age 70½, regardless of retirement Generally, the RMD must be withdrawn by April 1 following the end of the year in which the participant reaches age 70½, or, if later, by April 1 following the end of the year in which the participant retires For 5% owners, the RMD must be withdrawn by April 1 following the end of the year in which the participant reaches age 70½, regardless of retirement If the distribution is non-qualified, the May roll to a to avoid RMD Generally, the RMD must be withdrawn by April 1 following the end of the year in which the participant reaches age 70½, or, if later, by April 1 following the end of the year in which the participant retires For 5% owners, the RMD must be withdrawn by April 1 following the end of the year in which the participant reaches age 70½, regardless of retirement If the distribution is non-qualified, the May roll to a to avoid RMD RMD rules do not to s What is a qualified? N/A. The term qualified is used in the context of a Roth deferral account only BOTH of the following requirements must be met: Roth deferral account and/or Roth rollover account has been in place for 5 taxable years (from the year the first Roth contribution or the first in-plan Roth rollover was made, whichever was first) AND One of the following events has occurred: Attainment of age 59½ BOTH of the following requirements must be met: Roth deferral account and/or Roth rollover account has been in place for 5 taxable years (from the year the first Roth contribution or the first in-plan Roth rollover was made, whichever was first) AND One of the following events has occurred: Attainment of age 59½ BOTH of the following requirements must be met: The has been in place for 5 taxable years (from the year of the first contribution) AND One of the following events has occurred: Attainment of age 59½ Certain first-time purchase of a home Since 2006 was the first taxable year Roth deferrals were permitted in 401(k) and 403(b) plans, 2011 was the first year that qualified could be taken from the designated Roth deferral account. Assuming no Roth deferrals were made in any previous years, 2010 is the first taxable year in-plan Roth rollovers are permitted. The first year that qualified can be made from the in-plan Roth rollover account will be 2015. 3 of 7
What is a N/A. The term non-qualified is used in the context of a Roth deferral nonqualified account only.? How is the 5-year taxable period ( clock ) determined? N/A. The participant may take a distribution even if the criteria for a qualified distribution have not been met (This is a non-qualified distribution.) Distribution of the Roth deferral is nontaxable, but the earnings are taxable Certain are always considered non-qualified: 415 excess contributions Excess deferrals Excess contributions Deemed (loan defaults) For purposes of determining a qualified The 5-year clock begins on January 1 of the earliest of the following taxable years: deferral to the plan, or deferral to another plan which is rolled over to this plan in a direct rollover, or The year of the participant s first in-plan Roth rollover The designated Roth deferral account shares the same 5-year clock with the inplan Roth rollover account for purposes of determining if a distribution is a qualified The participant may take a distribution even if the criteria for a qualified distribution have not been met (This is a non-qualified distribution.) Distribution of the in-plan Roth rollover amount is nontaxable, but the earnings are taxable Certain are always considered non-qualified: Deemed (loan defaults) For purposes of determining a qualified The 5-year clock begins on January 1 of the earliest of the following taxable years: deferral to the plan, or deferral to another plan which is rolled over to this plan in a direct rollover, or The year of the participant s first in-plan Roth rollover The in-plan Roth rollover account shares the same 5-year clock with the designated Roth deferral account for purposes of determining if a distribution is a qualified With an in-plan Roth rollover, a separate 5-year clock will need to be maintained for purposes of the recapture tax rule If there are multiple in-plan Roth rollovers in different years, each in-plan Roth rollover will have a separate 5-year clock for purposes of the recapture tax rule account holders may take a distribution even if the criteria for a qualified distribution have not been met (This is a non-qualified distribution.) Ordering rules : Contributions are distributed first and are taxfree. Earnings are distributed second and are taxable if the distribution is non-qualified. For purposes of determining a qualified The 5-year clock begins on January 1 of the taxable year in which the individual first made a Roth contribution to any or all s The 5- year clock is the earlier of: The date the was originally established, or The date the first rollover was made to the The 5-year clock does not transfer from a designated Roth account or an in-plan Roth Rollover account Assume no was established. If designated Roth deferrals were made to a plan in 2007 and then rolled to a in 2012, the 5-year clock starts in 2012, not 2007. Assume a was established in 2006. If designated Roth deferrals were made to a plan in 2007 and then rolled to the in 2012, the 5-year clock starts in 2006, not 2007 or 2012 because the earliest date is the date the was originally established. 4 of 7
What tax Following a distributable event, the entire pre-tax account (deferrals and earnings) rules at are subject to federal and state taxation distribution? Taxation of earnings is determined based on whether the distribution is qualified or non-qualified, as follows: Qualified distribution The designated Roth deferrals and earnings are tax-free Non-qualified distribution Earnings are subject to federal and state taxation Taxation of earnings is determined based on whether the distribution is qualified or non-qualified, as follows: Qualified distribution The in-plan Roth rollover amount and earnings are tax-free Non-qualified distribution Earnings are subject to federal and state taxation If the in-plan Roth rollover is distributed from the plan within the 5-year period from the date of the rollover and the participant is under 59½, the 10% recapture tax will to the entire distribution, not just the earnings Taxation of earnings is determined based on whether the distribution is qualified or non-qualified, as follows: Qualified distribution The Roth contributions and earnings are tax-free Non-qualified distribution Earnings are subject to federal and state taxation Does the premature 10% distribution penalty? The premature 10% distribution penalty may to the entire distribution taken prior to age 59½ Age 55 and severance from employment The premature 10% distribution penalty may to non-qualified taken prior to age 59½ Age 55 and severance from employment The premature 10% distribution penalty may to non-qualified taken prior to age 59½ Age 55 and severance from employment The premature 10% distribution penalty (on earnings only) may to non-qualified taken prior to age 59½ If the in-plan Roth rollover is distributed from the plan within the 5-year period from the date of the rollover and the participant is under 59½, the 10% recapture tax will to the entire distribution, not just the earnings 5 of 7
What are the 20% must be withheld on the entire withdrawal amount which is eligible for mandatory direct rollover but which is not directly income tax rolled over Mandatory state tax withholding may also withholding requirements? 20% must be withheld on the taxable portion of the Roth deferral account which is eligible for direct rollover but which is not directly rolled over Qualified distribution No mandatory withholding (deferrals and earnings are nontaxable) Non-qualified distribution Mandatory withholding on investment earnings would Mandatory state tax withholding may also The in-plan Roth rollover transaction will not be subject to any withholding as the in-plan rollover is not a distribution from the plan 20% must be withheld on the taxable portion of the in-plan Roth rollover account which is eligible for direct rollover but which is not directly rolled over upon distribution from the plan Qualified distribution No mandatory withholding (assets and earnings are nontaxable) Non-qualified distribution Mandatory withholding on earnings would Mandatory state tax withholding may also N/A. Voluntary withholding applies What direct rollover opportunities* exist? * Note: These include both full and partial rollovers. The distribution must be an eligible rollover distribution and the participant must have a distributable event RMDs, hardship, corrective, and payments spread over 10 years or more are not eligible rollover May roll over to another plan 401(k), 403(b), or 457(b) governmental if the receiving plan accepts rollovers May roll over to a traditional IRA May roll over to a May do an in-plan Roth rollover if plan permits (For 401(k) and 403(b) plans, elective deferral amounts for active participants are not eligible prior to age 59½. For 457(b) governmental plans, elective deferral amounts for active participants are not eligible prior to age 70½.) Amounts rolled over to a or converted via the in-plan Roth rollover option in 2010 are eligible to have the tax liability spread equally over the 2011 and 2012 tax years. The distribution must be an eligible rollover distribution and the participant must have a distributable event RMDs, hardship, corrective, and payments spread over 10 years or more are not eligible rollover r If the in-plan Roth rollover is distributed from the plan within the 5-year period from the date of the rollover and the participant is under 59½, the 10% recapture tax will to the entire distribution, not just the earnings The distribution must be an eligible rollover distribution and the participant must have a distributable event RMDs, hardship, corrective, and payments spread over 10 years or more are not eligible rollover May roll over designated Roth account to another plan s designated Roth account in a 401(k), 403(b), or 457(b) governmental plan if the receiving plan accepts rollovers May roll over to a If the rollover was a qualified distribution, the entire rollover (Roth deferrals and earnings) represents the basis in the Roth IRA If the rollover was non-qualified, the custodian/trustee must separately account for Roth deferrals and earnings A may not be rolled over to a qualified plan A may roll over to another 6 of 7
What indirect rollover opportunities* exist? (i.e., 60-day rollover rule) * Note: These include both full and partial rollovers. May take a distribution in cash 20% of the entire taxable distribution must be withheld May roll over the distribution to another 401(k), 403(b), or 457(b) governmental plan within 60 days of the distribution if the receiving plan accepts rollovers May roll over to a traditional IRA within 60 days of distribution May take a distribution in cash 20% must be withheld from the taxable portion of the distribution (i.e., investment earnings of a non-qualified distribution) If the distribution is made to the participant, the 60-day rollover rule may be used, but if any portion of the distribution consists of Roth contributions (nontaxable assets), the recipient plan must be a The taxable portion only of the nonqualified distribution (i.e., investment earnings) may be rolled to another 401(k), 403(b), or 457(b) governmental plan within 60 days of the distribution if the receiving plan has a designated Roth account and accepts rollovers The 5-year clock does not transfer to the recipient plan May take a distribution in cash 20% must be withheld from the taxable portion of the distribution (i.e., investment earnings of a non-qualified distribution) If the distribution is made to the participant, the 60-day rollover rule may be used, but if any portion of the distribution consists of Roth rollover assets (nontaxable assets), the recipient plan must be a The taxable portion only of the nonqualified distribution (i.e., investment earnings) may be rolled to another 401(k), 403(b), or 457(b) governmental plan within 60 days of the distribution if the receiving plan has a designated Roth account and accepts rollovers The 5-year clock does not transfer to the recipient plan Individuals may take a distribution of the designated Roth deferral account in cash (taxable and nontaxable) and make a subsequent rollover to a May roll over the distribution to a within 60 days of distribution The 5-year clock does not transfer to a Roth IRA The information included in this chart is presented solely for the purpose of educating the user about pre-tax deferral accounts, designated Roth deferral accounts and in-plan Roth rollover accounts in employer-sponsored plans and s. The Roth deferral information is based on Final rules regarding Roth deferrals published by the IRS on December 30, 2005, Final Roth regulations effective April 30, 2007, the Small Business Jobs Act of 2010 passed on September 27, 2010, and IRS Notice 2010-84. Lincoln makes no representation that any or all of the material is appropriate or applicable to all employers or participants. Those who choose to use this information do so on their own initiative and are responsible for compliance with all laws, if and to the extent such laws are applicable. Lincoln strongly encourages you to consult your legal or tax advisors for additional information. There is no additional tax deferral benefit for contracts purchased in an IRA or other tax-qualified plan, since these are already afforded tax-deferred status. Therefore, an annuity should only be purchased in an IRA, 403(b) or qualified plan if the client values some of the other features of the annuity and is willing to incur any additional costs associated with the annuity to receive such benefits. For further information regarding s, please consult Publication 590 Individual Retirement Arrangements (IRAs). This publication is available at www.irs.gov. Annuities are issued by The Lincoln National Life Insurance Company in Fort Wayne, IN. Guarantees backed by the financial strength of the insurer. Two separate companies issue annuities: The Lincoln National Life Insurance Company of Fort Wayne, Indiana, and for contracts sold in New York, Lincoln Life & Annuity Company of Syracuse, New York. Securities distributed by Lincoln Financial Distributors, Inc., a broker dealer and wholesale distribution organization of Lincoln Financial Group. 7 of 7