Transcript ROTH 401(k) - Retirement & Estate Planning Opps

Understanding
the
New Roth
401(k)
Transamerica®. The retirement answer.
Presented by
Crystal Gravitt
and
Jonathan Anderson
This presentation does not constitute tax or legal advice. Please consult a tax or legal adviser for your specific situation.
TRANSAMERICA
®
RETIREMENT SERVICES
Transamerica Retirement Services (Transamerica or TRS), a marketing unit of Transamerica Financial Life
Insurance Company and other of its affiliates, specializes in the promotion of retirement plan products and services.
This presentation does not constitute tax or legal advice. Please consult a tax or legal adviser for your specific situation.
Agenda
The Basics
• What is a Roth 401(k) and how does it work?
• Comparison of Features
Compliance and Recordkeeping
Plan Sponsor Considerations
What Participants Need to Know
Reasons to Consider a Roth 401(k)
Comparison of Pre-tax 401(k), Roth 401(k), and Roth IRA
Conclusions
This presentation does not constitute tax or legal advice. Please consult a tax or legal adviser for your specific situation.
Introduction
New “Roth 401(k)” available January 1, 2006
Participants may elect to contribute all or part of
contributions as after-tax (Roth 401(k))or before-tax
(“regular” or pre-tax 401(k))
Pre-tax 401(k) accumulates income 100% tax-free until
distribution. At distribution, the entire amount (pre-tax
401(k) plus accumulated income) is taxed.
Roth 401(k) accumulates income 100% tax-free. At
distribution, a qualified distribution is 100% income
tax-free (includes Roth 401(k) plus accumulated
income)
“Pay Uncle Sam Now or Pay Him Later?”
This presentation does not constitute tax or legal advice. Please consult a tax or legal adviser for your specific situation.
Roth 401(k) Basics
Roth 401(k) Basics
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Eligibility Restrictions - No AGI Limit
Contribution Tax Treatment and Limits
–
Same as pre-tax 401(k) ; subject to FICA
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$15,000/$5,000 for 2006 (subject to COLA adjustments)
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Combined Limit for pre-tax 401(k) and Roth 401(k). For 2006, a participant not eligible to make
catch-up contributions could:
• Make $15,000 of pre-tax 401(k) only, or
• Make $15,000 of Roth 401(k) only, or
• Any combination of pre-tax 401(k) and Roth 401(k), so long as the combined total is $15,000
or less.
• The numbers above assume the participant was not otherwise limited by the plan or other
limits.
Distributions
–
Qualified distributions are 100% tax-free. A qualified distribution is one that is:
• Made after a 5-taxable-year period of participation, and
• Is made after the employee attains age 59 ½, becomes disabled, or dies.
–
A non-qualified distribution (other than a qualified distribution) will result in a partial tax-free
distribution.
This presentation does not constitute tax or legal advice. Please consult a tax or legal adviser for your specific situation.
Roth 401(k) Basics
Roth 401(k) Basics
Example : Roth 401(k) five-year Rule
• July 1, 2006, Karen, age 58, first contributes to a Roth 401(k)
• She leaves employer in 2007; transfers Roth 401(k) to another Roth
•
•
401(k) under a new employer’s plan
Makes first contribution to new employer’s Roth 401(k) plan January 1,
2008
1/1/2011 wants in-service distribution from Roth 401(k) account – if plan
permits
Is the Roth 401(k) distribution tax-free?
Yes. Satisfies purpose rule - over age 59½ satisfied
5-year rule - clock starts calendar year of 1st contribution (2006)
(5-year rule is carried over to new Roth 401(k))
This presentation does not constitute tax or legal advice. Please consult a tax or legal adviser for your specific situation.
Comparison Chart
Comparison of Features
Feature
Roth 401(k)
Traditional
401(k)
Roth IRA
Contributions In
After-tax
Pre-tax 401(k)
After-tax
“Qualified”
Distributions Paid
Tax-free
Taxed
Tax-free
70-½ Minimum
Distribution*
Required
Required
Not required
Contribution Limit
in 2006
$15,000 less
pre-tax 401(k) ♦
$15,000 less
Roth 401(k) ♦
$5,000
Income Restriction
None
None
$110,000 single
$160,000 married
*Some 401(k) plans have the RMD date as the later of 70-½ or termination from employment if not a 5% owner
♦Does
not include $5,000 additional catch-up contribution limit in 2006
This presentation does not constitute tax or legal advice. Please consult a tax or legal adviser for your specific situation.
Compliance & Recordkeeping
Recordkeeping Roth 401(k)
Contributions
•
Separate Accounting Requirement
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•
•
•
•
•
Roth 401(k) contributions and Roth 401(k) rollover contributions will both be
maintained as a separate money source
Must be maintained separately until entire account is distributed
Contributions, gain/losses, and expenses will be reflected in the Roth 401(k)
accounts
Roth 401(k) accounts will be reflected separately on the participant quarterly
statements and on the Web
Contribution File layouts will be modified to accept Roth 401(k) contributions
Track first contribution date – to determine qualified distributions
This presentation does not constitute tax or legal advice. Please consult a tax or legal adviser for your specific situation.
Plan Sponsor Considerations
Should everyone have a Roth 401(k)?
Issues MEP Sponsors should consider before adding a
Roth 401(k):
•
•
•
•
More complex enrollment process
More complex distribution process
Is employee interest strong enough to warrant a Roth
401(k)
Sunset Provision – will the Roth 401(k) be around in
future years
This presentation does not constitute tax or legal advice. Please consult a tax or legal adviser for your specific situation.
Targeting New Client Companies
• Employers who may be suitable for a Roth 401(k) feature:
– Business owner clients looking for more “spending power”
in retirement
– Niche businesses such as medical practices and law firms
– Businesses with a younger employee population
– Businesses with employees who have previously been
excluded from contributing to Roth IRAs because their
income level was too high
This presentation does not constitute tax or legal advice. Please consult a tax or legal adviser for your specific situation.
Targeting New Client Companies
• Employers who may be suitable for a Roth 401(k) feature
continued:
– Employers who would like to offer a more competitive
retirement program
– Employers who would like to give plan participants more
independence concerning retirement plan contributions, tax
deductions and when to pay taxes
This presentation does not constitute tax or legal advice. Please consult a tax or legal adviser for your specific situation.
Plan Sponsor Considerations
What MEP Sponsors Should Consider
• Employee Communications should include:
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Individual Contribution Limits
Same Investment Options and Participant Rights
Difference in Paycheck
How Marginal Tax Rate Impacts Choice
Impact on Employer Match
Rules for Qualified Distributions
Charts
As when 401(k) & Roth IRA 1st Available; Foreign Now, Familiar Soon
• Business Owner and Key Personnel Needs
• Employer Feasibility Study
– Recordkeeping & Compliance; Employee Communications
– Implementation Schedule; What Will It Cost?
This presentation does not constitute tax or legal advice. Please consult a tax or legal adviser for your specific situation.
Targeting Employees
• Employees who may be suitable for a Roth 401(k) feature
include:
– Employees who believe they will be in a higher tax bracket
in retirement
– Employees who have been excluded from contributing to a
Roth IRA because of their income level
– Employees looking for Estate Planning Tools
– Younger employees
This presentation does not constitute tax or legal advice. Please consult a tax or legal adviser for your specific situation.
Focus on Participants
What Participants Need to Know
•
•
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Marginal Tax Rate (“MTR”)
Employee contributions and Employer Match
Sunset Impact: Need to compare benefits resulting
from next 5 years of 401(k) vs. Roth 401(k)
contributions during retirement
This presentation does not constitute tax or legal advice. Please consult a tax or legal adviser for your specific situation.
Focus on Participants
What Participants Need to Know
• Employer Match: Lower Roth 401(k) may not Qualify
for Highest Available Match
Example: Roth 401(k) May Not Qualify for maximum Match
George, 15% MTR, contributes 6% or $1,740 of $29,000 pay to pre-tax
401(k) option; Employer matches $.50 for each dollar up to 1st 6% on
pre-tax 401(k) or the new Roth; George receives maximum $870 match
on current pre-tax 401(k) contribution
Will George receive maximum match if Roth 401(k)
contribution based on same salary reduction percentage?
This presentation does not constitute tax or legal advice. Please consult a tax or legal adviser for your specific situation.
What Participants Need to Know
No. A Roth 401(k) of 6% of compensation is a net $1,479,
compared to a 6% pre-tax 401(k), which is $1,740. For a Roth
401(k), George’s pre-tax compensation of $29,000 is (1)
multiplied by George’s MTR of 15%, which results in after-tax
compensation of $24,650, and then (2) George’s 6% Roth
401(k) is determined based upon after-tax compensation,
resulting in a contribution of $1,479 (compared to pre-tax
401(k) of $1,740 at 6%). Match on $1,479 is only $739.50.
This presentation does not constitute tax or legal advice. Please consult a tax or legal adviser for your specific situation.
What Participants Need to Know
• Assumptions:
– $29,000 earnings
– 6% Contribution
– .50/1.00 match for first 6% contribution
6% Contribution Match
Pretax
$1,740.00
$870.00
Post Tax
$1,479.00
$739.50
– Difference of $391.50 in Total Savings today
– Difference of $130.50 in Employer Match
This presentation does not constitute tax or legal advice. Please consult a tax or legal adviser for your specific situation.
Who Should Consider
Tax Rates for 2006
Each row represents a "Tax Bracket." *Charles’ current tax bracket in yellow.
Tax Married Filing Joint
Rate & Surviving Spouses
Unmarried
Individuals
Heads of
Households
Married Filing
Separate
10%
$0 - 15,100
$0 - 7,550
$0 - $10,750
$0 - 7,550
15%
$15,101 - 61,300
$7,551 - 30,650
$10,751 - 41,500
$7,551 - 30,650
25%
$61,301 - 123,700
$30,651 - 74,200
$41,501 - 106,000
$30,651 - 61,850
28%
$123,701 - 188,450*
$74,201 - 154,800
$106,001 - 171,650
$61,851 - 94,225
33%
$188,451 - 336,550
$154,801 - 336,550
$171,651 - 336,550
$94,226 - 168,275
35%
over $336,550
over $336,550
over $336,550
over $168,275
* This is a Hypothetical Tax Illustration – not actual data
This presentation does not constitute tax or legal advice. Please consult a tax or legal adviser for your specific situation.
Who Should Consider
Charles retires in 2020, receives $100,000/year. Based on hypothetical* tax rates for
2020, it turns out that Charles** was correct; he is in a lower tax bracket; however, he
pays federal income tax at a higher rate during retirement than he did back in 2006.
Hypothetical* Tax Rates for 2020
Tax Married Filing Joint &
Rate Surviving Spouses
Unmarried
Individuals
Heads of
Households
Married Filing
Separate
15%
$0 - 15,100
$0 - 7,550
$0 - $10,750
$0 - 7,550
25%
$15,101 - 61,300
$7,551 - 30,650
$10,751 - 41,500
$7,551 - 30,650
33%
$61,301 - 123,700**
$30,651 - 74,200
$41,501 - 106,000
$30,651 - 61,850
38%
$123,701 - 188,450
$74,201 - 154,800
$106,001 - 171,650
$61,851 - 94,225
42%
$188,451 - 336,550
$154,801 - 336,550
$171,651 - 336,550
$94,226 - 168,275
45%
over $336,550
over $336,550
over $336,550
over $168,275
* This is a Hypothetical Tax Illustration projected for 2020– not actual data
This presentation does not constitute tax or legal advice. Please consult a tax or legal adviser for your specific situation.
Rules
Rules
•
Five-year rule For qualified distributions, the law mandates
the five-year holding period.
•
Tracking Contribution Basis It is clear that the plan
sponsor is responsible for tracking the contribution basis while
the Roth 401(k) account remains in the plan, and that
individual account owners are responsible for this for Roth
IRAs.
This presentation does not constitute tax or legal advice. Please consult a tax or legal adviser for your specific situation.
Rules
Rules
•
Plan Amendment to add Roth generally required by last day of 2006
plan year. Off-calendar plans may offer Roth on and after 1/1/06 and
before beginning of 2006 plan year if amendment is adopted on or
before date Roth contributions start.
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Loans: Repayments subject to the same rules (level payments made
at least quarterly); the total vested balance (Roth and non-Roth) is
aggregated in determining maximum loan amount; if loan defaults,
deemed distribution treated as nonqualified distribution for any Roth
funds involved, even if the Roth funds otherwise met the
requirements for a qualified distribution.
This presentation does not constitute tax or legal advice. Please consult a tax or legal adviser for your specific situation.
Rules
Rules
• Automatic Enrollment Automatic enrollment may be used
in conjunction with Roth 401(k) contributions. The plan
document must state the extent to which default
contributions are irrevocably designated as Roth 401(k)
contributions or pre-tax 401(k) contributions.
•
Option Change Frequency The rules relating to the
frequency of elections (to make, change or suspend) pre-tax
401(k) contributions also apply to Roth 401(k) contributions
This presentation does not constitute tax or legal advice. Please consult a tax or legal adviser for your specific situation.
Rules
Additional IRS Guidance Required
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Interaction between Roth 401(k) with safe harbor rules
402(f) Notice
Form W-2
Separate IRS Form 1099-R
Additional rollover notification requirements
Model amendment
This presentation does not constitute tax or legal advice. Please consult a tax or legal adviser for your specific situation.
Reference Guides
Comparison of Plans – Advantages / Disadvantages
For a Plan Sponsor
Advantage / Disadvantage
Pre-tax 401(k)
Roth 401(k)
Ease of Administration
Advantage
Disadvantage1
Ease of Participant Communication
Advantage
Disadvantage2
1. Roth 401(k) requires separate recordkeeping
2. Roth 401(k) is added – the Plan Sponsor must create and distribute a formal communication plan to
employees.
This presentation does not constitute tax or legal advice. Please consult a tax or legal adviser for your specific situation.
Reference Guides
Comparison of Plans – Advantages / Disadvantages
For a Participant
Advantage / Disadvantage
Pre-tax 401(k)
Roth 401(k)
Tax Rate Decreases at Retirement
Advantage
Disadvantage
Tax Rate Unchanged at Retirement
Neutral
Neutral
Tax Rate Increases at Retirement
Disadvantage
Advantage
Maximum Contribution1
Disadvantage
Advantage
Tax Risk Diversification2
Disadvantage
Advantage
Postpone Distribution
Disadvantage
Advantage3 (if rolled
over into Roth IRA)
1. A maximum Roth 401(k) contribution entails paying more upfront to cover the taxes, therefore an equivalent before-tax
contribution would require taking the taxable amount for an equivalent Roth 401(k) contribution and investing it in a
separate taxable account over that same period.
2. With the addition of the Roth 401(k) feature to a plan, participants may choose to diversify their tax risk by allocating
contributions to both before-tax and after-tax accounts.
3. A Roth 401(k) accounts may be rolled over to a Roth IRA, which has no Required Minimum Distribution requirement.
This presentation does not constitute tax or legal advice. Please consult a tax or legal adviser for your specific situation.
Reference Guides
Comparison of Plans – Roth 401(k) & Roth IRA
Item
Roth 401(k)
Roth IRA
2006 Individual Contribution Limit
$15,000
$4,000
Catch-up Limit if 50 or older
$5,000
$1,000
Minimum Distribution
Requirements
Applies (the April 1 following the
attainment of age 70 ½ or separation
from service, provided participant is not
a 5% owner)
Does Not Apply
First Time Home Buyer Exception
Does Not Apply
Applies
Qualified Distribution Five-Year
Rule
Clock starts in year of 1st contribution to
Roth 401(k) . If participant joins another
employer plan, clock continues based
on original contribution date if, and only
if, original Roth 401(k) account is rolled
over into new Roth 401(k) employer
plan, if permissible.
First year of 5-year period determined by the date
of any contribution to any Roth IRA. If a
participant rolls over a Roth 401(k) to a Roth IRA,
the year of the first Roth 401(k) contribution is not
considered. A new 5-year period begins with the
year of the rollover unless rolled over into a
previously established Roth IRA (or into a new
Roth IRA and a previous Roth IRA exists).
Nonqualified Distribution Tax
Treatment
For partial distributions, taxed based on
proportionate distribution of principal
and interest considering the Roth 401(k)
account only.
Taxable based on 1st money in, 1st money out so
tax-free principal is distributed first, then taxable
interest. If Roth 401(k) acct rolled over to Roth
IRA, then Roth IRA rules apply to rollover.
This presentation does not constitute tax or legal advice. Please consult a tax or legal adviser for your specific situation.
Conclusions
Conclusions
•
•
No “one size fits all” answer to question:
– “Pay Uncle Sam Now or Pay Him Later?”
Knowledge of rules and contingency projections provide meaningful
guidance
You don’t need a crystal ball to see that the
Roth 401(k)
may afford significant retirement and estate planning
opportunities.
This presentation does not constitute tax or legal advice. Please consult a tax or legal adviser for your specific situation.
Points to Discuss with Prospective
Client Companies
• Structure your discussion around these four topics:
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Tax considerations
Estate planning benefits
Contributions
Flexibility
This presentation does not constitute tax or legal advice. Please consult a tax or legal adviser for your specific situation.
Points to Discuss with Prospective
Client Companies
• Tax Considerations
•
– Do you have employees who believe their personal tax rate
will rise in the future?
– Do you believe tax rates will rise in the future?
– Is your employee base predominantly lower-paid and
younger in age?
Estate Planning
– Do you have employees who may wish to preserve assets
for their heirs by rolling over their Roth 401(k) assets to a
Roth IRA to avoid Required Minimum Distributions?
This presentation does not constitute tax or legal advice. Please consult a tax or legal adviser for your specific situation.
Points to Discuss with Prospective
Client Companies
• Contribution Impact
– Do you have employees looking to pre-pay their tax liability
during their working years?
– Are some of your employees looking to maximize their
retirement benefits by “grossing-up” their salary deferrals
by the tax deduction they would have received in a
traditional 401(k) retirement program?
– Do you believe some of your plan participants are
aggressive investors who will be seeking to take advantage
of tax-free earnings at retirement?
This presentation does not constitute tax or legal advice. Please consult a tax or legal adviser for your specific situation.
Points to Discuss with Prospective
Client Companies
•
Flexibility
– Do you believe some of your employees would benefit from the
choice of investing on both a pre-tax and after-tax basis?
– Do you have higher income employees who were previously
excluded form contributing to a Roth IRA due to income limitations,
and are looking for the added flexibility of a Roth 401(k)?
– Do you have highly-compensated employees who have been
restricted in the amount of money they are able to contribute?
– Do you have highly-compensated employees who had their pre-tax
contributions returned because the plan did not meet testing
requirements?
– If possible, would your key employee be interested in ways to
maximize their annual contributions?
This presentation does not constitute tax or legal advice. Please consult a tax or legal adviser for your specific situation.
Building Retirement Plan Solutions Together
And you
Thank you for your time and attention!
This presentation does not constitute tax or legal advice. Please consult a tax or legal adviser for your specific situation.