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2015, College for Financial Planning, all rights reserved. Session 12 Distributions and Rollovers CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits

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Session Details Module7 Chapter(s)1, 5 LOs7-1 Identify the characteristics of retirement plan distributions. 7-3 Identify and analyze lump-sum options available to participants, including rollovers. 12-2

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In Service Distributions IRA & IRA hybrid plans Profit sharing plans Pension plans 12-3

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Hardship Withdrawals & Loans Employer may offer, but are not required Hardship withdrawals Elective deferrals only 10% early withdrawal penalty does apply Loans $50,000 or 50% of balance maximum 5-year limit (except for home) QDROs Exempt from 10% penalty 12-4

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Early Withdrawal Penalty Exceptions IRA refers to traditional IRAs. Roth IRAs have different withdrawal rules. Death Disability Medical expenses above 10% (7.5% if age 65 or older) All Plans First-time home purchase up to $10,000 Health insurance premiums while unemployed IRA Only Separation from service after age 55 Qualified domestic relations order (QDROs do not apply to IRA accounts) All Except IRA 12-5

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Substantially Equal Payments: Reg. 72(t) Minimum age to begin None Maximum age to begin 59 Frequency of payments At least once a year Duration of payments Greater of five years or age 59 IRS-approved calculation methods Life expectancy Amortization Annuitization Ordinary income tax applies Yes 10 percent penalty tax applies No Must be separated from service for a 72(t) distribution from a qualified plan or TSA 12-6

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Reg. 72(t) Withdrawal Example Assumes male, age 56, $150,000 account, 8% annual return AgeLife ExpectancyAmortizationAnnuitization 56$5,357$13,573$14,620 57$5,802$13,573$14,620 58$6,284$13,573$14,620 59$6,806$13,573$14,620 60$7,374$13,573$14,620 12-7

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Separation from Service Options Several separation from service options are available for qualified and 403(b) plans. Available distribution options are: Leave with employer Transfer to new employers plan Annuitization Lump-sum distribution IRA rollover 12-8

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Separation from Service Choices Made OptionPercentage Annuitize1% Transfer to new employers plan5% Leave in the plan25% Cash payment31% IRA rollover38% Source: Capturing the Opportunity of the 21st Century, LIMRA 2003 12-9

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Lump Sum Definition Four conditions required for distribution to be considered a lump sum: 1. Made from qualified pension, profit sharing, or stock bonus plan 2. Represents full amount credited to participant accounts 3. Distributed in one taxable year 4. Payable due to: o participants death o attainment of age 59 o separation from service o disability 12-10

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Ten-Year Forward-Averaging Tax Treatment Eligibility Participants must have been born in 1935 or earlier Distribution must be a lump sum Forward-averaging treatment must be elected on all lump-sum distributions in tax year Only one forward-averaging election allowed in lifetime Steps Use 10-year averaging on ordinary income portion Treat pre-1974 portion of gain as long-term capital gain 12-11

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Should you do an IRA rollover? Leave with employerRollover Not always allowedAlways allowed Tax-deferred growth Limited investment choicesMany investment choices Less beneficiary designation flexibilityMore beneficiary designation flexibility All withdrawals are taxed as ordinary incomeCompany stock may be partially taxed as capital gains May be able to convert directly to Roth IRAMay convert directly to Roth IRA Early withdrawal penalty age 55 if separate from service after age 55 Early withdrawal penalty age 59 RMD can begin later than age 70RMD must begin at age 70 12-12

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Rollover Distributions To preserve 10-year forward averaging: Qualified plan to conduit IRA to qualified plan Time period for completion of rollover: Indirect rollover must be completed within 60 days Eligible rollover distributions are distributions of all or any part of a qualified plan account, except: Nontaxable portion of distribution Part of a series of substantially equal periodic payments over 10 years or relevant life expectancy Required minimum distribution (age 70) Corrective distributions Loan treated as a distribution Dividends on employer securities in an ESOP Cost of life insurance coverage Hardship distribution 12-13

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Types of Rollovers Conduit IRAs Direct rollovers Trustee to trustee Indirect rollover (60-day limit, 20% withholding applies) Spousal beneficiary rollover Nonspouse beneficiary rollover 12-14

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Permissible Rollovers Roll to IRASEP-IRA SIMPLE IRARoth IRA Government 457(b)403(b) Qualified Plan Designated Roth Account Roll from IRAYES NOYES, but taxable YES, must have separate accounts YES NO SEP-IRAYES NOYES, but taxable YES, must have separate accounts YES NO SIMPLE IRA YES, after two years YESYES, after two years, is taxable YES, must have separate accounts YES, after two years NO Roth IRANO YESNO 457(b)YES NOYES, but taxable YES Yes, after 9/27/10 403(b)YES NOYES, but taxable YES, must have separate accounts YES Yes, after 9/27/10 Qualified Plan YES NOYES, but taxable YES, must have separate accounts YES Yes, after 9/27/10 Designated Roth Account NO YESNO YES, if a direct trustee- to-trustee transfer 12-15

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Practice Problem 1 What are the exceptions to the 10% early withdrawal penalty tax for the following scenarios? a. Exceptions that apply to all plans 1. ___________________________ 2. ___________________________ 3. ___________________________ 12-16

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Practice Problem 1 continued b. Exceptions that apply only to qualified plans and 403(b) plans 1. ________________________________ 2. ________________________________ 3. ________________________________ 12-17

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Practice Problem 1 continued c. Exceptions that apply only to IRA accounts 1. ________________________________ 2. ________________________________ 3. ________________________________ 4. ________________________________ 12-18

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Question 2 Clark Benson was born in 1935, and he is still employed at Oak Enterprises, Inc. He has accumulated $250,000 in Oak Enterprises profit sharing 401(k) plan after more than 20 years of employment; to date, he has taken no distributions from the plan. He plans to take distribution of the full account when he retires next year. Which of the following describe the tax consequences of Clarks planned distribution schedule? I.not subject to 10% penalty II.subject to 15% mandatory withholding III.subject to 50% minimum distribution penalty IV.eligible for 10-year forward averaging a.I and IV only b.II and III only c.III and IV only d.I, II, and III only e.I, III, and IV only 12-19

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Question 3 At age 57, Anita Buford retired from PQR Corporation in January this year after 15 years of service. She received a check for the distribution of her account in the PQR Money Purchase Plan. Her account balance was $60,000 on her final day of employment. Which of the following statements describe the income tax or penalty tax consequences of this distribution? I.subject to 10% penalty II.subject to mandatory 20% withholding III.eligible for 10-year forward averaging IV.exempt from the 10% early withdrawal penalty a.I and II only b.II and III only c.II and IV only d.I, II, and III only e.I, II, and IV only 12-20

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Question 4 Which of the following distributions would be exempt from the 10% early withdrawal penalty for qualified plans, 403(b) plans, and IRA accounts? I.distribution due to disability II.distribution due to death III.distribution for medical expenses in excess of 7.5% of AGI IV.distribution for qualified postsecondary education expenses a.I and II only b.II and III only c.I, II, and III only d.I, II, III, and IV 12-21

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2015, College for Financial Planning, all rights reserved. Session 12 End of Slides CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits