CED

January 2013

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Financial Planning participants and business owners: n I believe federal income taxes are as low now as they are going to be for many years. Paying federal income taxes now locks in the federal income tax impact on your retirement plan assets, provided the distributions are taken on a qualified basis. n I want to maximize my contributions into my retirement plan. Participants can be limited by the IRS annual deferral limit of $17,000 (2012), an internal plan limit, a nondiscrimination test limit or sometimes all three. By making contributions on a favorable after-tax basis through a Roth 401(k) deferral, the effect on a participant���s retirement benefit could be more favorable, as no federal income tax liability is accumulating while your retirement plan assets grow ��� as long as the distributions are taken on a qualified basis. n I want to limit my Modified Adjusted Gross Income (MAGI) in retirement. This may reduce the amount of my Social Security Benefit, which is subject to federal income tax. An individual drawing a Social Security retirement benefit may have up to 85 percent of such benefit subject to federal income tax when received. In 2011, individuals married filing a joint return with a MAGI of more than $32,000 but less than $44,000 may have up to 50 percent of their Social Security retirement benefit subject to federal income tax. If their MAGI is greater than $44,000, they may have up to 85 percent of their Social Security benefit subject to federal income tax. Retirement plan distributions can have a great impact on the taxation of these benefits. Roth distributions (whether 401(k), rollover or individual) do not count toward an individual���s MAGI, while distributions that are subject to current federal income tax (such as pretax contributions) do. More and more participants and financial planners are thinking about these options. n I want to use the Roth 401(k) option to create an efficient way to transfer assets to my heirs. Individuals who feel they may not need to maximize their retirement assets are looking at an additional use for making Roth 401(k) contributions into a retirement plan or requesting Roth 401(k) conversions. They are looking at a very efficient way to transfer assets to their heirs. Let���s examine the impact of a 65-year-old retiring from a company with $100,000 of Roth 401(k) assets in his account. He rolls his Roth 401(k) assets into an individual Roth rollover account at retirement. By doing this he eliminates the requirement to take Required Minimum Distributions each year starting with his attainment of age 70��. In this example, the 65-year-old has a life expectancy of another 22 years in which to benefit from the income-tax-free growth. Based on an average 5 percent interest rate compounded over the period, the assets in the rollover account will have grown to over $292,000. If the person were to die at age 87, the beneficiaries of the account would receive the $292,000 free from any federal income tax, provided the federal tax regulations are the same then as today. n Having my post-retirement assets as Roth assets may lower any estate taxes owed at the time my death. Proceeds from any qualified retirement plan assets are includable in valuing an estate and calculating the estate taxes owed. Under the scenario above, where the individual���s $292,000 went to the beneficiaries of the Roth rollover account: 1.) The $292,000 would not be subject to any federal income tax because of the Roth status. 2.) The full $292,000 would be included in the value of the deceased���s estate. 3.) If the deceased had assets of at least $1 million in addition to the retirement assets, the $292,000 would incur at least 45 percent in estate tax. In this situation the $292,000 would be effectively reduced by 45 percent of its value (net $160,600.) If this individual���s retirement assets at death were all on a pretax basis in an amount of $400,000, at death the following would happen: 1.) $400,000 would be subject to federal income tax in the year of death (estimate of 35 percent). 2.) The full $400,000 would be included in the value of the deceased���s estate. 3.) If the deceased had assets of at least $1 million in addition to the retirement assets, the $400,000 would incur at least 45 percent in estate tax. In this situation the $400,000 would be effectively reduced by 80 percent of its value (net $80,000.) For all these reasons, you can see why many more employers, other plan sponsors, and financial planners are looking more closely at the Roth 401(k) options to enhance their current retirement plans and for other prudent planning objectives. n Jerry E. Stanford is director for Sentry Life Insurance Company. He has spent almost 30 years working with employers and other plan sponsors on their employee benefit packages. He may be reached at jerry.stanford@sentry.com. This article is provided for educational purposes only. Jerry E. Stanford, Sentry Life Insurance Company and Sentry Life Insurance Company of New York do not provide tax, legal and accounting advice. Sentry suggests you consult your tax, legal and accounting professionals for advice specific to your own situation. January 2013 | Construction Equipment Distribution | www.cedmag.com | 65 64_Roth_401k_Feature_KP.indd 65 12/21/12 3:30 PM

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