IRAs, Roth IRAs, and 401(k) Plans (10.29.12)
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IRAs, Roth IRAs, and 401(k) Plans (10.29.12)

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IRAs, Roth IRAs, and 401(k) Plans by Valerie Lee

IRAs, Roth IRAs, and 401(k) Plans by Valerie Lee

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  • Thank you for the introduction, Brett. The vast majority of you in this classroom have an advantage that Brett, Ken, and I no longer have. What is that advantage? It ’s time. After I graduated from college, I didn’t start working right away because I decided to attend graduate school. By the time I got out of graduate school, I was 24 years old. The company I worked for at the time did not offer a 401(k) plan so I only put away $2,000 in a Traditional IRA for my retirement savings. Back then, there was no such thing as a Roth IRA. You’re lucky because today, you have more investment options to choose from and you have the advantage of time.
  • What is a Traditional IRA? IRA stands for Individual Retirement Arrangement and it is a retirement savings account that provides tax advantages. The earnings grow tax-deferred until withdrawal. Whether your contributions are tax-deductible depends on two things: Whether you participate in a retirement plan at work and, if you do, Your income level Source: IRS Publication 590, Individual Retirement Arrangements (IRAs)
  • Why invest in an IRA? There are two primary advantages – tax-deductible contributions and tax-deferred growth. The chart on this slide is a hypothetical example of how quickly your money can grow over time when it ’s in a tax-advantaged account versus a taxable account. After 30 years, a $5,000 annual contribution at a 6% annual rate of return grew to $318,762 in a taxable account. In the Traditional IRA, that same $150,000 contribution ($5,000 times 30 years) grew to $351,756. At the top of the chart, the Roth IRA grew to $419.008 after 30 years. I ’ ll talk about the Roth IRA later in my presentation. Source: “Understanding Traditional and Roth IRAs” August 2012 white paper (page 2) and “Wealth and Taxes: Planning for Uncertain Times” September 2012 white paper (page 3)
  • This slide shows the value of contributing to an IRA early in your career. Someone who contributes half as long but started very early ends up with more than someone who contributes twice as long but starts later. Unfortunately, the sad truth of the matter is almost no one starts saving at 21. Most folks don’t get serious about saving until they are in their 40s and 50s, but if you want to retire by the time you turn 67, you want to start saving now. Also, consider the fact that millions of Americans suffer some sort of job interruption over their careers. In my case, I took four years off to raise a child and looking back, I wish I had saved more money before I had my child. Also, consider the fact that your income may not always increase more than the rate of inflation. Sometimes companies have pay freezes. All of these are good reasons why you should start saving now rather than waiting until you’re in your 30s, 40s or 50s. Source: “Understanding Traditional and Roth IRAs” August 2012 white paper (page 6)
  • While the deadline to make your IRA contribution is always April 15 of the next year, you can fund your IRA as early as January 1 of the current year. In this illustration, Jan makes her annual IRA contributions on January 1, while Andrew waits until April 15 of the following year. After 30 years of contributing $5,000 annually, Jan ends up with $433.041 and Andrew ends up with $425,863 assuming a a 6% annual rate of return. Because Jan had a 15-month headstart every year, she accumulated more than $7,000 in additional gains compared to Andrew (1.7% difference). Source: “Understanding Traditional and Roth IRAs” August 2012 white paper (page 6)
  • This slide describes whether you can deduct IRA contributions from your income tax. MAGI stands for Modified Adjusted Gross Income. Source: http://www.tax-news.com/news/IRS_Discloses_Inflation_Adjustments_For_2013____57887.html
  • In 2013, it increases by $500. If you’re 50 or older, you can contribute an additional $1,000. Source: IRS Publication 590, Individual Retirement Arrangements (IRAs)
  • Substantially equal periodic payments – annual distributions that one may take from an IRA without penalty. In order to avoid the penalty, one must agree to receive the payments in roughly the same amount for five years or until one turns 59 ½ (whichever is longer). Source: IRS Publication 590, Individual Retirement Arrangements (IRAs)
  • I ’ll go over this slide pretty quickly since everyone in this room is a long way from 70 ½. Once you turn 70 ½, you have to start taking money out of your Traditional IRA. Source: IRS Publication 590, Individual Retirement Arrangements (IRAs)
  • Let ’s look at Roth IRAs and Traditional IRAs and how they compare: Read what is on slide, then say, for more information, please refer to the handout entitled, “Understanding Traditional and Roth IRAs.” Source: “Is a Roth Right for You? How to Maximize Your Retirement Savings With Tax-Free Income” July 2011 PowerPoint presentation (slide 5)
  • Are you eligible for a Roth IRA? For 2012, if your modified adjusted gross income is $125,000 or more as an individual—or $183,000 or more as a married couple filing jointly—you cannot contribute to a Roth. For 2013, if your modified adjusted gross income is $127,000 or more as an individual—or $188,000 or more as a married couple filing jointly—you cannot contribute to a Roth. If your income currently makes you ineligible to contribute to a Roth IRA, you can consider conversion . A conversion is when you transfer—or convert—assets from a Traditional IRA or employer-sponsored plan to a Roth IRA. However, you will have to pay taxes on those converted assets. Source: “Understanding Traditional and Roth IRAs: Contributions” October 2012 white paper (page 2) and http://blogs.wsj.com/totalreturn/2012/10/18/irs-announces-2013-inflation-adjustments/
  • Most experts predict that income tax rates will increase in 2013, so now could be a good time to convert from a Traditional IRA to a Roth IRA. However, keep in mind that when you convert from a Traditional IRA or employer-sponsored plan to a Roth IRA you will incur certain tax liabilities, but as a result you can benefit from tax-free income in retirement. These tax liabilities include: Taxes on any pretax contributions Taxes on any earnings or growth It ’s important to identify funds outside the IRA that can be put toward the taxes due on the conversion, because tapping into the IRA will: Reduce the converted assets available for tax-free potential growth and Trigger a 10% early-withdrawal penalty if you ’re under age 59½ unless an exception applies You should consult a tax advisor to determine the best option for paying the taxes due. Source: “Is a Roth Right for You? How to Maximize Your Retirement Savings With Tax-Free Income” July 2011 PowerPoint presentation (slide 7) and “Wealth and Taxes: Planning for Uncertain Times” September 2012 white paper (page 3)
  • Why convert to a Roth IRA? A Roth IRA provides three significant benefits over a Traditional IRA: Tax savings Income planning Wealth planning Now let ’s look at all these benefits in more detail. Source: “Is a Roth Right for You? How to Maximize Your Retirement Savings With Tax-Free Income” July 2011 PowerPoint presentation (slide 8)
  • First, let ’s look at the tax advantages. Similar to a Traditional IRA, assets in a Roth benefit from tax-deferred growth potential—even better, withdrawals from a Roth IRA are typically tax-free, as long as certain conditions are met. In particular, at least five years have passed since you opened your Roth account, AND: you are at least 59½ years old; OR you use the money to fund a qualified first-time home purchase (maximum $10,000), or in the event of your disability or death. There are also valuable tax-diversification benefits. Diversifying your investment portfolio by investing in multiple asset classes is a proven way to mitigate risk. The same principle applies to tax diversification: by spreading your retirement assets across accounts that receive different tax treatment, you create diversification. When you combine a Roth IRA with a taxable account, such as a brokerage account or mutual funds, and a tax-deferred account like a 401(k) or a Traditional IRA, you get the flexibility to take income from different sources to potentially keep taxes low in retirement. For example, in a year in which taxable income is higher than expected, you might supplement your income with tax-free withdrawals from a Roth IRA. On the flip side, if taxable income is lower, you might consider taxable withdrawals from a Traditional IRA. Of course, you should work with your tax advisor to evaluate your income sources and tax ramifications. Source: “Is a Roth Right for You? How to Maximize Your Retirement Savings With Tax-Free Income” July 2011 PowerPoint presentation (slide 9)
  • Roth IRAs offer income planning flexibility: Unlike Traditional IRAs, Roth IRAs let investors make contributions after age 70½ (provided you meet earned-income requirements). That option means your assets have the potential to continue to grow tax-free. Also, there are no required minimum distributions from a Roth IRA. This lets you tailor your withdrawals to your actual income needs—or eliminate them altogether in any given year. This may enable you to manage your taxable income in retirement. The bottom line: your assets have the potential to continue to grow tax-deferred for you and your heirs. Source: “Is a Roth Right for You? How to Maximize Your Retirement Savings With Tax-Free Income” July 2011 PowerPoint presentation (slide 10)
  • Roth IRAs can be an effective wealth planning tool. Since there is no contribution cutoff at age 70½ and no required minimum distributions, you can leave as much of your money in the account as you wish. By allowing your assets the potential to grow tax-deferred, you could have more to pass on to your heirs. What ’s more, your heirs will be able to withdraw these assets without incurring taxes. By using the “stretch IRA” concept with a Roth IRA, you can leave an even greater, tax-free financial legacy. The “stretch IRA” concept involves designating one’s children as beneficiaries and thus allowing them to stretch out payments over their lifetimes. The result is effectively to ensure a lower tax bill annually, rather than a large tax bill up front, since annual payouts would be based on the beneficiaries’ longer life expectancy. However, there is a currently a bill in the Senate which would end this practice by requiring that all taxes on an inherited IRA held by a nonspousal person be paid within five years of the taxpayer’s death. Since Roth assets can be distributed tax-free, it may be worth considering converting a large amount of assets into a Roth and paying the taxes with outside assets—leaving the proceeds to heirs income-tax-free, as long as five years have passed. Source: “Is a Roth Right for You? How to Maximize Your Retirement Savings With Tax-Free Income” July 2011 PowerPoint presentation (slide 11) and “Gift and Estate Taxes in 2012: The “Clock” is Ticking” March 2012 white paper (page 4)
  • There are two main types of 401(k) plans: the Traditional 401(k) and the Roth 401(k). So, what is the traditional 401(k) Plan? A 401(k) plan is a retirement plan set up by an employer which allows an employee to defer a part of their salary on a pre-tax basis. In a Traditional 401(k), income tax is not paid on the money put into the retirement plan or earnings made from investments in the plan. Rather, these funds are taxed when they are withdrawn from the plan. Although not subject to income tax, salary deferrals are subject to FICA and FUTA taxes. FICA is more commonly known as Social Security and FUTA is the Federal Unemployment Tax Act. In 2012, the maximum salary deferral contribution into a 401(k) is $17,000 of annual compensation. Those who have turned 50 during the year or are older than age 50 may make additional “catch up” contributions of up to $5,500. The contribution amounts are subject to change and are set each year by the Internal Revenue Service. Source: “Optimizing Your 401(k) October 2012 PowerPoint presentation (slide 8)
  • A 401(k) plan can offer you several benefits: It 's simple, convenient and flexible —you decide how much to invest and you can adjust how much you contribute and change your investment options. Pre-tax contributions - meaning that all deductions from your salary are made from your gross pay, prior to any taxation. This shrinks your taxable income, thus lowering your current tax bill. Tax-deferred growth – this refers to the ability of your investments to grow without being taxed on the earnings each year. Professionally managed investment options - refers to investment options potentially available within the plan Diversification – spreading your assets among different types of investments to reduce volatility Portability – the ability to transfer 401(k) assets to other retirement plans if you switch employers Discretionary matching contributions - possible matching contributions by the company Convenient Payroll Deductions - your contributions are automatically deducted each pay period. This means you never have to worry about writing checks, remembering to make a deposit, or spending the money you intended to save. Time and regular investing can have a huge impact on the total amount you can save for retirement. Source: “Making the Most of Your 401(k) Retirement Plan” PowerPoint presentation October 2012 (Slide 8)
  • This slide shows the annual employee contribution limits for 401(k)s, 403(b)s, and 457(b) plans for 2012 and 2013. In 2012, you can ask your employer to save up to 25% of your pay or $50,000, whichever is less. The annual limit for combined employer and employee contributions is $50,000 in 2012 and $51,000 in 2013. A 403(b) plan is a retirement plan for certain public school employees and employees of nonprofit organizations. A 457(b) plan is a type of defined contribution retirement plan for state and local public employees. It is also known as a Thrifty Savings Plan (TSP). If you work for a nonprofit or the public sector, you can’t contribute to a 401(k) plan, but you can contribute to a 403(b) and/or a 457(b) plan, which is similar to a 401(k) plan. Sources: www.pensionrights.org/publications/fact-sheet/retirement-plan-contribution-and-benefit-limits http://www.irs.gov/publications/p571/ch01.html http://www.irs.gov/Retirement-Plans/IRC-457(b)-Deferred-Compensation-Plans
  • Here is an example of the tax savings that result from pre-tax contributions: On a $4,000 monthly salary, the tax bill is $1,000, assuming a tax rate of 25%. If this participant contributes $100 in pre-tax income to a 401(k), taxable income drops to $3,900. The federal tax savings is $25 per month. Source: “Making the Most of Your 401(k) Retirement Plan” PowerPoint presentation October 2012 (Slide 9)
  • In this slide, you can see the dramatic difference between taxable investment growth and tax-deferred investment growth. With tax-deferred investments you don ' t have to pay federal income taxes on your earnings every year, as you do with a taxable account. But you must pay federal income taxes when you withdraw the money at retirement. In each of these 10, 20 and 30-year examples, the tax-deferred account grows dramatically. This is the result of taking what would have been the annual tax bill on earnings and keeping it invested, allowing it to grow. Source: “Making the Most of Your 401(k) Retirement Plan” PowerPoint presentation October 2012 (Slide 10)
  • What is a Roth 401(k)? In a Roth 401(k) plan, during your working years, you pay Federal income taxes on contributions. At retirement, withdrawals are free from Federal income tax. In order to withdraw funds tax free from the Roth 401(k): The distribution must occur five taxable years after the initial contribution AND the participant must attain age 59½, die, or become disabled Source: “Optimizing Your 401(k) October 2012 PowerPoint presentation (Slide 10)
  • What are the tax benefits for a Roth 401(k)? Generally speaking: If you expect to be in a higher tax bracket when you retire, a Roth 401(k) may be the better choice, since you will save by paying lower income taxes now. Younger employees like you who have a longer retirement horizon for their earnings to accumulate tax-free should consider a Roth 401(k). Employees who aren’t eligible for a Roth IRA should consider a Roth 401(k) so they can pool tax-free money to draw on in retirement. Employees who want to leave tax-free money to their beneficiaries should also consider a Roth 401(k). Source: “Optimizing Your 401(k) October 2012 PowerPoint presentation (Slide 11)
  • How much did you learn? Let ’s test your knowledge. Which one . . . Allows you to receive tax-free income in retirement by prepaying your taxes? Answer: a Roth IRA Lets you make contributions after the age of 70½? Answer: a Roth IRA Imposes requirements on how much you withdraw in retirement at age 70 1/2? Answer: a Traditional IRA Allows you to make income-tax-free transfers to your heirs? Answer: a Roth IRA Source: “Is a Roth Right for You? How to Maximize Your Retirement Savings With Tax-Free Income” PowerPoint presentation (Slide 3)
  • Thank you for your time. Are there any questions about IRAs, Roth IRAs or 401(k) plans? With that, I ’ll turn the floor over to my colleague, Ken, who will talk about investment strategy and discipline.

IRAs, Roth IRAs, and 401(k) Plans (10.29.12) IRAs, Roth IRAs, and 401(k) Plans (10.29.12) Presentation Transcript

  • IRAs, Roth IRAs and 401(k) Plans: Beginning Your Investment Journey October 30, 2012 Valerie Lee Morgan Stanley Wealth Management 733 Bishop Street Suite 2800, Honolulu Hawaii 96813 tel: 808-525-6988, email: valerie.a.lee@morganstanley.com Morgan Stanley Smith Barney LLC. Member SIPC
  • What is a Traditional IRA?A retirement savings account thatprovides tax advantagesEarnings grow tax-deferred untilwithdrawalContributions may be tax-deductibleCan be established by an individualunder age 70 ½ who has earnedincome or whose spouse has earnedincome 2
  • Why invest in an IRA?Tax-deductiblecontributionsTax-deferred growth IRAs $419,008 Roth IRA Traditional $351,756 IRA Taxable $318,762 Account After 30 years $150,000 After 20 yearsAssumptions: Total Contribution After 10 years5,000 annual IRA contribution6% annual rate of return25% ordinary income tax bracket $- $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000 $400,000 $450,000For illustrative purposes onlyNot representative of any specificinvestment 3
  • Value of Starting Early Total Savings at Age 65 $486,389 $756,362 Total IRA Contributions $165,000 $75,000 30 Years Starting at Age 35 15 Years Starting at Age 21 $- $200,000 $400,000 $600,000 $800,000Assumptions:$5,000 annual IRA contribution6% annual rate of returnFor illustrative purposes onlyNot representative of any specific 4investment
  • Fund Your IRA Early in the YearJan funds her IRA inJanuary of the currentyear Andrew $425,863Andrew funds his IRAin April of the followingyearJan has a 15-monthheadstart every year Jan $433,041Assumptions:Both contribute $5,000 $420,000 $425,000 $430,000 $435,000annually for 30 years6% annual rate of returnFor illustrative purposesonlyNot representative of any 5specific investment
  • Traditional IRA 2013 Contribution EligibilityFull deduction when MAGI:– Single Filer: < $59,000– Joint Filer: < $95,000Partial deduction when MAGI:1– Single Filer: > $59,000 but < $69,000– Joint Filer: > $95,000 but < $115,0001 Partial Partial deduction only if you or your spouse arenot covered by a workplace retirement plan;otherwise, the deduction is phased out for theseincome ranges 6
  • Annual Contribution Limit For 2012, you can contribute up to $5,0001 or 100% of earned income, whichever is less. For 2013, you can contribute up to $5,5001 or 100% of earned income, whichever is less. 2012 and 2013: $1,000 catch-up contribution for individuals 50 and older.1 Maximum annual contribution to either a Traditional IRA or Roth IRA, or a combination of the two 7
  • Traditional IRA2012 Taxation of WithdrawalsBefore age 59 ½: Ordinary income tax and 10%penalty unless certain conditions are metPenalty free (no 10% penalty) if:– Utilizing substantially equal periodic payments– First-time home ownership ($10,000 lifetime limit)– Qualified higher education expenses– Disability– Medical expenses exceeding 7.5% of MAGI– Purchase of health insurance after receiving unemployment compensation for 12 weeks or more– DeathAfter age 59 ½: Ordinary income taxAt any age beneficiaries: Ordinary income tax 8
  • Traditional IRARequired Minimum DistributionsBegins when individual turns 70 ½First distribution may be postponedto April 1 of following yearRMDs generally apply to beneficiariesthe year after the individual’s death,unless another option is selected 9
  • Roth IRA vs. Traditional IRARoth Traditional • Deductible or non-deductible• Non-deductible contributions contributions• Tax-deferred growth • Tax-deferred growth• Tax-free withdrawals1 • Taxable withdrawals• Tax-free withdrawals in • Taxable withdrawals in retirement retirement do not raise the tax can raise the account owner’s tax bill on Social Security benefits bill on Social Security benefits• No required minimum • Must begin taking required distributions minimum distributions at age during account owner’s lifetime 70½ Ability to continue contributions • Cannot contribute beyond age after age 70½ 70½ • Assets left to heirs will be taxable• Assets remaining in IRA pass as ordinary income upon income-tax-free to heirs1 withdrawal 101 Contributions can be withdrawn tax-free at any time, and earnings can be withdrawn without income tax if the account has been in effect for five years and the owner is over age 59½, has died, is disabled or is a qualified first-time home purchaser (maximum $10,000).
  • Are You Eligible for a Roth IRA? 2012 2013ContributionsModified • For Individuals: <$125K • For Individuals: <$127KAdjusted Gross • Married couples (filing • Married couples (filingIncome Limits jointly): <$183K jointly): <$188KAnnual • Individuals: $5K maximum • Individuals: $5K maximumContribution • Individuals age 50+: $6K • Individuals age 50+: $6KLimits maximum maximumConverting from a Traditional IRA/ 401(k) Plan to aRoth IRAModified • NO income limits for • NO income limits for anyoneAdjusted Gross anyone • Married couples filingIncome Limits • Married couples filing separately are eligible for separately are eligible for conversions conversions 11
  • Tax ConsiderationsWhen you convert from a Traditional IRA oremployer-sponsored plan to a Roth IRA, you will incur certain tax liabilities1These include: Taxes on Any Pretax Contributions Taxes on Any Earnings or Growth1 It’s important to identify funds outside the IRA that can be put toward the taxes due on the conversion. Tapping into the IRA may offset any gains generated by the conversion – and trigger a 10% penalty if you’re under age 59½. 12
  • Why Convert to a Roth IRA?A Roth IRA Provides Three Significant Benefits Over a Traditional IRA: Tax Savings Benefits Income Planning Benefits Wealth Planning Benefits 13
  • Roth IRA: Tax Advantages Contributions have tax-deferred growth potential, and withdrawals Tax-Free Withdrawals are typically tax-free if minimum holding periods and certain conditions are met1 Holding a tax-free account like a Roth IRA in addition to a taxable account (e.g., brokerage account or mutual funds) and Tax Diversification tax-deferred account (e.g., a 401(k) or Traditional IRA) gives you the flexibility to take income from different sources to potentially keep taxes low in retirement1 Contributions can be withdrawn tax-free at any time, and earnings can be withdrawn without income tax if the account has been in effect for five years and the owner is over 59½, has died, is disabled or is a qualified first-time home purchaser (maximum $10,000). 14
  • Roth IRA: Income Planning Flexibility Unlike Traditional IRAs, Roth IRAs let investors makeNo Contributions contributions after age 70½ (provided earned-incomeCutoff at Age 70½ requirements are met), allowing assets the potential to continue to grow tax-free There are no required minimum distributions from a Roth IRA for the owner or a spouse beneficiary – i.e., no rule that you must begin tapping your account at age 70½ No RMDs This enables you to: • Tailor withdrawal amounts to your actual income needs – or eliminate them altogether in any given year • Manage your taxable income in retirement Your assets can continue to grow tax-deferred for you and your heirs 15
  • Roth IRA: Wealth Planning Advantages No contributions cutoff at age 70½ and no RMDs can mean your Tax-DeferredGrowth of Assets investments have the potential to continue growing tax-deferred, providing more to pass on to your heirs Roth IRAs can be an effective wealth planning tool, since heirs Tax-FreeWealth Transfer can enjoy the potential for continued asset growth without paying taxes when they withdraw assets Using the “stretch” IRA concept with a Roth IRA lets you leave a Stretch IRA greater, tax-free financial legacy for your heirs 16
  • What Is A Traditional 401(k) Plan?– A retirement plan set up by an employer which allows an employee to defer a part of their salary on a pre-tax basis– Subject to FICA and FUTA taxes 2012 2013 Maximum $17,0001 $17,5001 Contribution Maximum $5,5002 $5,5002 Catch-Up Contribution 1 Contribution amounts are set each year by the IRS 17 2 For those age 50 and older
  • Benefits of 401(k)sSimple, convenient and flexiblePre-tax contributions (after-tax for Roth401(k))Tax-deferred growthProfessionally managed investmentoptionsDiversificationPortabilityMatching contribution at company’sdiscretionConvenient payroll deductions 18
  • Employee Contribution Limit: 401(k), 403(b), or 457(b) Plans 2012 2013ContributionsAnnual • $17,000 • $17,500EmployeeContributionLimitAnnual Catchup • $5,500 • $5,500ContributionLimit (50+ yrs.)Annual Limit for • $50,000 • $51,000combinedemployer-employeecontributions 19
  • Pre-Tax Contributions Without With Retirement Retirement Plan Plan ($) ($)$4,000 Mo. Pay 4,000 4,000Retirement Plan (100) (0)ContributionTaxable Pay 3,900 4,000Federal Income 975 1,000TaxMonthly Federal Tax Savings = $25Annual Federal Tax Savings = $300Source: Morgan Stanley 20Chart applies to participants who are allowed to contribute on their own behalf. This illustration uses a flat federal income tax withholding rate of25%. The numbers in this illustration are hypothetical and are presented for illustrative purposes only. Actual results may vary.
  • Tax-Deferred Growth($000s) Taxable Account Tax-Deferred Account Before Taxes Tax-Deferred Account After TaxesSource: Morgan StanleyThe above chart assumes a participant makes $48,000 annually and contributes 8% twice a month. Also assumes a25% tax bracket and a 7% annual rate of return. These numbers are hypothetical and are presented for illustrative 21purposes only. Actual results may vary.
  • What is a Roth 401(k)? Traditional 401(k) – Withdrawals Taxed During your working At retirement, you pay years, you pay no Federal income tax on Federal income tax contributions and on contributions earnings at distribution Roth 401(k) – Contributions Taxed During your working At retirement, withdrawals years, you pay Federal are free from Federal income tax on income tax1 contributions1 In order to withdraw funds tax free from the Roth 401(k): The distribution must occur five taxable years after the initial contribution AND the participant must 22 attain age 59½, die, or become disabled
  • Tax Saving Benefits—Roth 401(k)• If you expect to be in a higher tax bracket when you retire, you will save by paying lower income taxes now• Younger employees have a longer retirement horizon for their earnings to accumulate tax-free• Employees who aren’t eligible for a Roth IRA may pool tax-free money to draw on in retirement• Leave tax-free money to beneficiaries 23
  • Test Your Knowledge Allows you to receive tax-free income in retirement by prepaying your taxes? Answer: Roth IRA or Traditional IRA ? Lets you make contributions after the age of 70½? Answer: Roth IRA or Traditional IRAWhich one ... Imposes requirements on how much you withdraw in retirement at age 70 1/2? Answer: Roth IRA or Traditional IRA Allows you to make income-tax-free transfers to your heirs? Answer: Roth IRA or Traditional IRA 24
  • Questions? 25
  • Tax laws are complex and subject to change. Morgan Stanley SmithBarney LLC (“Morgan Stanley”, its affiliates and Morgan StanleyFinancial Advisors and Private Wealth Advisors do not provide taxor legal advice and are not “fiduciaries” (under the Internal RevenueCode or otherwise) with respect to the services or activitiesdescribed herein except as otherwise agreed to in writing by MorganStanley. This material was not intended or written to be used for thepurpose of avoiding tax penalties that may be imposed on thetaxpayer. Individuals are encouraged to consult their tax and legaladvisors regarding any potential tax and related consequences ofany investments made under such account.