Since you started working, you’ve probably been accumulating retirement assets in a variety of places, such as Social Security benefits, a traditional pension plan, or personal savings accounts such as IRA’s, 401(k), 457(b), or 401(k) plans. When you’re ready to retire, these assets will become the sources for your retirement income. So now, let’s look into your future and imagine you are within 1-3 years of retirement. You’re probably starting to think in specifics about how you’ll support yourself once you stop working full time. You will probably find yourself with multiple accounts to access for income, and each type of account has different options for when and how you can access your money. It pays to understand the differences. It’s also important to remember that just because you’re retiring doesn’t necessarily mean you have to begin taking money out of all your accounts right away. You may want to keep some or all of your retirement assets invested to give them opportunity to continue to grow. But for the sake of today’s discussion, let’s assume you’re ready to begin receiving income from your retirement accounts. TRANSITION : Let’s take a look at a few of the most common options you may have for taking a “payout” from your accounts.
There are four general types of payout options. Often, the first option that comes to mind is a “lump sum” distribution. With this option, you cash out your entire account all at once. Remember, if you take a lump sum distribution, you’re liable for ordinary income tax on the full amount and it will be added to any other income in that year. You should consider the tax consequences of this type of withdrawal and consult a tax professional for additional information. Second, you could take a “partial lump sum” distribution. This option allows you to withdraw part of your account balance in a lump sum, while leaving the rest of your assets in the account to remain invested. Third, you could request a “systematic withdrawal” . This option is essentially like setting up your own paycheck. You receive periodic payments from your account while your remaining balance remains invested in your account. There are two primary types of systematic withdrawals: The first type allows you to choose a period of time – say 10 years – over which you will “draw down” your account. Your plan administrator recalculates your payout every year so that your entire account balance is withdrawn by the end of the chosen period. The second type allows you to choose a set dollar amount to receive from your account periodically – say $500 every month. Payouts continue until the account balance runs out. Remember that in either case market changes will continue to affect your account balance and payments. Some plans also offer a fourth type of payout option called a “lifetime payout” . These are options that will pay you or your spouse over your life time or as long as either of you is alive. This is a more complicated option, so we will discuss it in a bit more detail in just a moment. Remember, your plan may not allow one or more of these payout options, and you may even want to choose some combination of these options to suit your needs. For example you may want to take a partial lump sum distribution right away and then set up a systematic withdrawal of your remaining account balance. It’s important to note that payouts are generally taxed as ordinary income. Depending on the account type, there may also be penalties for early withdrawal. For most public sector employees, the 457(b) deferred compensation plan has no early withdrawal penalties. Of course, neither Nationwide, nor any of its representatives give tax advice. Please consult your own legal or tax adviser before you make decisions about taking a distribution. TRANSITION : Now, let’s take a closer look at the “lifetime payout” option...
As we discussed, a “lifetime payout” option is a little more complicated. This type of payout is also known as an “annuity” . Typically, this is your only payout option for a pension, however many other types of retirement accounts also offer an annuity payout option. Most annuity payout options are based on three criteria: Starting account balance Age of the person(s) to be paid Rate of return (either fixed or variable, depending on plan type) The chart on the screen illustrates how three common lifetime payout options may affect the monthly income you receive from an annuity. Keep in mind that this example is hypothetical and does not represent any specific retirement plan payout. Selecting “single life” will provide the maximum monthly benefit, but upon your death, your spouse or selected survivor will receive no benefit. For this reason, some plans require you to select a “joint and survivor” payment option. You can see the most common options on the slide, and how the benefits are affected. TRANSITION : As I mentioned before, when you retire you do not necessarily have to begin withdrawing money from your account right away. But at some point, the IRS does require something called a RMD or Required Minimum Distribution…
In most qualified and deferred compensation plans, you have been deferring your income for later use. You’ve also been deferring paying income taxes on this income. While there may be benefits to waiting to take distributions – like making your retirement income last longer – the Internal Revenue Code only allows income tax-deferral to continue for so long before you must begin paying income taxes on the money you’ve accumulated. This is why the IRS requires you to begin taking a minimum distribution from your account by April 1 of the year after you reach age 70½. If you don’t begin distributions by this deadline – or if you do not withdraw enough to meet the minimum requirement – you could be liable for a 50 percent federal tax penalty. What if you’re still working and contributing to the plan when you reach the RMD deadline? If this is the case, the adjusted RMD date is April 1 of the year after you terminate employment with that plan sponsor. This may all seem somewhat confusing. But the good news is that as long as your money remains invested in a Nationwide plan, we will automatically calculate your RMD amount for you each year to help you meet the IRS requirements and avoid tax penalties. CONCLUSION: Today’s discussion has been a very high-level overview. If you have additional questions about the information I’ve covered today, I’d be happy to speak with you after this meeting or schedule a one-on-one appointment with you to review your individual situation.
Welcome! Thank you for participating in this brief presentation to learn what to do with your DROP account. Before we get started, let me introduce myself. My name is __________ and I’m your Nationwide Retirement Specialist. I’m here to show you the options you have when it comes to your Deferred Retirement Optional Program. For the past few years, you’ve taken advantage of DROP, which has been an additional way for you to save more money. You’ve had the opportunity to still earn your salary, but during this time, your pension began to payout. And instead of the money coming to you directly, it has gone right into your DROP account with tax-deferred interest. Transition: Now it’s time to move your DROP account somewhere else. So today we’ll answer the question: What can I do with my DROP account now?
By taking no action with your DROP account, you will automatically receive a very big paycheck of the entire account balance. Receiving a larger amount of money might put you into a higher tax bracket for the year. While I can’t give legal or tax advice, it’s important you consult your attorney or tax advisor for answers to your specific questions. Another reason you may not want to receive this large payout is you still need your money to have the chance to keep growing. Even though you can’t keep the balance within DROP, you do have the opportunity to roll it into another account. Look at the figures on the screen. If you’re not planning to stop working right away, it may be worth it to keep your money invested. OR If you have a major purchase or vacation planned, you may choose to take some of the payment as a lump-sum and put the rest into another retirement account. Don’t forget that you may need the money more later in retirement than the very moment you retire. Many people don’t realize the impact that medical expenses, inflation and unexpected costs can have on retirement income. These factors can make it difficult to maintain your standard of living. Most people need more for retirement than they think. Giving your DROP dollars the opportunity to continue growing may help with what you’ll need later in retirement. Transition: The bottom line is…
You’ve worked really hard to accumulate money for your retirement. You can keep what you’ve earned. And keep your money in one place by rolling all your eligible assets, including your DROP account, into your deferred compensation plan. You may want to consider rolling some or all of your DROP into it. Let’s quickly talk about rolling your DROP dollars into deferred compensation. Your deferred compensation plan is a significant employee benefits. The money you contribute isn’t taxed until you receive your money when you begin taking payouts. It also means your account has the potential to earn money on what you would’ve paid in taxes if you take a lump sum withdrawal. Because soon, you won’t be working any more, you also won’t be making contributions to your account. This is a smart way to make one more additional contribution Your money and any earnings will continue to have the opportunity to keep growing by being reinvested. Transition: Lets talk briefly about the 59 ½ rule and penalties.
Funds rolled from a DROP plan into a 457 will be viewed as rollover contributions. Distributions are always subject to ordinary income tax. IRS Rule 72(t) states that A 10% penalty in addition to ordinary income tax may apply to distributions unless you are 59½, attained age 55 or older in the year you separated from service. There is also no penalty for distributions that are part of a series of substantially equal periodic payments, to a beneficiary or due to disability. I want to remind you that that neither Nationwide nor any of its representatives give tax, legal or investment advice. For such guidance, please contact your legal or tax professional. Exemption from the 10% penalty (Section 828 of the PPA) “ Public safety employees” would be exempt from the 10% premature distribution penalty for distributions made from governmental defined benefit plans after a separation from service that occurs on or after age 50 instead of age 55). This exception would seem to be helpful to participants who receive lump-sum distributions from DROP programs. However, funds rolled over to defined contribution plans like 457, 401(k) etc would not be subject to the exception from the 10% penalty. Transition: Now for the great news?
You’ll continue to enjoy personalized help either in person (with me) or over the phone through our home office partners. As your local Nationwide Retirement Specialist, it’s my role to help you learn how to plan up to and throughout your retirement years. The information I give you is for your educational purposes only and isn’t intended as investment advice. If you’re not sure exactly how to manage your money in retirement, I can introduce you to a colleague of mine who is a Personal Retirement Consultant who can give you personalized retirement information. It’s available to you at no extra charge, just by being a part of Nationwide’s plan. And if you’re not enrolled in deferred compensation, you can enroll today and still rollover your DROP money into your new account. By enrolling in the plan, you can take advantage of retirement plan options, services and education from Nationwide. We’re committed to helping American workers – like you – protect, grow and enjoy their financial resources and achieve their goals in retirement. Transition: Okay, I promised this would be brief, so let’s wrap-up. Your deferred compensation plan is a convenient and easy way to invest your DROP dollars into your future. And because it’s time-sensitive, I’ve brought the DROP transfer form with me today so you don’t have to worry about it later. I’m happy to meet with you after the presentation today. Or, feel free to schedule an individual meeting with me at your convenience. Here is how you can reach me.