Putnam IRA
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Turning IRA assets into income. Strategy that can help you meet your income and legacy objectives, by seeking to minimize taxes.
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Putnam IRA
- 1. S h i f t i n g i n t o r e t i r e me n t Tu r n i n g I RA as s e t s i n t o i n c o me Not FDIC May Lose No Bank Insured Value Guarantee EO032 274522 4/12 |1
- 2. You can’t take a distribution before age 59½ without penalty Calculating required minimum distributions is complicated Tax benefits stop at the death of the IRA owner EO032 274522 4/12 |2
- 3. Don’t be slowed by penalties before age 59½ • Access your IRA penalty free through substantially equal periodic payments No penalty Age for Age 59½ distributions 70½ Penalty for Must begin distributions distributions Withdrawals are subject to income tax and those made before age 59½ may be subject to an additional 10% tax. EO032 274522 4/12 |3
- 4. Follow Rule 72(t) straight to penalty-free distributions • You must take systematic payments for five years or until you reach age 59½, whichever is longer • Avoids the usual 10% additional tax on taxable IRA distributions made before age 59½* * Distributions taken prior to reaching age 59½ are normally subject to an additional 10% tax. Distributions of deductible contributions and earnings will be subject to federal income tax. EO032 274522 4/12 |4
- 5. How does it work? Bob retires at age 50 Sally retires at age 57 He must stick to the She must stick to the distribution schedule for distribution schedule for 9.5 years (until age 59½) 5 years (until age 62) EO032 274522 4/12 |5
- 6. The road you take makes a difference Distribution method Life expectancy Amortization Annuity Year 1 $2,924 $3,699 $3,681 Year 2 3,148 3,699 3,681 Year 3 3,400 3,699 3,681 Year 4 3,661 3,699 3,681 Year 5 3,940 3,699 3,681 A one-time switch from either the “amortization” or the “annuity” method to the “life expectancy” method. This hypothetical example assumes a 50-year-old, traditional IRA owner, an account balance of $100,000 with an 8% annualized rate of return, and an interest rate of 1.4% in conjunction with the IRS mortality table. Performance is not indicative of any Putnam fund, which will fluctuate. Not all required years of distribution are shown. EO032 274522 4/12 |6
- 7. You can’t take a distribution before age 59½ without penalty Calculating required minimum distributions is complicated Tax benefits stop at the death of the IRA owner EO032 274522 4/12 |7
- 8. Mapping your RMD involves careful planning • You must start taking distributions from your traditional IRA by No penalty April 1 of the year after Age for Age you turn 70½* 59½ distributions 70½ • IRA regulations make taking distributions Penalty for Must begin easy and relatively distributions distributions favorable from a tax standpoint * Note that these distributions are required of traditional IRA owners. Roth IRA owners are not required to take distributions during their lifetime. EO032 274522 4/12 |8
- 9. The express route to your RMD has four checkpoints Just keep in mind Date You must start taking minimum distributions by April 1 of the year after you turn 70½ Calculation method There is one simple calculation method* Beneficiary You may change beneficiaries whenever you wish without affecting the amount of your lifetime distributions Penalty for failure Equal to 50% of the minimum required to withdraw distribution not taken * IRA owners who have a spousal beneficiary who is more than ten years younger than the IRA owner may opt to use the IRS joint life expectancy table. EO032 274522 4/12 |9
- 10. You can’t take a distribution before age 59½ without penalty Calculating required minimum distributions is complicated Tax benefits stop at the death of the IRA owner EO032 274522 4/12 | 10
- 11. Extend your roadtrip with a Stretch IRA • Extend tax deferral No penalty • Increase Age 59½ for distributions Age 70½ compounding potential Penalty for Must begin distributions distributions • IRA income for heirs EO032 274522 4/12 | 11
- 12. Spousal beneficiary • Once RMD for the year of death has been made, a spouse beneficiary may take over decedent’s IRA and treat it as his or her own (assuming certain requirements are met) – Spouse can calculate RMDs, if required, based on the uniform distribution table – Name new beneficiaries • Spouse can also transfer funds to a beneficiary IRA – If the beneficiary spouse is under age 59½, he or she can access the IRA assets immediately without incurring a 10% early withdrawal penalty – Spouse beneficiary may still opt to treat the beneficiary IRA as his or her own at any time in the future EO032 274522 4/12 | 12
- 13. How does it work? Spousal beneficiary example YE AR 0 0 Bob (age 65) rolls $200K into an IRA and names wife, Sally (age 60), as sole beneficiary EO032 274522 4/12 | 13
- 14. How does the spousal beneficiary work? YE AR 0 5 Bob dies at age 70. Before commencing RMDs, Sally (age 65) elects to treat the IRA as her own and designates their son, Bruce (age 40), as her IRA beneficiary RMDs have not started EO032 274522 4/12 | 14
- 15. How does the spousal beneficiary work? Y E A R 1 0 • Sally dies in Year 10 at age 70 before commencing RMDs. • The following year, Bruce (age 45) begins receiving payments based on his (much longer) life expectancy under the new IRS regulations. He names his wife, Wendy, as his beneficiary. Year 11 distribution $12,019 Year 0 Year 10 Year 20 Year 30 Year 40 Year 50 $3.2 million in income based upon an initial investment of $200,000 and cumulative annual distributions of 39 years. This hypothetical illustration assumes an 8% annualized return and that distributions are kept to the required minimum. It does not represent the performance of any Putnam fund or investment. Investors should consider various factors that can affect their decision, such as possible changes to tax laws, the impact of inflation and other risks including periods of market volatility when investment return and principal value may fluctuate with market conditions. EO032 274522 4/12 | 15
- 16. How does the spousal beneficiary work? Year 49 distribution $270,526 Year 40 distribution $124,329 Bruce dies at age 74. Wendy continues the established distribution schedule. No rollover is available Year 30 distribution $54,566 Year 20 distribution $24,506 Year 11 distribution $12,019 Year 0 Year 10 Year 20 Year 30 Year 40 Year 50 $3.2 million in income based upon an initial investment of $200,000 and cumulative annual distributions of 39 years. This hypothetical illustration assumes an 8% annualized return and that distributions are kept to the required minimum. It does not represent the performance of any Putnam fund or investment. Investors should consider various factors that can affect their decision, such as possible changes to tax laws, the impact of inflation and other risks including periods of market volatility when investment return and principal value may fluctuate with market conditions. EO032 274522 4/12 | 16
- 17. How does the spousal beneficiary work? Total of 39 annual distributions $3,200,000 was distributed from the account Year 0 Year 10 Year 20 Year 30 Year 40 Year 50 $3.2 million in income based upon an initial investment of $200,000 and cumulative annual distributions of 39 years. This hypothetical illustration assumes an 8% annualized return and that distributions are kept to the required minimum. It does not represent the performance of any Putnam fund or investment. Investors should consider various factors that can affect their decision, such as possible changes to tax laws, the impact of inflation and other risks including periods of market volatility when investment return and principal value may fluctuate with market conditions. EO032 274522 4/12 | 17
- 18. Non-spousal beneficiaries • IRA owner may designate a non-spousal beneficiary, including a minor • Upon reaching age 70½, owner begins RMDs • When IRA owner dies, the beneficiary may establish RMDs based on his/her own life expectancy and name a new beneficiary,* even if RMDs have already started * Special rules may apply if the designated non-spouse beneficiary is a non-person, such as an estate, trust, or charitable organization. EO032 274522 4/12 | 18
- 19. How does the non-spousal beneficiary work? YE AR 0 0 Betty (age 60) rolls $200K into an IRA She names her sons — Max, age 34, and Sam, age 40 — as beneficiaries EO032 274522 4/12 | 19
- 20. How does the non-spousal beneficiary work? YE AR 1 0 0 Betty begins RMDs using the IRS’s simple calculation method Year 10 distribution = $16,480 EO032 274522 4/12 | 20
- 21. How does the non-spousal beneficiary work? YE AR 1 0 2 Betty dies at age 72 after receiving $53,443 in distributions over 3 years IRA split evenly between sons Max and Sam EO032 274522 4/12 | 21
- 22. How does the non-spousal beneficiary work? YE AR 1 0 2 Sam (now age 52) decides to liquidate his portion of the account immediately Sam’s lump-sum distribution = $243,158 EO032 274522 4/12 | 22
- 23. How does the non-spousal beneficiary work? $243,158 140,000 Y E A R 1 2 120,000 Sam receives $243,158. 100,000 In the year following Betty’s death, 80,000 year 13, Max (now age 47) begins 60,000 taking distributions based on his 40,000 single life expectancy 20,000 0 Year Year Year Year 1 10 12 49 Annual distributions: Betty Sam Max This hypothetical example assumes an 8% annualized return with distributions on an initial $200,000 investment based initially on the uniform distribution table. After the owner’s death, distributions are based on the non-recalculated single life expectancy of a single beneficiary. Distributions are taken at the end of the year and are kept to the required minimum. Performance is not indicative of any Putnam fund. EO032 274522 4/12 | 23
- 24. How does the non-spousal beneficiary work? $243,158 140,000 Y E A R 4 9 120,000 100,000 Max’s IRA is depleted. Total of $1,436,936 received 80,000 in distributions 60,000 40,000 20,000 0 Year Year Year Year 1 10 12 49 Annual distributions: Betty Sam Max This hypothetical example assumes an 8% annualized return with distributions on an initial $200,000 investment based initially on the uniform distribution table. After the owner’s death, distributions are based on the non-recalculated single life expectancy of a single beneficiary. Distributions are taken at the end of the year and are kept to the required minimum. Performance is not indicative of any Putnam fund. EO032 274522 4/12 | 24
- 25. How does the non-spousal beneficiary work? Total distributions Max has received $1,436,936 over $1 million more than Sam $243,158 $53,443 Betty Sam Max This hypothetical example assumes an 8% annualized return with distributions on an initial $200,000 investment based initially on the uniform distribution table. After the owner’s death, distributions are based on the non-recalculated single life expectancy of a single beneficiary. Distributions are taken at the end of the year and are kept to the required minimum. Earnings on Sam’s distribution are not reflected. Performance is not indicative of any Putnam fund. EO032 274522 4/12 | 25
- 26. Three helpful facts on the road to retirement • You can take a distribution before age 59½ without penalty • Calculating RMDs is straightforward • Tax benefits can continue after the death of the IRA owner EO032 274522 4/12 | 26
- 27. What’s next? • Consider how much IRA income you may need in retirement • Complete a Putnam IRA checklist and inventory • Check your IRA beneficiary designations, but know that they can be changed without affecting RMDs • Ask your financial representative about ways to help make the most of your IRA EO032 274522 4/12 | 27
- 28. This information is not meant as tax or legal advice. Please consult your legal or tax advisor before making any decisions. Investors should carefully consider the investment objectives, risks, charges, and expenses of a fund before investing. For a prospectus, or a summary prospectus if available, containing this and other information for any Putnam fund or product, call your financial representative or call Putnam at 1-800-225-1581. Please read the prospectus carefully before investing. Putnam Retail Management putnam.com EO032 274522 4/12 | 28
- 29. S h i f t i n g i n t o r e t i r e me n t Tu r n i n g I RA as s e t s i n t o i n c o me Not FDIC May Lose No Bank Insured Value Guarantee EO032 274522 4/12 | 29
Editor's Notes
- Welcome and thank you for joining me to discuss an important and timely topic today: Turning your IRA assets into income. Following retirement’s simple rules of the road can help you shift smoothly from saving to receiving income. People retiring today face challenges unlike many of their predecessors including: The fact that people live longer puts more pressure on their savings to last more years in retirement Changes to employer retirement plans have resulted in less sources of guaranteed income such as pensions The responsibility for saving for retirement has generally shifted from corporations to individuals. The task of making contributions, selecting investments, and preparing for income rests with you and your advisor.
- There are three big misconceptions surrounding IRAs: first, that you can’t access your money before age 59½ without penalty; second, that calculating required minimum distributions is complicated; and third, that tax benefits cannot extend beyond the death of the original IRA owner.
- Whether you’re planning to retire early or you’ve left your job unexpectedly, you may wish to draw income from your tax-deferred savings before age 59½. Currently, the IRS levies a 10% additional tax, beyond the regular income tax, on withdrawals made before age 59½. This 10% additional tax can be avoided by withdrawing IRA assets in what the IRS refers to as “substantially equal periodic payments.”
- Here’s how it works. You must withdraw assets in substantially equal periodic payments on no less than an annual basis for five years or until you reach age 59½, whichever is longer. Doing this allows you to avoid the usual 10% additional tax on taxable distributions made from a Traditional IRA prior to reaching age 59½.
- The “whichever is longer” part of this rule is important. For example, if Bob starts taking substantially equal periodic payments at age 50, he must stick to the withdrawal schedule until he reaches age 59½, a period of nine and a half years. However, if Sally starts receiving payments at age 57, she must stick to her withdrawal schedule for 5 years, at which time she will be age 62. If you fail to receive payments for the entire required period, all payments in the series will be retroactively subject to the 10% additional tax, plus interest.
- To calculate the distribution amount, generally you must use one of three IRS-approved calculation methods. Two of these methods require you to take FIXED annual payments, meaning that you have to take the same amount of money each year. With the third method, the amount of the required withdrawal VARIES based on the changing value of your IRA, as measured once each year on a specific date. If you have already begun withdrawals using a fixed method, you are allowed a one-time switch to the variable “required minimum distribution (RMD)” method without triggering the 10% penalty or interest charges. Once you make this election, however, you cannot switch back to any fixed method. Your tax advisor and financial representative can help you determine whether this decision is suitable for you.
- There are three big misconceptions surrounding IRAs: first, that you can’t access your money before age 59½ without penalty; second, that calculating required minimum distributions is complicated; and third, that tax benefits cannot extend beyond the death of the original IRA owner.
- Shortly after you turn 70½, the IRS requires that you start taking certain annual minimum distributions from your traditional IRAs. Failure to take these distributions may result in an IRS-imposed penalty equal to 50% of the amount that should have been withdrawn in addition to income tax liability. The good news is that the IRS regulations on RMDs make it simple to figure out your distributions.
- If you’re turning 70½ this year, you need to start thinking about taking distributions from your IRA. There is a simple calculation for determining the amount of your RMD. The age of, and your relationship to, your beneficiary does not affect the amount of your RMD (unless your beneficiary is your spouse and more than 10 years your junior). This means that you have the flexibility to change beneficiaries whenever you like without affecting the amount of your lifetime required minimum distributions. There may be an alternative to the one calculation method for those owners with a spousal beneficiary who is more than 10 years younger than they are. In these cases, joint life expectancy tables may still be used in place of the uniform distribution table.
- There are three big misconceptions surrounding IRAs: first, that you can’t access your money before age 59½ without penalty; second, that calculating required minimum distributions is complicated; and third, that tax benefits cannot extend beyond the death of the original IRA owner.
- Under old IRS regulations, when an IRA owner over age 70½ died, the required minimum distributions continued to be distributed to a beneficiary under the original distribution terms. Then, in the event of the death of the beneficiary, any remaining IRA balance was typically distributed in full to the estate of the beneficiary. Not only did tax deferral stop, but the beneficiary's estate was required to pay income taxes on the full distribution. Under current regulations governing RMDs, IRA assets may continue to accumulate tax deferred beyond the deaths of the original owner and beneficiary, offering years of tax-deferred compounding potential for heirs. This feature is known as a Stretch IRA. A key distinction to note is that the Stretch IRA feature is designed for investors who will not need the money in the account for their own retirement needs.
- One method for stretching the tax-deferred status of an IRA is through a spousal rollover. A spouse beneficiary has the option of taking over the decedent’s IRA as his or her own and naming new beneficiaries. In order for a spouse beneficiary to do this, he or she must be the sole beneficiary of the IRA, and must have an unlimited right to withdrawal amounts from the IRA. This means that this option is not available to a spouse who is the beneficiary of a trust that is named as the beneficiary of the IRA. If the original owner was taking RMDs, the spouse must take the distribution for the year in which the owner died, if any, before treating the IRA as his or her own. Once this process is complete, new beneficiaries are chosen and any future RMDs are calculated for the spouse using the uniform distribution table. Upon the death of the surviving spouse, the new beneficiaries must take required minimum distributions calculated under rules applicable to beneficiaries. The surviving spouse can also transfer funds to a beneficiary IRA. If the spouse is under age 59½, he or she can access the IRA assets immediately without incurring a 10% early withdrawal penalty.
- This example illustrates how a Stretch IRA might work in a case where the sole beneficiary is a spouse. In this case, Bob, who is 65, has a traditional IRA worth $200,000 from which he has not yet begun taking distributions, and names his wife Sally as sole beneficiary of the IRA.
- When Bob dies 5 years later, before commencing RMDs, Sally takes over the IRA as her own and designates her son Bruce as her sole beneficiary. At this point, RMDs have not yet started.
- Sally dies in year 10, 5 years after Bob dies. The following year, year 11, her son Bruce can implement the stretch provision by establishing a schedule of distributions over his life expectancy beginning in the year following the year of death or elect to receive the entire IRA within 5 years. Let’s say he elects the scheduled distributions, thereby stretching the IRA’s tax deferral and compounding potential. Let’s also assume that Bruce names his wife Wendy as beneficiary to continue his scheduled distributions in the event that he dies before the account is depleted. This slide and the next one show what distributions from the IRA might look like over time. Remember, this hypothetical illustration is based on a lengthy time period. Investors should consider various factors that affect their decision, such as possible changes to tax laws, the impact of inflation, and other risks.
- Nine years later, with an annual distribution of over $270,000, the IRA that Bob originally established is finally depleted.
- A total of just over $3.2 million has been distributed from what started as a $200,000 IRA in this hypothetical example. Please keep in mind that this is a hypothetical illustration based on distributions determined using the rates and ages of these hypothetical investors. Performance is not representative of any mutual fund or product. Results will differ for individual investors based on inflation and their own rates of return, ages, and tax situation.
- The owner of an IRA may also designate a non-spousal beneficiary, including a minor. If the owner dies before or after RMDs have started, the non-spousal beneficiary may establish systematic withdrawals based on his or her life expectancy and name a new beneficiary. Thus, withdrawals may continue beyond the death of the original non-spousal beneficiary. Again, we are assuming the beneficiary does not need the money in the account for his or her own retirement needs and does not live beyond his/her own life expectancy.
- This second hypothetical example illustrates how a stretch IRA might work in the case where the beneficiary is not a spouse. We start with a traditional IRA worth $200,000, owned by a single parent, Betty. Betty names her sons Max, age 34, and Sam, age 40, as beneficiaries.
- When Betty reaches age 70½, she begins taking distributions based on the IRS’s simple calculation method.
- Betty dies at age 72 after receiving more than $50,000 in distributions over 3 years. The remaining IRA balance is split evenly between her two sons.
- In the same year that Betty dies, Sam, now age 52, decides to liquidate his portion of the account immediately and receives $243,158, which he uses to buy a house.
- In the year following Betty’s death, Max, now age 47, begins taking distributions based on his single life expectancy. Sam’s shorter life expectancy does not affect Max’s RMD calculation because Sam received his entire amount before December 31 of the year following Betty’s death. So, under the new rules, Sam is not considered a designated beneficiary for RMD purposes.
- Max’s IRA is depleted in year 49. He has received a total of $1,436,936 in distributions. This illustration is based on a lengthy time period. Investors should consider various factors that may affect their decision, such as possible changes to tax laws, the impact of inflation, and other risks. Stretch IRAs assume that you will have no need for the money in the IRA, either before or after retirement. They also assume that you will take the smallest amount from the IRA that the law allows, and at the latest time it allows without penalty. Stretch IRAs also assume that the beneficiaries die before reaching their full life expectancy, so that the money they do not receive passes on to the next beneficiary. Election of Stretch IRA does not guarantee that any beneficiary will receive any distribution from the IRA since owner or prior beneficiary can withdraw funds in excess of minimum required distributions. Stretch illustrations do not allow for inflation, the fact that tax laws do change, and that the rate of return on any underlying investment is consistent and can be projected accurately over the long term.
- Compared with Sam’s $243,158, Max has received a difference of more than $1 million (although Sam’s distribution would have had the potential for earnings in non-tax-deferred investments as well).
- The examples we just walked through illustrate an IRA’s flexibility in regard to the age at which you may begin withdrawing your savings, required minimum distribution planning, and tax benefits for your heirs.
- To make the most of your IRA, consider your retirement and income goals, complete an IRA checklist and inventory, check your beneficiary designations, and talk to your financial representative about your specific situation.