Nonqualified Rollover Strategy to Improve Your Income in Retirement
Note: Not an offer to sell. Not for distribution to individual investors
Background
O
ne of the benefits of a 401(k) retirement plan is that it can follow an employee throughout his or her career. When changing employers, the investor has four options:
1. Leave assets with old employer 2. Complete a 401(k) rollover to new employer 3. Complete a 401(k) rollover and move the assets to an Individual Retirement Account (IRA) 4. Cash out the proceeds, paying taxes and a 10% penalty fee (if you cash out before the age of 59½)
However, when it comes to your nonqualified assets, which are in most cases much larger, there are only two options: take a lump sum or leave it with your old employer based on your pre-election.
Now there is a new alternative.
The Neglected Opportunity: Benefit Distribution Efficiency Since nonqualified plans cannot provide a tax-free rollover at retirement, most plans have not anticipated or provided for efficient nonqualified plan distributions. IRC Section 409A has forced individuals to make final elections on when/how nonqualified benefits are paid. Risk exposure and the current market uncertainty has led many individuals to choose lump sums at retirement. T h e A lt e r n at i v e s
at
Retirement
Most Nonqualified Plan Participants are Faced With: ››
Taking a lump sum
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Redirect distributions to a new strategy in a taxable investment portfolio Invest those funds in retail priced investments as they leave the institutional environment
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Corporations have not had a viable post-retirement alternative for individuals.
Until now ...
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Nonqualified Benefit Distribution Efficiency Progression of Nonqualified Plan Best Practices ››
Since nonqualified plans cannot provide a tax-free rollover at retirement, most plans have not anticipated or provided for efficient nonqualified plan distributions.
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Most plans are simply optimized for pre-retirement efficiency
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§409A motivated many executives to elect lump sum distributions
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Consequently, much attention is now focused on the need for efficient retirement distributions
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Nonqualified Benefit Distribution Efficiency Plan Overview The rollover strategy is designed to: ››
Provide a tax-advantaged strategy for nonqualified lump sum benefits
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Provide a life insurance benefit to individuals
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Improve corporate costs without additional proxy disclosure
For the Corporation: ››
The “Rollover” Strategy can provide enhanced income tax efficiency and improved investment yield over existing taxable funding
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If COLI is currently utilized, the rollover strategy often enhances funding efficiency and corporate net yield
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While improving corporate financial results, the rollover strategy enables the Company to pre-fund an improved financial arrangement for individuals
For the Individual, a distribution of the rollover strategy provides:
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Non-taxable earnings
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If properly structured, non-taxable distributions (from the insurance policy)
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A proprietary mechanism to restore taxes on plan distributions, keeping those dollars working in the policy
Nonqualified Benefit Distribution Efficiency Funding Structure: Pre-Retirement ››
To provide tax-advantaged asset accumulation/distributions, the individual’s account balances are invested in cash values in life insurance policies. »» These are the same type of corporately-priced contracts many companies utilize to fund their nonqualified benefits, but are designed to be distributed to individuals at retirement
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Pre-retirement, the Company begins funding for some or all of an individual’s nonqualified benefits (e.g. deferred compensation, SERP).
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Pre-retirement, the funding will be owned by the Company and managed like any taxable portfolio except that the investment gains on assets will be shielded from federal and state income tax.
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The corporation will set an asset allocation policy either hedging individual investment elections and/or one compatible with other company investment guidelines.
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Nonqualified Benefit Distribution Efficiency Funding Structure: Post-Retirement At retirement, lump sum benefits will be distributed to the individual as follows: ››
A portion of the benefit will be distributed in case to pay taxes
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The remaining portion will be distributed to the rollover vehicle “in-kind”
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On Distribution Day, individuals will have same net distribution as a traditional plan
Traditional Distribution
R o l l ov e r S t r at e g y D i s t r i b u t i o n
Retirement Distribution
Retirement Distribution
Corporation: $1,000,000 Distribution
$1,000,000 Cash
Individual: Net $600,000 in Taxable Portfolio
$400,000 IRS*
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Corporation: $1,000,000 Distribution
$400,000 Cash $600,000 “In-Kind”
$400,000 IRS*
*Based of a 40% tax rate.
Individual: Net $600,000 in rollover strategy
Nonqualified Benefit Distribution Efficiency Funding Structure: Post-Retirement Individuals can either: ››
Determine their own individual asset allocation
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Use RIA recommended best-in class funds or
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Utilize predetermined asset allocation portfolios, based upon risk tolerance
Going forward, individuals will have the following advantages of the “in-kind” distribution: ››
Earnings are not subject to current income taxation
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If properly structured, distributions are non-taxable
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The policy provides a mechanism to restore taxes on contributions, keeping those dollars at work after distribution
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We’re here for you.
For more information, please contact an RCG consultant for a brief appointment at a time and location convenient to you: Corporate Headquarters 12340 El Camino Real, Suite 400 San Diego, CA 92130 (858) 677-5900 RCG Boston 20 Park Plaza, Suite 1014 Boston, MA 02116 (617) 904-9444 RCG Chicago 707 Skokie Blvd, Suite 250 Northbrook, IL 60062 (847) 849-1791 RCG Denver 888 South Williams Street Denver, CO 80209 (303) 249-6639 RCG Milwaukee 12080 Corporate Parkway, Suite 140 Mequon, WI 53092 (262) 478-2015 or (262) 478-2005 RCG Southeast 11465 Johns Creek Parkway, Suite 330 Duluth, GA 30097 (770) 232-0303 RCG Vinings 351 Atlanta Street Marietta, GA 30060 (770) 422-4800
Choice never looked so good.
W illiam L. M ac D onald
Chairman, President, CEO RCG|Executive Compensation & Benefits Group Corporate Headquarters: 12340 El Camino Real, Suite 400 San Diego, CA 92130 tel: (858) 677-5900 ext. 460 fax: (858) 677-5915 www.retirementcapital.com info@retirementcapital.com
RCG
BENEFITS GROUP
Securities Offered Through Retirement Capital Group Securities, a Registered Broker/Dealer, Member FINRA/SIPC William MacDonald, Registered Representative | California Insurance License #0556980