401k decay

Changing Jobs or Retiring?Avoid 401(k) Decay!

Sean Latterner Minneapolis Financial Group Seminar And Insurance Sales Presentation

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Retirement Income Strategies

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What is 401(k) Decay?

Your choices for handling your 401(k)

Special rule for distributions

The quality of your retirement is in your hands

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It is the erosion of your 401(k) balance due to taxes assessed upon a lump sum withdrawal.

What is 401(k) Decay?

All investors are subject to income taxes on withdrawals

Investors younger than 59 1/2 may be subject to an additional 10% federal income tax penalty on withdrawals

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Example of “401(k) Decay”

Mary decides to cash in her 401(k) 28% of the balance goes to pay federal income taxes 10% goes to pay the “pre 59 1/2” withdrawal federal income

tax penalty

Mary’s balance post-taxes is $37,200 She uses $17,200 to pay off her car loan She invests the remaining $20,000 in an investment

earning 8%

Mary Barton Age 35 28% Tax Bracket

(Assumption: No special lump sum tax treatment is available.)

$60,000 401(k) balance Changing jobs

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30 Years Later, Mary is 65 and Ready to Retire

The car she paid off 30 years earlier with the $17,200 from her post-tax 401(k) is worth $0, and long gone

The remaining $20,000 she invested in an investment @ 8% is now worth $201,253

NOT TOO SHABBY, RIGHT?

NOT TOO SHABBY, RIGHT?

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WRONG!!!Since Mary joined another company 30 years ago, she never really needed the money from her 401(k) when she cashed it out.

* Examples assume 8% average annual return. This return is for illustrative purposes only, and is not meant to represent the performance of any MassMutual product.

What she gave up by cashing it out: $229,429* - This is what the $22,800 she paid in income

and penalty taxes would have grown to; $173,078* - This is what the $17,200 she used to pay off

her car loan would have grown to (an expensive car!) What she’d have if she had let her $60,000 continue to grow tax-deferred:

$603,759* - (before taxes) What she’d have even if she cashed out the entire $603,759 today (at age 65 after taxes, assuming a 28% tax bracket):

$434,706*

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What if Mary had not paid off the car loan, butinvested the $37,200 after-tax amount?

Over 30 years it would have grown to $374,331 - much better, but…

$60,375 LESS than her after-tax amount today if she let the original $60,000 grow tax-deferred!

This doesn’t even take into account the $ she pays in taxes each year on her currently taxable investment

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Your Choices for Handling Your 401(k)

HOW DO THESE CHOICES COMPARE?HOW DO THESE CHOICES COMPARE?

1. Transfer your balance directly to a Rollover IRA, or to another eligible retirement plan

2. Leave your balance in your former employer’s plan;

3. Transfer your balance to your new employer’s plan;

4. Receive your balance - after taxes - in a check.

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Option 1 Transfer Your Balance To A Rollover IRA

ADVANTAGES DISADVANTAGES

* Subject to income qualifications; consult your tax advisor

Maintain tax-deferral and avoid current taxation

Flexibility: You may choose an investment that meets YOUR needs

May convert to a Roth-IRA* Those <59 1/2 who need income

may avoid penalty taxes with IRC Section 72(t) provisions, allowing for substantially equal periodic payments

YOU need to research appropriate vehicles to fund your IRA

No loans permitted in an IRA, while some employer plans do allow them

Conversion to a Roth IRA subjects amount converted to current income tax.

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Option 2 Leave Your Assets in Your Former Employer’s Plan

Your current strategy can continue without interruption

No need to take any action - so it’s simple


You’re limited to the plan’s investment choices

You may receive LESS educational information about your plan, as compared to current employees

Some plans impose limits on withdrawals available to former employees


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Option 3 Move Your Balance to Your New Employer’s Plan


ALL your employer-sponsored retirement assets will be in one plan

Some employer plans don’t permit transfers, or have a waiting period

Your new plan may limit investment choices

The plan may limit withdrawals or other access


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Once all taxes are paid, the money is yours to use as you wish

Income and penalty taxes could take a substantial portion of your distribution

The temptation to spend what’s left after taxes can be overwhelming; once spent it’s gone forever

Option 4 Receive Your Plan Assets As A Distribution (Check) From Your Former Employer


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Special Rules for Distributions

All distributions are subject to both federal and state income taxes, if applicable,

If you are under age 59 1/2 , you will pay an additional 10% federal income tax penalty, unless:

You are disabled You’ve exercised the 72(t) provisions for receipt of substantially equal periodic

payments (see brochure for more details) You’ve attained age 55 before leaving your employer You’ve incurred medical expenses allowable as a medical expense deduction.

Distributions for medical expenses may not exceed the amount of the expense without incurring the federal tax penalty.

Certain other exceptions from the 10% federal tax penalty may apply. If you are over age 59 1/2, the 10% federal income tax penalty doesn’t apply

Special tax treatment may be available for certain distributions

Consult your tax advisor for details on these tax treatments

So You Want A Check Anyway? Know the Facts:

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The Quality of Your Retirement Is In Your Hands

Understand your choices

Compare the merits and disadvantages of each choice

Choose a course of action that you won’t regret in the future

Work with a professional with whom you’re comfortable

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Important Disclosures

Annuities do not provide any additional tax advantage when used to fund a qualified plan. Investors should consider buying an annuity to fund a qualified plan for the annuity’s additional features, such as lifetime income payments and death benefit protection.

Annuity products are issued by Massachusetts Mutual Life Insurance Company and C.M. Life Insurance Company. C.M. Life Insurance Company, 100 Bright Meadow Boulevard, Enfield, CT 06082, is non-admitted in New York and is a subsidiary of Massachusetts Mutual Life Insurance Company, 1295 State Street, Springfield, MA 01111-0001.

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© 2008 Massachusetts Mutual Life Insurance Company, Springfield, MA. All rights reserved. www.massmutual.com. MassMutual Financial Group is a marketing name for Massachusetts Mutual Life Insurance Company (MassMutual) and its affiliated companies and sales representatives.

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