Financial Fundamentals
IRA DISTRIBUTION PLANNING
Developing a smart income strategy can be
almost as important as saving for retirement in
the first place. A well-planned strategy can help
you maximize tax efficiencies, reduce the
chances of outliving your assets, and possibly
leave a larger legacy behind. IRA distribution
planning is just one part of your overall income
strategy in retirement.
RMDs are generally required to be distributed by
December 31, beginning in the year you reach
age 70½.* However, you may choose to postpone
your first distribution until your Required
Beginning Date (RBD), which is April 1 of the
following year. It’s important to note that waiting
until your RBD will require a second distribution
to be taken by December 31 of that same year.
Before you begin taking distributions from any
retirement account, it’s important to sit down
with your financial advisor and develop a list
of all the sources that will fund your retirement.
Your advisor can help you create a plan to determine
which sources to draw from, in what order, the
amount to take, and when to start.
Once you turn 70½, the IRS requires you to
withdraw a certain percentage of your Traditional
IRA and qualified retirement account values on
an annual basis. These withdrawals, known as
Required Minimum Distributions (RMDs), keep
individuals from deferring taxes on their
retirement savings indefinitely.
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REQUIRED MINIMUM DISTRIBUTIONS
Your RBD would be April 1, 2016
if your 70th birthday fell between:
January 1, 2015
70
June 30, 2015
▲
Your RBD would be April 1, 2017
if your 70th birthday fell between:
July 1, 2015
70
December 31, 2015
▲
In this issue of Financial Fundamentals, we’ll
focus on some IRA distribution strategies that,
with the help and guidance of your financial
advisor, can help ensure what you’ve worked
so hard for will continue to work for you —
throughout your retirement years and beyond.
RBD example when turning 70 in 2015:
*Some employer-sponsored retirement plans will allow you to
defer RMDs until you retire, even if you are older than 70½;
however, you cannot defer taking RMDs from a Traditional IRA.
CALCULATING YOUR RMD
Your RMD is determined by dividing the prior
year-end value of your account by a life
expectancy factor published by the IRS.
Depending on your individual circumstances,
you would generally use a factor from one of
three tables:
■
Uniform Lifetime Table (for most account
owners)
■
Single Life Expectancy Table (for individuals
inheriting IRA assets)
■
Joint Life and Last Survivor Expectancy Table
(for account owners whose spouse is the sole
designated beneficiary and is more than ten
years younger)
NOT FDIC INSURED • MAY LOSE VALUE • NO BANK GUARANTEE
TAKING YOUR RMD
HOW WE CAN HELP
If you have multiple IRAs, you can take a
distribution from each account, or take enough
from one account to satisfy the entire RMD
amount required for the year.1 It’s important to
take the correct distribution; not doing so can
subject you to a 50% federal income tax penalty
on the amount that should have been distributed,
but wasn’t. Consolidating IRAs may help you
keep track of your RMD obligations and avoid
unnecessary penalties.
Hartford Funds’ Automatic RMD Program will
calculate your RMD amount on an annual basis,
without having to submit a written request
each year.
ROTH CONVERSIONS
If you would like to avoid having to take RMDs in
the future, you may want to consider converting
assets now from your Traditional IRA to a Roth IRA.
Roth IRA owners never have to take RMDs (though
beneficiaries do), so assets have the potential to
keep growing throughout retirement. And because
you pay taxes at the time of the conversion, you
leave those converted assets, and any potential
growth, to your heirs income tax free.2 The potential
for income tax-free distributions to either you or
your beneficiaries may be an attractive feature
to consider.
There is no limit to how much you can convert to
a Roth IRA, however, maximum annual contribution
limits and certain income restrictions still apply to
Roth contributions. Converting assets to a Roth
IRA is a taxable event, and the taxes are due for
the tax year in which the conversion took place.
Using assets from your Traditional IRA to pay the
tax liability caused by a Roth conversion reduces
the amount available to invest, which can have a
negative effect on your growth potential.
Note: Required Minimum Distributions cannot be
converted to a Roth IRA.
RMDs FROM IRA ANNUITIES
If you own a qualified annuity that has not yet
been annuitized, there is a special rule associated
with calculating the RMD for that account. Known
as the “entire interest” rule, the RMD is calculated
by taking the year-end contract value, plus the
estimated value of any additional benefits
provided under the contract.3 The company that
issued your annuity will calculate this amount for
you, and in many cases, any increase in your RMD
will be relatively small.
By understanding and correctly using the RMD
rules, you, along with your financial advisor and
tax professional, can develop a plan to manage
distributions, and possibly extend the life of your IRA.
IRA DISTRIBUTION STRATEGIES USING RMDs
Fund another investment
If you don’t need the income, using your RMDs
for another purpose can help you accomplish a
variety of goals, such as:
■
Helping to protect your family by funding the
premiums on a life insurance policy.
■
Funding a 529 college savings plan for a child
or grandchild’s qualified higher education
expenses.
■
Investing in a tax-deferred product may help
you benefit from tax deferral and compounding,
as well as possibly provide a guaranteed
lifetime income stream.
1
Before taking an RMD withdrawal, please be aware of any
surrender charges or penalties that may apply for taking a
distribution.
2
Distributions to beneficiaries will generally be income tax free
provided the Roth IRA has been open for at least five years.
3
Additional benefits may include any guaranteed living or
death benefits associated with the contract. Please contact
your annuity provider and speak to your tax or legal counsel
for advice.
EXTENDING YOUR LEGACY THROUGH PROPER BENEFICIARY DESIGNATIONS
Your spouse as beneficiary
It’s common for IRA owners to name their spouse
as beneficiary of their IRA for a variety of reasons,
including:
■ Providing an income for them upon the
owner’s death.
■
In most cases, an IRA that passes to a spouse
will avoid probate and qualify for the unlimited
marital deduction for estate tax purposes.5
■
Surviving spouses are eligible to rollover the IRA
assets into a new or existing IRA of their own.
They may then name a new beneficiary, such as
a child or grandchild; that beneficiary, when the
time comes, will then have a chance to “stretch”
the IRA distributions over his or her life
expectancy.
Non-spouse beneficiary
Some IRA owners name their children, grandchildren,
friends or relatives as their IRA beneficiaries.
Depending on whether the owner has started RMDs,
beneficiaries have certain options available to them
upon the owner’s death (please see chart).
SPOUSE
NON-SPOUSE
6
Multiple beneficiaries
For IRAs with multiple beneficiaries, the
beneficiaries can take RMDs based on their
own individual life expectancies, provided the
custodian of the IRA can set up separate accounts
for each. If the beneficiary is younger than the
owner, less of the account value will be required
to be distributed, leaving more assets to potentially
accumulate over time. If setting up separate
accounts can’t be done by December 31 of the
year following the IRA owner’s death, then each
beneficiary will be required to base their RMDs
on the oldest beneficiary’s life expectancy.
Non-natural beneficiary
These include charities, estates, and trusts.
Naming any of these entities as beneficiary of
your IRA will not affect how you calculate your
RMD while you are living. For example, IRA
owners may still use the Uniform Lifetime Table in
most cases. However, the requirements for taking
RMD after your death which are applicable to
non-natural beneficiaries may differ from the
requirements applicable to other types of
beneficiaries.
ESTATE**
6
TRUST***
6
Lump-sum distribution
Lump-sum distribution
Lump-sum distribution
Lump-sum distribution6
5-year deferral7
5-year deferral7
5-year deferral7
5-year deferral7
Distributions over life
Distributions over life8
Distributions over life9
Distributions over life9
Rollover
** If you don’t name a beneficiary to your IRA, or the named beneficiary predeceases you, the assets will generally be paid to your estate.
*** Certain requirements must be met in order for the beneficiaries of a trust to be able to take life expectancy distributions,
which would be calculated based on the oldest beneficiary’s age. You should consult with a tax professional before naming a
trust as a beneficiary.
5
Although the IRA will not be subject to estate taxes as part of the deceased IRA owner’s estate, careful consideration should be
given to how this transfer will affect the surviving spouse’s estate upon his or her death.
6
Any distributions, other than non-deductible (after-tax) contributions, are fully taxable as ordinary income. It is the beneficiary’s
responsibility, based on the IRA owner’s records, to report the taxable and non-taxable portion of a distribution from an IRA that
includes non-deductible contributions.
7
Provided an IRA owner dies before his or her Required Beginning Date, the beneficiary may defer taking the entire IRA balance
until the year containing the fifth anniversary of the owner’s death. Although the entire balance must be distributed no later than
December 31 of the calendar year containing the fifth anniversary of the owner’s death, the beneficiary may take distributions at
any time during the five-year period in order to spread out the income tax liability.
8
If an IRA owner dies on or after his or her Required Beginning Date, an individual who is a non-spouse beneficiary generally must
base RMD for years after the year of the owner's death on the longer of the beneficiary’s life expectancy or the owner's remaining
life expectancy (determined in accordance with the applicable IRS factor and calculation method). If an IRA owner dies before his
or her Required Beginning Date, a non-spouse beneficiary choosing to take distributions over life must base RMD for years after the
year of the owner's death using the beneficiary’s life expectancy (determined in accordance with the applicable IRS factor and
calculation method).
9
If an IRA owner dies on or after his or her Required Beginning Date, an estate/trust may choose to take distributions over the
remaining life expectancy of the deceased IRA owner. The age of the deceased IRA owner as of his or her birthday in the year of
death determines life expectancy. In subsequent years, this factor will be reduced by one for each year that passes.
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NOW WHAT?
Take action! Talk to your
financial advisor and tax
professional and visit
hartfordfunds.com to learn
more about IRAs and how
Hartford Funds can help you
reach your investment goals.
We stand ready to help you
as you work with your financial
advisor to grow your retirement
assets. We offer a wide range
of products, services, and
educational material, as well as
online
tools to help you make
informed decisions about
your retirement.
DID YOU KNOW?
By taking only your required distributions, you’re allowing the remaining assets continued tax-deferred
growth potential, possibly leaving more for your beneficiaries or a favorite charity.
This information is written in connection with the promotion or marketing of the matter(s) addressed in this material. The information cannot be relied upon for the purpose of avoiding IRS penalties. These
materials are not intended to provide tax, accounting or legal advice. As with all matters of a tax or legal nature, you should consult your own tax or legal counsel for advice.
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Investors should carefully consider the investment objectives, risks, charges, and expenses of Hartford
Funds before investing. This and other information can be found in the prospectus and summary
prospectus, which can be obtained by calling 888-843-7824 (retail) or 800-279-1541 (institutional).
Investors should read them carefully before they invest.
Hartford Funds are underwritten and distributed by Hartford Funds Distributors, LLC.
All information herein is as of 6/15, unless otherwise noted.
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