4 An IRA lets you draw on your money for whatever reason as long as you are willing to pay a federal tax penalty of 10%
MFS® Retirement Strategies Traditional and Roth IRAs
FORWARD FOCUS Accumulating wealth for retirement
ASSESS YOUR NEEDS
TAKE CONTROL OF YOUR FINANCIAL FUTURE
With more people living well into their 80s and beyond, you could spend one-third or more of your lifetime in retirement. Will your current savings and future income sources carry you through? Fortunately, today’s tax-advantaged Individual Retirement Accounts (IRAs) could help you build the wealth you will need to meet key financial needs in retirement. You will find that IRAs could be a great way to • receive a regular stream of income during retirement • keep your retirement savings potentially growing tax deferred • minimize taxes on your retirement savings • create a legacy for your heirs
This material is not intended to replace the advice of a qualified professional. Before making any financial commitment regarding the issues discussed here, consult a professional advisor. MFS® does not provide legal, tax, or accounting advice. Any statement contained in this communication (including any attachments) concerning US tax matters was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code. This communication was written to support the promotion or marketing of the transaction(s) or matter(s) addressed. Clients of MFS should obtain their own independent tax and legal advice based on their particular circumstances.
NOT FDIC INSURED • MAY LOSE VALUE • NO BANK GUARANTEE
Income sources of the average American retiree1
33% 46% 21%
33% 46% 21%
Social Security
Other sources
Pensions
Start here. Finish strong. Financial planning experts believe you will need approximately 80% of your peak preretirement income to maintain your current lifestyle in retirement.2 If your peak income is $50,000, then you may need $35,000 or more each year. When you multiply that annual figure by your expected years in retirement from the table at right,3 you may find you are going to need more than you have planned for.
LIFE EXPECTANCY
MALE
FEMALE
At age 65
18.0 years
20.5 years
At age 75
11.2 years
13.0 years
The more time you take now to focus on your future financial needs, find the right IRA for your situation and put a carefully planned strategy in motion, the more influence you could have on the kind of retirement you may be able to enjoy later.
Source: Facts and Figures About Social Security, 2016. Source: Employee Benefit Research Institute (ebri.org) Issue Brief, February 2012 (the latest data available). 3 Source: U.S. Center for Disease Control, National Vital Statistics Reports, Vol. 65, No. 4, June 30, 2016. “Life expectancy at selected ages, by race, Hispanic origin, race for non-Hispanic population, and sex: United States, 2014.” 1 2
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CONSIDER YOUR OPTIONS
AN IRA FOR EVERYONE
How can an IRA help me take control of my financial future? Roth and traditional IRAs are accounts that individuals can use to save for their own retirement. Virtually all wage earners — including active participants in companysponsored retirement plans and the self-employed — are eligible to open an IRA. While each IRA has unique rules and is designed to help meet the needs of certain investors, all offer benefits that could really add up over the long term:
• a smart way to put more money aside for retirement • tax-deferred growth potential • access to your assets at all times4
Which IRA is right for me? When choosing between a traditional and a Roth IRA, you may want to figure out how much you will have in after-tax dollars at retirement in each situation. For many people, especially those with longer-term time horizons, a Roth IRA’s tax-free withdrawals may lead to more retirement income. However, if your tax bracket is higher now than you think it will be during retirement, a traditional IRA may be the better choice, especially if all or part of your contributions can be tax deductible. Your financial advisor can help you select the right IRA for your retirement needs.
• investment flexibility as your needs evolve 4
An IRA lets you draw on your money for whatever reason as long as you are willing to pay a federal tax penalty of 10% in addition to regular income taxes on the withdrawal amount. Penalty-free withdrawals are allowed after age 591/2, in the event of death or disability and for certain other expenses, such as funding a college education or buying a first home. For more information about IRA withdrawals, talk with your financial or tax advisor.
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IRAs at a glance Both the traditional and Roth IRA can help you work toward your retirement goals, but they differ significantly in their tax treatment of contributions and distributions. TRADITIONAL IRA
ROTH IRA
Taxable capital gains from investment exchanges
No
No
Tax-free distributions at retirement5
No
Yes
Withdrawals must begin by age 701⁄2
Yes
No
See table, next page
No
Tax-deductible contributions
Generous IRA contribution limits SINGLE
MARRIED COUPLE7
CATCH-UP CONTRIBUTION PER PERSON IF OVER 50
2016
$5,500
$11,000
$1,000
20176
$5,500
$11,000
$1,000
Source: irs.gov, “IRS Announces 2017 Pension Plan Limitations,” 10/27/16.
5 6 7
R oth IRA distributions that include investment earnings are not subject to taxes if the distribution is made after a five-year holding period for a “qualified” purpose. Future years will be indexed for inflation. Each spouse contributed to a separate IRA.
IRA options for small businesses SEP IRA plan The Simplified Employee Pension IRA (SEP IRA) is a retirement plan specifically designed for selfemployed individuals and small business owners. When establishing a SEP IRA plan, you and any eligible employees establish your own separate SEP IRA.
SIMPLE IRA plan The Savings Incentive Match Plan for Employees of Small Employers (SIMPLE IRA) allows businesses with 100 or fewer employees to offer a tax-advantaged, company-sponsored retirement plan. SIMPLE IRA plans are funded by employer contributions and can be funded by elective employee salary deferrals.
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CONSIDER YOUR OPTIONS
TRADITIONAL IRA ADVANTAGES
Does the tax-deductible feature of a traditional IRA apply to me? The traditional IRA offers you two ways to save for retirement: 1) deductible, which allows tax-deductible contributions and tax-deferred earnings 2) nondeductible, which allows only tax-deferred earnings As long as you are under the age of 70½ andhave earned income, you can make a contribution to a traditional IRA. For your contributions to be at least partly deductible, you must meet one of the following conditions: 1) You are not an active participant in an employer-sponsored retirement plan. 2) Your modified adjusted gross income (MAGI) is under a certain amount. (See below.) Here are the key advantages and features traditional IRAs offer: • potential tax deduction up to the limit for the year ($5,500 for 2016 and 2017), plus any catch-up contributions • earnings accumulate tax deferred
Traditional IRA deductibility (for individuals covered by an employer-sponsored retirement plan) Deductibility is phased out based on modified adjusted gross income (MAGI).
MODIFIED ADJUSTED GROSS INCOME
SINGLE
MARRIED FILING JOINTLY
2016
DEDUCTION
$61,000 or less
$62,000 or less
$61,001 to < $71,000
$62,001 to < $72,000
partial
$71,000 or more
$72,000 or more
none
$98,000 or less
$99,000 or less
$98,001 to < $118,000
$99,001 to < $119,000
partial
$118,000 or more
$119,000 or more
none
Source: irs.gov, “IRS Announces 2017 Pension Plan Limitations,” 10/27/16.
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2017
full
full
CONSIDER YOUR OPTIONS
ROTH IRA ADVANTAGES
Can I benefit from the tax-free potential of a Roth IRA? As long as you or your spouse has earned income that falls within certain dollar limits, you can start contributing to a Roth IRA. Here are the key advantages and features a Roth IRA offers:
• Earnings accumulate tax deferred and may be distributed tax free after you reach age 59½ and you have had the Roth IRA for at least five years. • Contributions may be withdrawn at any time with no tax consequence. • Distributions to the owner at age 70½ are not required.
Roth IRA eligibility There are no maximum or minimum age limits for a Roth contribution. You may contribute 100% of earned income up to $5,500, plus catch-up contributions, if you are age 50 or older, subject to income limits below. Contributions are not deductible, but distributions of earnings may become tax free after five years. Maximum contributions amounts are phased out based on modified adjusted gross income (MAGI).8
MODIFIED ADJUSTED GROSS INCOME
2016
2017
Less than $117,000
Less than $118,000
$117,000 to < $132,000
$118,000 to < $133,000
Less than $184,000
Less than $186,000
$184,000 to < $194,000
$186,000 to < $196,000
DEDUCTION full
SINGLE
MARRIED FILING JOINTLY
partial full partial
Source: irs.gov, “IRS Announces 2017 Pension Plan Limitations,” 10/27/16. 8 Contributions phase out proportionally over range.
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CONSIDER YOUR OPTIONS
ROTH IRA ADVANTAGES
Can I benefit from the tax-free potential of a Roth IRA?
A tale of three IRA investors The Roth IRA has proven to be very popular with retirement investors over the past few years. A quick look at the powerful combination of tax-deferred earnings potential and tax-free withdrawals over time helps explain why. Although they are just age 25, Kristen, Jack, and Erika are all planning for retirement. Each has opened an IRA according to his or her unique circumstances and needs. They all plan to contribute $5,000 each year to their IRAs for the next 40 years and catch-up contributions of an additional $1,000 per year after age 50. Here we see what their distributions (after taxes) could look like at retirement.
Total distribution after taxes Kristen’s deductible traditional IRA
$570,110
Investment of annual tax savings Net to IRA owner
$146,738
$716,848
Jack’s nondeductible traditional IRA
$643,040 Erika’s Roth IRA
$850,911 Assuming a 25% tax rate during the investment phase, Kristen would have accrued $55,250 in annual tax savings. If the annual savings had been invested in an investment account that grew at 4.5%,9 these annual tax savings could have grown to $146,738. For the purpose of this illustration, lump-sum distributions are taxed at a 33% total rate. Keep in mind that this hypothetical scenario is intended to serve as an educational tool, not investment or tax advice. Your circumstances are unique; therefore, you should consult a financial advisor for personal guidance. The estimated values shown are not intended to be indicative of the future performance of traditional IRAs, Roth IRAs or any MFS product. 9
Tax savings invested in the taxable, non-retirement account returned 6% (4.5% after taxes).
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Additional assumptions: • Each IRA investor in this hypothetical example assumes a 25% federal tax rate before retirement. • The 6% average annual rate of return, compounded annually, used to calculate these projections is hypothetical. It does not represent the performance of any specific security, and there is no guarantee that the selected rate of return can be achieved. Rates of return will vary over time, particularly for long-term investments. • Contributions are assumed to be made on December 31 of each year. • Calculations assume eligibility to contribute.
CONSIDER YOUR OPTIONS
ROTH IRA CONVERSION ADVANTAGES
Should I use the Roth conversion option? By converting your traditional IRA to a Roth IRA, you can prepay income taxes. This could allow your beneficiaries to receive distributions from the IRA tax free. However, a Roth conversion is not for everyone. First of all, you will need assets to pay taxes on the conversion, as it is a taxable event. But if you have a long time frame, you have the potential to offset the costs through growth, as the examples below show. Be sure to talk to your tax advisor about the tax consequences of a Roth conversion.
The benefit of tax-free growth
Assumptions:
Scott has accumulated $100,000 in his traditional IRA. He is eligible for a Roth conversion and is considering converting those assets into a Roth IRA. In this hypothetical example, the benefit of tax-free growth potential outweighs the up-front cost of converting from a traditional to a Roth IRA.
• Hypothetical 6% annual return. Both IRAs would grow to $320,714 in 20 years. • Scott would have paid $25,000 in up-front taxes (from a source other than the IRA) to convert to a Roth, as he is in the 25% federal tax bracket. • If, instead of converting, Scott were to invest the $25,000 in a taxable account, it would grow to $60,293 in 20 years.10 • If he were to take a lump-sum distribution from the traditional IRA at the end of 20 years, it would cost him $80,178 in taxes11 (at a 25% flat rate), leaving him with $240,535. Add in the $60,293 taxable account, and he would have $300,828. • A qualified lump-sum distribution from the Roth IRA is tax free, so he would be left with $320,714 after 20 years.
Scott stays with a traditional IRA
$240,535
Scott converts to a Roth IRA
$320,714
Taxable account funded with tax savings
Scott keeps
$60,293 $300,828 Scott keeps
$320,714
ypothetical results are for illustrative purposes only and are not intended to represent the performance of any MFS product. There is no guarantee that the selected rate of return H can be achieved. Rates of return will vary over time, particularly for long-term investments. 10 At hypothetical 6% annual return. 11 It is unlikely that the total tax in 20 years will be exactly 25%. If tax rates are higher, the benefit of the Roth conversion will be greater than shown. If tax rates are lower, the total after-tax value of the traditional IRA would be higher than shown.
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TAKE ACTION
TAKE THREE SIMPLE STEPS
STEP 1. Talk to your financial advisor today Here are four questions you can use to start an IRA discussion with your financial advisor. Your specific answers will help lead you to the right IRA for pursuing your retirement savings goals.
• How can an IRA work for me? • Can I benefit from the tax-free potential of a Roth IRA? • Can I take advantage of the tax-deductible features of a traditional IRA? • Should I consider a Roth conversion for its estate planning benefits? Your financial advisor can also help you create an asset allocation strategy for your IRA that reflects your specific financial goals, time horizon and tolerance for risk.
STEP 2. Put your plan into action Consider starting to fund your IRA as soon as possible. The earlier you act, the more time you will have to let the power of tax-deferred investing work for you — and the better the chance you will accumulate the wealth you will need in retirement.
STEP 3. Take control of your financial future Keep an eye on changes in tax laws, interest rates, inflation and Social Security benefits. Take advantage of any new opportunities to maximize the tax-deferred potential of your IRA.
See Education & Planning/Asset Allocation Strategies on mfs.com. No investment strategy, including asset allocation, can guarantee a profit or protect against a loss.
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WE BELIEVE IN THE POWER OF ACTIVE MANAGEMENTSM MFS® is a global investment manager committed to skilled active management as the most powerful way to meet investors’ need for strong returns over the long term. We bring you the value of our insights and expertise through: Integrated Research Taking advantage of the depth and reach of our research teams around the world and across equity, fixed income and quantitative disciplines, we uncover investment opportunities and thoroughly analyze our best ideas to develop a full perspective on the securities we select for our portfolios. Global Collaboration We believe good decision making, driven by our ability to work together, share information and actively debate different viewpoints, leads to better investment outcomes for our clients. Active Risk Management To help protect capital and generate alpha, we seek segments where risk is appropriately rewarded, focus on selecting investments with the potential to hold their value through challenging markets and apply systematic risk reviews on multiple levels. Long-Term Conviction Developing our insights, differentiating meaningfully from the benchmark and staying true to our convictions over the long term allows the market time to potentially reward our investment ideas.
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