Comparison Chart: Pre-Tax Deferrals, Designated Roth Deferrals, In-Plan Roth Rollovers, & Roth IRAs

(1)

Question Pre-Tax Deferral Designated Roth Deferral In-Plan Roth Rollover Roth IRA

Who is

eligible to

establish

a plan?

Subject to the terms of the plan document:

• 401(k) – Any eligible employee

• 403(b) – Any eligible employee

• 457(b) Governmental – Any eligible employee

• There are no income restrictions

• The plan document may permit designated Roth deferrals, as they are an optional provision

(effective for plan years beginning January 1, 2011)

• The plan document must first permit designated Roth deferrals and also allow for the in-plan Roth rollover

(effective for plan years beginning January 1, 2011)

• An individual’s ability to make Roth IRA contribution is determined by single or married filing status and Adjusted Gross Income (AGI) as described below for 2011:

Who may

benefit?

• Employees who expect to be in a lower tax bracket at retirement

• Employees who want to avoid current taxation on deferrals and earnings

• Younger employees in lower tax brackets with a long time horizon until retirement

• Employees who expect tax rates to increase by their retirement date

• Employees interested in estate planning opportunities

• Younger employees in lower tax brackets with a long time horizon until retirement

• Employees who expect tax rates to increase by their retirement age

• Employees interested in estate planning

• Amounts converted in 2010 are eligible to have the tax liability spread equally over the 2011 and 2012 tax years

• Younger individuals in lower tax brackets with a long time horizon until retirement

• Individuals who expect tax rates to increase by their retirement date

• Individuals interested in estate planning opportunities

What are the

contribution

limits?

• Contributions are made on a pre-tax basis

• Pre-tax deferrals are combined with Roth deferrals for the purpose of the contribution limits (as indexed)

• Contributions are limited to the lesser of 100% of includible compensation or the maximum dollar limit (as indexed)

• Contributions are made on an after-tax basis (not deductible)

• Pre-tax deferrals are combined with Roth deferrals for the purpose of the contribution limits (as indexed)

• N/A • Contributions are made on an after-tax basis

(not deductible)

• Roth IRA contributions are combined with traditional IRA contributions for the purpose of the contribution limits (as indexed)

**Caution: Please note that some of the items included on this grid are the result of Lincoln National Corporation’s* current interpretation**

of the Final Roth Regulations, the Small Business Jobs Act of 2010, and IRS Notice 2010-84. Others may reasonably have a different

interpretation of that material. In addition, this area of the law has been and continues to be subject to significant change.

Tax years: 2009 - 2011 Deferral limit: Up to $16,500 Tax year: 2012

Deferral limit: Up to $17,000

Tax years: 2009 - 2012 Deferral limit: Up to $5,000 Filing

status Adjusted Gross

Income (AGI) Full/Partial Contribution Single <$110,000

$110,000 - $124,999

>$125,000

FullPartial None Married

Filing Jointly

<$173,000

$173,000 - $182,999

>$183,000

FullPartial None Married

Filing Separately

$0$1 - $9,999

>$10,000

FullPartial None

Tax years: 2009 - 2011 Deferral limit: Up to $16,500 Tax year: 2012

(2)

Are age 50

catch-up

contributions

permitted?

• Available to participants who attain age 50 by the end of the taxable year

• Pre-tax catch-up deferrals and Roth catch- up deferrals are combined for the purpose of the catch-up limit

• Available to participants who attain age 50 by the end of the taxable year

• Pre-tax catch-up deferrals and Roth catch- up deferrals are combined for the purpose of the catch-up limit

• N/A • Available to participants who attain age 50 by

the end of the taxable year

• Roth IRA catch-up contributions are combined with traditional IRA contributions for the purpose of the catch-up limit

What are

distributable

events?

Subject to the terms of the plan document, distributable events include:

• Death

• Disability

• Severance from employment

• Retirement

• Plan termination

• Other in-service withdrawals (see in-service withdrawal section)

• Death

• Disability

• Retirement

• Other in-service withdrawals (see in- service withdrawal section)

• Death

• Disability

• Retirement

• Other in-service withdrawals (see in-service withdrawal section)

• Distributions are available any time from a Roth IRA

• Individuals do not need to experience a distributable event

Are hardship

withdrawals

available?

• Hardship withdrawals may be permitted

• The amount available for hardship is limited to pre-tax deferrals

• Earnings on pre-tax deferrals after January 1, 1989, are not available for distribution

• For 457(b) Governmental plans, hardship withdrawals are allowed in the event of an unforeseeable emergency

• The amount available for hardship is limited to Roth deferrals

• The withdrawal is pro-rated between Roth deferrals and earnings

• If the distribution is “non-qualified” (see

“non-qualified distribution” section), the earnings will be taxable

• The withdrawal is pro-rated between the in- plan Roth rollover amount and earnings

• Individuals do not need to experience a hardship event

Are in-service

withdrawals

available?

• For 401(k) and 403(b) plans, in-service withdrawals for active participants are NOT permitted prior to age 59½

• Plans may permit in-service withdrawals of pre-tax deferrals after attainment of age

• For 457(b) Governmental plans, in-service 59½ withdrawals for active participants are not permitted prior to 70½

• For 401(k) and 403(b) plans, in-service withdrawals for active participants are NOT permitted prior to age 59½

• Plans may permit in-service withdrawals after attainment of age 59½

• The withdrawal is pro-rated between Roth deferrals and earnings

• For 457(b) Governmental plans, in-service withdrawals for active participants are not permitted prior to 70½

• Plans may permit in-service withdrawals of the in-plan Roth rollover account

• The withdrawal is pro-rated between the in- plan Roth rollover amount and earnings

• Individuals do not need to experience an in-service withdrawal event

Tax years: 2009 - 2012

Deferral limit: Up to $5,500 Tax years: 2009 - 2012

Deferral limit: Up to $1,000 Tax years: 2009 - 2012

(3)

Are loans

permitted?

• A plan may offer loans up to certain limits (generally 50% of the participant’s vested account balance) from the pre-tax deferral account as well as other sources

• If a loan default and deemed distribution occurs, the entire outstanding loan balance becomes taxable

• A plan may offer loans up to certain limits (generally 50% of the participant’s vested account balance) from the designated Roth deferral account as well as other sources

• If a loan default and deemed distribution occurs, the loan amount represents a

“nonqualified” distribution

• A plan may offer loans up to certain limits (generally 50% of the participant’s vested account balance) from the in-plan Roth rollover account as well as other sources

• If a loan default and deemed distribution occurs, the loan amount represents a

“nonqualified” distribution

• Loans are not available

Are required

minimum

distributions

(RMD) at

age 70½

necessary?

• Generally, the RMD must be withdrawn by April 1 following the end of the year in which the participant reaches age 70½, or, if later, by April 1 following the end of the year in which the participant retires

• For 5% owners, the RMD must be withdrawn by April 1 following the end of the year in which the participant reaches age 70½, regardless of retirement

• If the distribution is “non-qualified,” the earnings will be taxable

• May roll to a Roth IRA to avoid RMD

• If the distribution is “non-qualified,” the earnings will be taxable

• May roll to a Roth IRA to avoid RMD

• RMD rules do not apply to Roth IRAs

What is a

“qualified

distribution”?

• N/A. The term “qualified distribution” is used in the context of a Roth deferral account only

BOTH of the following requirements must be met:

• Roth deferral account and/or Roth rollover account has been in place for 5 taxable years (from the year the first Roth contribution or the first in-plan Roth rollover was made, whichever was first) AND

• One of the following events has occurred:

• Attainment of age 59½

• Disability

• Death

• Since 2006 was the first taxable year Roth deferrals were permitted in 401(k) and 403(b) plans, 2011 was the first year that qualified distributions could be taken from the designated Roth deferral account.

• Roth deferral account and/or Roth rollover account has been in place for 5 taxable years (from the year the first Roth contribution or the first in-plan Roth rollover was made, whichever was first) AND

• One of the following events has occurred:

• Disability

• Death

• Assuming no Roth deferrals were made in any previous years, 2010 is the first taxable year in-plan Roth rollovers are permitted. The first year that qualified distributions can be made from the in-plan Roth rollover account will be 2015.

• The Roth IRA has been in place for 5 taxable years (from the year of the first contribution)

• One of the following events has occurred:AND

• Disability

• Death

• Certain first-time purchase of a home

(4)

What is a

“nonqualified

distribution”?

• N/A. The term “non-qualified distribution” is used in the context of a Roth deferral account only.

• The participant may take a distribution even if the criteria for a qualified distribution have not been met (This is a

“non-qualified” distribution.)

• Distribution of the Roth deferral is nontaxable, but the earnings are taxable

• Certain distributions are always considered non-qualified:

• 415 excess contributions

• Excess deferrals

• Excess contributions

• Deemed distributions (loan defaults)

• The participant may take a distribution even if the criteria for a qualified distribution have not been met (This is a “non-qualified” distribution.)

• Distribution of the in-plan Roth rollover amount is nontaxable, but the earnings are taxable

• Certain distributions are always considered non-qualified:

• Deemed distributions (loan defaults)

• Roth IRA account holders may take a distribution even if the criteria for a qualified distribution have not been met (This is a

“non-qualified” distribution.)

• Ordering rules apply:

Contributions are distributed first and are tax- free. Earnings are distributed second and are taxable if the distribution is “non-qualified.”

How is the

5-year taxable

period

(“clock”)

determined?

• N/A. For purposes of determining a “qualified

distribution”

• The 5-year “clock” begins on January 1 of the earliest of the following taxable years:

• The year of the participant’s first Roth deferral to the plan, or

• The year of the participant’s first Roth deferral to another plan which is rolled over to this plan in a direct rollover, or

• The year of the participant’s first in-plan Roth rollover

• The designated Roth deferral account shares the same 5-year “clock” with the in- plan Roth rollover account for purposes of determining if a distribution is a “qualified distribution”

For purposes of determining a “qualified distribution”

• The 5-year “clock” begins on January 1 of the earliest of the following taxable years:

• The year of the participant’s first Roth deferral to the plan, or

• The year of the participant’s first Roth deferral to another plan which is rolled over to this plan in a direct rollover, or

• The year of the participant’s first in-plan Roth rollover

• The in-plan Roth rollover account shares the same 5-year “clock” with the designated Roth deferral account for purposes of determining if a distribution is a “qualified distribution”

Special recapture tax rule:

• With an in-plan Roth rollover, a separate 5-year “clock” will need to be maintained for purposes of the recapture tax rule

• If there are multiple in-plan Roth rollovers in different years, each in-plan Roth rollover will have a separate 5-year “clock” for purposes of the recapture tax rule

For purposes of determining a “qualified distribution”

• The 5-year “clock” begins on January 1 of the taxable year in which the individual first made a Roth contribution to any or all Roth IRAs

• The 5- year “clock” is the earlier of:

• The date the Roth IRA was originally established, or

• The date the first rollover was made to the Roth IRA

• The 5-year “clock” does not transfer from a designated Roth account or an in-plan Roth Rollover account

• Assume no Roth IRA was established. If designated Roth deferrals were made to a plan in 2007 and then rolled to a Roth IRA in 2012, the 5-year “clock” starts in 2012, not 2007.

• Assume a Roth IRA was established in 2006. If designated Roth deferrals were made to a plan in 2007 and then rolled to the Roth IRA in 2012, the 5-year “clock” starts in 2006, not 2007 or 2012 because the earliest date is the date the Roth IRA was originally established.

(5)

What tax

rules apply at

distribution?

• Following a distributable event, the entire pre-tax account (deferrals and earnings) are subject to federal and state taxation

Taxation of earnings is determined based on whether the distribution is “qualified” or “non-qualified,” as follows:

• Qualified distribution – The designated Roth deferrals and earnings are tax-free

• Non-qualified distribution – Earnings are subject to federal and state taxation

Taxation of earnings is determined based on whether the distribution is “qualified” or

“non-qualified,” as follows:

• Qualified distribution – The in-plan Roth rollover amount and earnings are tax-free

• Non-qualified distribution – Earnings are subject to federal and state taxation Special recapture tax rule:

• If the in-plan Roth rollover is distributed from the plan within the 5-year period from the date of the rollover and the participant is under 59½, the 10% recapture tax will apply to the entire distribution, not just the earnings

Taxation of earnings is determined based on whether the distribution is “qualified” or

“non-qualified,” as follows:

• Qualified distribution – The Roth contributions and earnings are tax-free

• Non-qualified distribution – Earnings are subject to federal and state taxation

Does the

premature

10% distribution

penalty

apply?

• The premature 10% distribution penalty may apply to the entire distribution taken prior to age 59½

• Exceptions apply, such as:

• Age 55 and severance from employment

• Death

• Disability

• Substantially equal periodic payments

• Deductible medical expenses

• The premature 10% distribution penalty may apply to “non-qualified” distributions taken prior to age 59½

• Death

• Disability

• The premature 10% distribution penalty may apply to “non-qualified” distributions taken prior to age 59½

• Death

• Disability

• Deductible medical expenses Special recapture tax rule:

• The premature 10% distribution penalty (on earnings only) may apply to “non-qualified” distributions taken prior to age 59½

• Death

• Disability

(6)

What are the

mandatory

income tax

withholding

requirements?

• 20% must be withheld on the entire withdrawal amount which is eligible for direct rollover but which is not directly rolled over

• Mandatory state tax withholding may also apply

• 20% must be withheld on the taxable portion of the Roth deferral account which is eligible for direct rollover but which is not directly rolled over

• Qualified distribution – No mandatory withholding (deferrals and earnings are nontaxable)

• Non-qualified distribution – Mandatory withholding on investment earnings would apply

• The in-plan Roth rollover transaction will not be subject to any withholding as the in-plan rollover is not a distribution from the plan

• 20% must be withheld on the taxable portion of the in-plan Roth rollover account which is eligible for direct rollover but which is not directly rolled over upon distribution from the plan

• Qualified distribution – No mandatory withholding (assets and earnings are nontaxable)

• Non-qualified distribution – Mandatory withholding on earnings would apply

Special recapture tax rule:

• N/A. Voluntary withholding applies

What direct

rollover

opportunities*

exist?

* Note: These include both full and partial rollovers.

The distribution must be an “eligible rollover” distribution and the participant must have a distributable event

• RMDs, hardship distributions, corrective distributions, and payments spread over 10 years or more are not “eligible rollover” distributions

• May roll over to another plan – 401(k), 403(b), or 457(b) governmental – if the receiving plan accepts rollovers

• May roll over to a traditional IRA

• May roll over to a Roth IRA

• May do an in-plan Roth rollover if plan permits (For 401(k) and 403(b) plans, elective deferral amounts for active participants are not eligible prior to age 59½. For 457(b) governmental plans, elective deferral amounts for active participants are not eligible prior to age 70½.)†

†Amounts rolled over to a Roth IRA or converted via the in-plan Roth rollover option in 2010 are eligible to have the tax liability spread equally

r

• May roll over designated Roth account to another plan’s designated Roth account in a 401(k), 403(b), or 457(b) governmental plan if the receiving plan accepts rollovers

• May roll over to a Roth IRA

• If the rollover was a “qualified distribution,” the entire rollover (Roth deferrals and earnings) represents the basis in the Roth

• If the rollover was “non-qualified,” the IRA custodian/trustee must separately account for Roth deferrals and earnings

• A Roth IRA may not be rolled over to a qualified plan

• A Roth IRA may roll over to another Roth IRA

(7)

The information included in this chart is presented solely for the purpose of educating the user about pre-tax deferral accounts, designated Roth deferral accounts and in-plan Roth rollover accounts in employer-sponsored plans and Roth IRAs. The Roth deferral information is based on Final rules regarding Roth deferrals published by the IRS on December 30, 2005, Final Roth regulations effective April 30, 2007, the Small Business Jobs Act of 2010 passed on September 27, 2010, and IRS Notice 2010-84. Lincoln makes no representation that any or all of the material is appropriate or applicable to all employers or participants. Those who choose to use this information do so on their own initiative and are responsible for compliance with all laws, if and to the extent such laws are applicable. Lincoln strongly encourages you to consult your legal or tax advisors for additional information.

There is no additional tax deferral benefit for contracts purchased in an IRA or other tax-qualified plan, since these are already afforded tax-deferred status. Therefore, an annuity should only be purchased in an IRA, 403(b) or qualified plan if the client values some of the other features of the annuity and is willing to incur any additional costs associated with the annuity to receive such benefits.

For further information regarding Roth IRAs, please consult Publication 590 – Individual Retirement Arrangements (IRAs). This publication is available at www.irs.gov.

What indirect

rollover

opportunities*

exist?

(i.e., 60-day

rollover rule)

* Note: These include both full and partial rollovers.

• May take a distribution in cash

• 20% of the entire taxable distribution must be withheld

• May roll over the distribution to another 401(k), 403(b), or 457(b) governmental plan within 60 days of the distribution if the receiving plan accepts rollovers

• May roll over to a traditional IRA within 60 days of distribution

• 20% must be withheld from the taxable portion of the distribution (i.e., investment earnings of a non-qualified distribution)

• If the distribution is made to the participant, the 60-day rollover rule may be used, but if any portion of the distribution consists of Roth contributions (nontaxable assets), the recipient plan must be a Roth IRA

• The taxable portion only of the “non- qualified” distribution (i.e., investment earnings) may be rolled to another 401(k), 403(b), or 457(b) governmental plan within 60 days of the distribution if the receiving plan has a designated Roth account and accepts rollovers

• The 5-year “clock” does not transfer to the recipient plan

• 20% must be withheld from the taxable portion of the distribution (i.e., investment earnings of a non-qualified distribution)

• If the distribution is made to the participant, the 60-day rollover rule may be used, but if any portion of the distribution consists of Roth rollover assets (nontaxable assets), the recipient plan must be a Roth IRA

• The taxable portion only of the “non- qualified” distribution (i.e., investment earnings) may be rolled to another 401(k), 403(b), or 457(b) governmental plan within 60 days of the distribution if the receiving plan has a designated Roth account and accepts rollovers

• The 5-year “clock” does not transfer to the recipient plan

• Individuals may take a distribution of the designated Roth deferral account in cash (taxable and nontaxable) and make a subsequent rollover to a Roth IRA

• May roll over the distribution to a Roth IRA within 60 days of distribution

• The 5-year “clock” does not transfer to a Roth IRA