Trust Department Quarterly Newsletter

2nd Quarter 2007

Distribution Requirements of Tax Deferred Retirement Plan

For generations the largest asset many people owned at their retirement was their personal residence. Although real estate prices have overall increased dramatically over the last few years, many people are retiring with substantial amounts of money in retirement plans. Since tax deferred money in retirement plans is subject to income tax upon distribution to either the owner or designated beneficiaries, informed decisions need to be made so that unnecessary tax ramifications are not incurred.

The Owner

You are allowed to keep money in your retirement accounts (employer sponsored retirement and/or traditional IRA) for a long time, but not forever. The IRS eventually gets their piece of the pie. As an owner, turning 70 ½ requires you to start taking distributions. These distributions are called Required Minimum Distributions (RMD). The amount of the RMD is calculated by taking the prior December 31 value and dividing it by the IRA owner’s life expectancy factor. This factor is a pre-determined percentage set by the IRS that increases each year as we get older. You have until April 1 of the year after you turn 70 ½ to take the first RMD. This date is referred to the Required Beginning Date (RBD). Distributions from IRA’s and depending on the retirement plan, can commence at age 59 ½ (or earlier under certain conditions) without paying the 10% federal tax penalty.

Spouse as Sole Beneficiary

If the Owner dies before the RBD, the spouse as beneficiary has the following options:

• Take a full distribution.
• Deplete the retirement account within 5 years of owner’s death.
• Rollover the retirement account into the spouse’s name; defer until the spouse reaches age 70 ½.
• Start taking distributions over the spouse’s life expectancy.
• Retain assets in the deceased owner’s account until owner would have been age 70 ½.

If the Owner dies after the RBD, the spouse as beneficiary has the following options:

• Rollover the retirement account into his or her own name.
• Take a full distribution of his or her share from the account.
• Maintain the retirement account in the name of the deceased spouse and take distributions based on the survivor’s annually recalculated life expectancy.

Other Designated Beneficiary (Non-Spouse Beneficiary)

If the Owner dies before the RBD, the non-spouse beneficiary has the following options:

• Deplete the retirement account within 5 years of owner’s death.
• Start taking distributions over the beneficiary’s life expectancy by December 31 of the year following year of owner’s death.

If the Owner dies after the RBD, the non-spouse beneficiary has the following options:

• Take distributions based on the life expectancy of the oldest beneficiary.
• Divide, disclaim and distribute the IRA into separate accounts allowing the use of individual life expectancies, with distributions starting the year following the owner’s death.

Summary

Complicated? It can be. If you are the owner or beneficiary of a retirement account consult a qualified tax and/or financial professional to help sort it all out. Making the wrong election or no election could force unnecessary tax dollars being paid.

The Stock Market

The stock market turned in a very strong quarter. During the second quarter of 2007 the Dow Jones Ind ustrial Ave rage broke through its previous all-time high, which occurred back in 2000. At its high point for the quarter the Dow was up 9.73% for the year before settling back at the end of June. Technology and energy related stocks turned in the best gains during the quarter with consumer goods lagging the averages. The summer mont hs have generally experienced a decline in prices. Rising interest rates and continued higher energy costs will continue to have a negative affect on the ind ividual consumer. We see the stock market having a negative return for the third quarter before having a positive run in the fourth quarter to end the year with between a 7% to 9% positive return for the year 2007.

The Bond Market

Analysts had projected the Federal Reserve Board would reduce the discount rate in the latter half of 2007. With the concern of inflation continuing to increase this probably will not take place. During the second quarter we experienced an increase in the yield on bonds in the range of approximately .3%. The yield was actually higher than this during the quarter before backing off at the end. Sub-prime mortgages are still a negative on the bond market. We would anticipate rates to continue to increase through the end of 2007 with a yield on 10-year treasury being between 5.4% and 5.5% on December 31, 2007.

Interesting…

During the initial space flights, NASA discovered that biro pens didn’t work under zero gravity conditions. To beat the problem, NASA spent 6 years and $2 million in designing a pen for use in space. The pen would work under zero gravity conditions due to the pressurized ink inside, it would work under sub zero conditions, underwater, on glass and virtually any surface know to man. The Russians used a pencil.

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