CH 1 - Pension & Retirement Planning Overview

Question 1

Name the EIGHT qualified plans.

Answer 1

1. defined benefit
2. cash balance
3. target benefit
4. money purchase
5. profit-sharing
6. 401(k)
7. stock bonus
8. ESOP

Question 2

Name the THREE other non-qualified plans.

Answer 2

1. SEP
2. SIMPLE
3. 403(b)

Question 3

What are the FOUR tax-advantage plan characteristics?

Answer 3

1. Employer deduction at time of contribution
2. Income is not taxed at the trust level
3. Employee pays taxes on distributions
4. Distributions can be rolled into other tax-deferred vehicles

Question 4

What are the FOUR Non-qualified Deferred Compensation characteristics?

Answer 4

1. few/no design restrictions
2. Employer deduction matched the year in the employee has income
3. executives only
4. not pre-funded

Question 5

Deferring taxes is powerful. So, the higher the tax rate the greater the savings with…

Answer 5

the pre-tax approach.

Question 6

Demonstrate the power of pre-tax savings using $15,000.

Qualified vs After-Tax?

Answer 6

QUALIFIED INVESTING

Savings $15,000

Less taxes 0

You Invest $15,000

Earnings at 5% = $750

Less taxes 0

Total $15,750

AFTER-TAX INVESTING

Savings $15,000

Less taxes $5,400 (36%)

You Invest $9,600

Earnings at 5% = $480

Less taxes = $173 (36%)

Total = $9,907

Question 7

What are the FOUR reasons employers have tax-advantage plans?

Answer 7

1. attraction/retention employees
2. graceful transition (superannuated employees)
3. avoidance/appeasement of unions
4. employee motivation

Question 8

Unions (can/cannot) be excluded from pension coverage.

Answer 8

CAN

Question 9

Name FOUR ways small business owners can benefit from implementing a qualified retirement plan.

Answer 9

• for maximizing tax shelter
• for solving liquidity problems that occur at retirement or death
• for sheltering their assets from legal liability and bankruptcy
• for avoiding taxes on excess accumulated earnings