Ch 11 Retirement Plans Flashcards
Qualified plan
A Qualified plan is a retirement or employee compensation plan established and maintained by an employer that meets specific guidelines spelled out by the IRS and consequently receives favorable tax treatment.
ERISA (The Employee Retirement Income Security Act of 1974)
ERISA (The Employee Retirement Income Security Act of 1974) is a federal law that sets minimum standards for most voluntarily established pension and health plans in private industry to provide
protection for individuals in these plans.
Defined contribution plans
Defined contribution plans are a tax-qualified retirement plan in which annual contributions are determined by a formula set forth in the plan. Benefits paid to a participant vary with the amount of
contributions made on the participant’s behalf and the length of service under the plan.
Profit-sharing plans
Profit-sharing plans are any plans whereby a portion of a company’s profits isset aside for distribution to employees who qualify under the plan.
Defined benefit plans
Defined benefit plans are pension plans under which benefits are determined by a specific benefitformula.
401(k) Plan
The 401(k) Plan is a retirement savings plan sponsored by an employer. It lets workers save and invest a piece of their paycheck before taxes are taken out. Taxes aren’t paid until the money is withdrawn from the account.
403(b) Plan
The 403(b) Plan is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers.
Keogh plans
Keogh plans are designed to fund retirement of self-employed individuals; name derived from the author of the Keogh Act (HR-10), under which contributions to such plans are given favorable tax
treatment.
Simplified employee pension (SEP)
Simplified employee pension (SEP) is a type of qualified retirement plan under which the employer contributes to an individual retirement account set up and maintained by the employee.
SIMPLE
SIMPLE is a qualified employer retirement plan that allows small employers to set up tax-favored retirement savings plans for their employees.
Traditional IRA
Traditional IRA is a personal qualified retirement account through which eligible individuals accumulate tax- deferred income up to a certain amount each year, depending on the person’s tax bracket.
IRA Contributions/Withdrawals
IRA Contributions/Withdrawals provide generous tax breaks. But it’s a matter of timing when you get to claim them. Traditional IRA contributions are tax deductible on both state and federal tax
returns for the year you make the contribution, while withdrawals in retirement are taxed at ordinary income tax rates. Anyone under the age of 70 1/2 with earned income may open a traditional IRA.
Withdrawals must start no later than April 1 following the year in which the participant reaches the age of 70 1/2, and the law specifies a minimum amount that must be withdrawn every year. No cash
withdrawals prior to the age of 59 1/2 are permitted without having to pay a 10% excise tax, with the following exceptions:
* if the owner dies or becomes disabled;
* if distribution is in equal payments over the owner’s lifetime;
* if higher education expenses for a dependent are necessary;
* to purchase a first home with up to $10,000 down payment;
* if out-of-pocket medical expenses are in excess of 7.5% of adjusted gross;
* to pay health insurance premiums while unemployed; or
* to correct or reduce an excess contribution.
Roth IRA
Roth IRA is an individual retirement account allowing a person to set aside after-tax income up to a specified amount each year. Both earnings on the account and withdrawals after age 59 1/2 are tax-
free. The funds are taxed as income before the contribution is made. In other words, Roth contributions are made with after-tax dollars. Therefore, at the time of payout, the funds are tax free. Unlike the traditional IRA, the Roth imposes no age limits. Roth withdrawals are either qualified or nonqualified. Also, unlike traditional IRAs, Roth IRA distributions are not mandatory and can therefore be inherited and passed down through generations.
Qualified Withdrawals
Qualified Withdrawals provide the tax-free distribution of earnings. To be a qualified withdrawal, the funds must have been held in the account for a minimum of five years; and if the withdrawal occurs for
one of the following reasons, no portion of the withdrawal is subject to tax.
* The owner has reached age 59 1/2
* The owner dies or becomes disabled
* The distribution is used to purchase a first home
Nonqualified Withdrawal
Nonqualified Withdrawal If a withdrawal is taken without meeting the above criteria and the amount of the withdrawal exceeds the total amount contributed, it is a nonqualified withdrawal. The earnings
from the contributions become taxable.
