Chapter 10: Retirement Plans Flashcards
What is a qualified retirement plan?
A plan that meets federal requirements and receives favorable tax treatment
Purposes of Employee Retirement Income Security Act of 1974
- Protect rights of workers covered under employer-sponsored plans
- Regulates group health insurance
- Receive the pension benefit they thought they had earned
What is form 5500?
A disclosure document used to satisfy annual reporting requirements under ERISA
Vesting Schedules
For all plans employees have 100% vested interest in benefits that accrue from their own contributions
Alienation of benefits
Assigning retirement plan benefits to another person
- only permitted under exceptional circumstances
Funding Standards
There must be real contributions made by the employee, employer or both
Three types of Defined Contribution Plans
Final amount available depends in the total contribution amount, plus interest and dividends
- Profit- sharing: Employees contribute to the profit of the company
- Stock bonus Plans: Benefits distributed in the form of company stock
- Money Purchase Plan: Fixed contributions and benefits to be determined
Employee Stock Ownership plans
Provides company’s workforce with an ownership interest in company
Defined Benefit Plans
Has a specific predetermined benefit
- Uses a formula or actuarial computation
- Must provide systematic payments of benefits to employees over a period of years (usually for life)
- Provides mainly retirement benefits
- Must align with employers objectives
Cash or deferred arrangements (401(k) Plans)
Employees elect to take a reduction in their current salaries by putting it into retirement plan
Tax-Sheltered Annuities (403(b) Plans)
- Special tax favored retirement plan available only to certain groups id employees.
- May be for nonprofit charitable, education, religious and other 501(c) (3) organizations
Keogh Plans (HR-10s)
For incorporated businesses (self-employed) that allows the business owner to participate as an employee as long as they include all other employees
- are subject to same corporate rules of retirement plans
- defined contribution: $49,000
- defined benefit: $195,000
Simplified Employees Pensions (SEPs)
- for small employer
- to help small business owners overcome cost, compliance and administrative hurdles
- Employee maintains an IRA (individual retirement account) to which the employer contributes
Salary Reduction SEP Plans (SARSEPs)
- Employer can contribute to SEP with taxable cash compensation
- 25 or fewer employees
- Ended in 1990s
SIMPLE Plans
- Tax favored retirement savings plans without having to address many of the burdensome qualifications
- For small businesses
Catch-Up Contributions
- For people who are at least 50 years ild to make additional “catch-up” contributions
Roth IRAs
- Require nondeductible contributions but offers tax-free earning and withdrawals
- Contributions are not tax deductible
- Provide back end benefits
- Not subject to mandatory distributions
Traditional IRA
- Individuals can save money for retirement and receive tax breaks now
- Taxed only during retirement (upon distribution)
Deduction of IRA Contributions
- Deducted from income
- Ability to make contributions rests on two factors: Being covered by and employer-sponsored plan will have different restrictions, and how much the participant makes
Traditional IRA: What happens at 70 1/2?
The law states a minimum amount that must be withdrawn every year or it can be taxed up to 50%
traditional IRA: What happens at 59 1/2?
- Owner can take a lump-sum payment or periodic installments of their retirement fund
- If they die before receiving full benefits it goes to named beneficiary
IRA Funding
- Flexible Premium fixed deferred annuity
- or bank deposits, credit union accounts, mutual fund shares, real estate…
Qualified Roth Withdrawals
- Funds must have been held in account for minimum five years
- Withdrawal must occur because owner has reached 59 1/2
Note: if not qualified then account earnings are subject to tax
Spousal IRA
- Someone may create an IRA for a nonworking spouse
Rollover IRA
Can transfer funds from one plan to another, specifically to a rollover IRA
Within 60 days to avoid tax consequences
Conduit IRA
Funds that are on their way to another qualified plan
Pension Protection Act
- 2006
- Encourages workers to increase their contributions to employer sponsored plans and helps them manage their investments
Section 529 Plans
Prepaid tuition plans: Prepay college tuition
College savings plans: Invest after-tax dollars in professionally managed accounts
Which portion of distributions is taxable when payments are made to recipients?
Gains are taxable
