Chapter 10: Retirement Plans

Question 1

What is a qualified retirement plan?

Answer 1

A plan that meets federal requirements and receives favorable tax treatment

Question 2

Purposes of Employee Retirement Income Security Act of 1974

Answer 2

• Protect rights of workers covered under employer-sponsored plans
• Regulates group health insurance
• Receive the pension benefit they thought they had earned

Question 3

What is form 5500?

Answer 3

A disclosure document used to satisfy annual reporting requirements under ERISA

Question 4

Vesting Schedules

Answer 4

For all plans employees have 100% vested interest in benefits that accrue from their own contributions

Question 5

Alienation of benefits

Answer 5

Assigning retirement plan benefits to another person

• only permitted under exceptional circumstances

Question 6

Funding Standards

Answer 6

There must be real contributions made by the employee, employer or both

Question 7

Three types of Defined Contribution Plans

Answer 7

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

Question 8

Employee Stock Ownership plans

Answer 8

Provides company’s workforce with an ownership interest in company

Question 9

Defined Benefit Plans

Answer 9

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

Question 10

Cash or deferred arrangements (401(k) Plans)

Answer 10

Employees elect to take a reduction in their current salaries by putting it into retirement plan

Question 11

Tax-Sheltered Annuities (403(b) Plans)

Answer 11

• 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

Question 12

Keogh Plans (HR-10s)

Answer 12

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

Question 13

Simplified Employees Pensions (SEPs)

Answer 13

• 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

Question 14

Salary Reduction SEP Plans (SARSEPs)

Answer 14

• Employer can contribute to SEP with taxable cash compensation
• 25 or fewer employees
• Ended in 1990s

Question 15

SIMPLE Plans

Answer 15

• Tax favored retirement savings plans without having to address many of the burdensome qualifications
• For small businesses

Question 16

Catch-Up Contributions

Answer 16

• For people who are at least 50 years ild to make additional “catch-up” contributions

Question 17

Roth IRAs

Answer 17

• Require nondeductible contributions but offers tax-free earning and withdrawals
• Contributions are not tax deductible
• Provide back end benefits
• Not subject to mandatory distributions

Question 18

Traditional IRA

Answer 18

• Individuals can save money for retirement and receive tax breaks now
• Taxed only during retirement (upon distribution)

Question 19

Deduction of IRA Contributions

Answer 19

• 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

Question 20

Traditional IRA: What happens at 70 1/2?

Answer 20

The law states a minimum amount that must be withdrawn every year or it can be taxed up to 50%

Question 21

traditional IRA: What happens at 59 1/2?

Answer 21

• 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

Question 22

IRA Funding

Answer 22

• Flexible Premium fixed deferred annuity

- or bank deposits, credit union accounts, mutual fund shares, real estate…

Question 23

Qualified Roth Withdrawals

Answer 23

• 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

Question 24

Spousal IRA

Answer 24

• Someone may create an IRA for a nonworking spouse

Question 25

Rollover IRA

Answer 25

Can transfer funds from one plan to another, specifically to a rollover IRA

Within 60 days to avoid tax consequences

Question 26

Conduit IRA

Answer 26

Funds that are on their way to another qualified plan

Question 27

Pension Protection Act

Answer 27

• 2006

- Encourages workers to increase their contributions to employer sponsored plans and helps them manage their investments

Question 28

Section 529 Plans

Answer 28

Prepaid tuition plans: Prepay college tuition

College savings plans: Invest after-tax dollars in professionally managed accounts

Question 29

Which portion of distributions is taxable when payments are made to recipients?

Answer 29

Gains are taxable