Chapter 11- Retirement Plans 5-10 Questions Flashcards
Qualified Retirement Plans
Contributions tax deductible
Plan approved by IRS
Plan cannot discriminate
Tax on accumulation is deferred
All withdrawals taxed
Plan is a trust
Nonqualified plans
Contributions not tax deductible
Plan does not need IRS approval
Plan can discriminate
Tax on accumulation is deferred
Excess over cost basis is taxable
Plan is not a trust
Favor specific employees
Nonqualified deferred compensation plan
Defer receipt of current income in favor of payment in retirement
May forfeit benefits if leaving before retirement, and firm becomes a general creditor
Employee has no right to plan benefits if the company fails
When benefit is paid, employer can take a tax deduction
Board members who do no other work for the company are not eligible
Payments are made as ordinary income
Nonqualified Payroll deduction plans
Allow employees to deduct a specified amount for retirement savings and put it in a retirement vehicle
Money deducted after taxes and invested in a retirement vehicle
Not a 401k as a 401k is a salary deduction plan
Individual retirement accounts (IRA) NON-QUALIFIED
Eligible if you have earned income
Allowed to contribute up to a specified percentage determined by IRS ($5,500total for IRA/Roth, 6,500 for catch up)
Or
100% of earned income
Whichever is less
6% excess contribution penalty is charged on anything over percentage
Catch up rate allowable for those over 50
Contributions are fully tax deductible if participant is not able to participate in another qualified plan
If eligible to participate in another plan, contributions are fazed out based on AGI
Begins at 118 single, 186 for married filling joint
Still can contribute though
IRA contributions
Can make spousal IRA contributions if filling jointly (double normal max contribution)
Contributions must be made by April 15th of year following tax year (so 2016 deadline is April 15th)
Can continue to fund, though there may not be a deduction at certain point
FDIC insurance on contributions held at banks is 250,000
May not fund an IRA with collectibles, life insurance contracts, municipal bonds, short sales, speculative option stratagies,
Covered calls are allowed because it does not increase risk
FDIC Insurance on retirement accounts held at banks is
250k
Ineligible funding for IRA
Collectibles Life insurance contracts Municipal bonds (due to tax exempt status) Short sale of stock Speculative option strategies
Covered Call writing is permissible
Other insurance products like annuities are also allowed
Distributions from an IRA
May begin without penalty after age 59 1/2
Must begin April 1st in the year after the individual turns 70 1/2
Distributions before age 59 1/2 receive a 10% penalty along with regular taxation except in event of:
Death
Disability
First time home buyer
Education expense
Medical premiums for unemployed
Medical expenses above defined AGI limits
50% penalty if distributions do not take place at 70 1/2
Based on IRS life expectancy tables, still taxed on full amount
If required to take out 10000, you would be accessed a $5000 penalty and pay taxes on the 10,000
Rollover
May move investments from IRA to IRA or qualified plan to IRA
Can only rollover funds once a year and must be completed within 60 days
A 20% withholding tax is held if the rollover is distributed to an individual in case it is not put in another qualified plan, does not apply to individual IRA rollovers
No withholding tax held if using direct transfer
Could take a distribution from a pension and put the amount in an IRA
Transfer
Assets sent directly from one custodian to another
No limit on how many transfers can be done
IRA distribution to an HSA (HSA is a qualified plan)
HSA is a qualified plan that allows before tax contributions to a savings account to be used for medical expenses
IRS allows a ONE TIME funding distribution from a IRA to an HSA without paying taxes or penalties
Roth IRA (Non-Qualified plan)
After tax contribution, not deductible
May not exceed 5,500 in combination with an IRA
Contribution to IRAs are combined in total and may not exceed Fed limit
No phase out schedule regarding a contribution being deductible
However, there is a phase out of how much can be contributed tied to AGI (117-132 single, 184-194 joint)
Distributions are not taxed as long as money has been in account for 5 years and owner is over 59 1/2
No required distribution at age 70 1/2, 10% fee before age 59 1/2 only waived for first time home owners
May continue to add past 70 1/2 if they have earned income!
IRS rules on conversions and re-characterization
IRS has allowed in past for conversion of IRA types
Has allowed recharactsrizations of contributions (contribution to one can be used on other)
Re-characterization= Accomplished in a trust to trustee transfer of contributions
Must be done before end of tax year and the conversion can be treated as if it never happened
Couple reasons why it might be done:
Person exceed earning limit for a Roth
In event of a conversion, the investor will have to pay taxes that would be due
Conversion and re characterization rules
Cannot convert and reconvert in same tax year or during 30 day period of recharacterization
Coverdell (Education IRA) (non-qualified)
Up to $2,000 a year per student under 18, contribution limit can be reduced for high income individuals
Contributions are made after tax, not tax deductible
Distributions are tax free as long as they are used for qualified education expenses
Include: college, secondary or elementary school and books
If not depleted by 30, funds are distributed and subject to income tax plus 10% penalty or are rolled into an education IRA
Section 529 plans
College only
2 types: prepaid tuition plans for state residents or
College savings for residents and non residents
Prepaid plans- Way to lock in college tuition rates by paying for college now
College savings- save money to be used later, more popular
Student does not have to be related
Contributions are taxed going in
Distributions are tax free with Fed but can be taxed by states if it is an out of state plan
Contribution levels vary state by state, donors control assets, no income limitations, account balance may be transferred, rollover to another states plan allowed once every 12 months
Simplified employee pensions (SEP IRAs) QUALIFIED
Self employed and small business owners use
Allows employers to contribute to SEP IRAs
May contribute max amount each year for employer and employees
Catch up generally not allowed unless non sep/Ira contributions can be made
Employer can take income deduction for contributions made to employees, and employees pay no tax
Keogh (HR-10) Plans QUALIFIED
Usually called HR-10 now
Qualified plan, intended for self employed and owner-employees of unincorporated or professional practices
Can be set up as defined contribution or defined benefit plans
Tax deductible contributions
Defined contribution- 25% of taxable income after contribution is allowed
Defined benefit- requires an actuary
Employers must make contributions into eligible employee plans at same rate
Eligible if:
Worked at least 1000 hours
One or more years of continuous employment
21+
Employee may also make non deductible contributions, life insurance is allowed
10% penalty for excess contribution
Difference between a keogh plan and IRA
In a keogh, the employer makes contributions for the employee
Can purchase cash value life insurance
Employee would receive a distribution to be rolled over into an IRA in 60 days with change of employer
10% penalty for excess contributions instead of 6% for IRA
Tax sheltered Annuities (403b plans) QUALIFIED PLAN
Available for employees of:
Public education
Tax exempt orgs
Religious institutions
Must be 21+ to participate and have one year of service
Funded by elective employee deferrals (pay is excluded from gross income)
Written salary reduction agreement must be made
Student workers are not allowed to participate
Distributions are 100% taxable, 10% penalty before 59 1/2
Corporate pension (defined benefit)
Promise of a specific benefit based on retirement age, years of service and compensation
Used to favor key employees getting close to retirement
Unfounded pension liability- company has not set aside enough assets
Require an actuary to determine the amount necessary to fund
Corporate pension (Defined contribution plan)
Contribution amount is specified by the trust agreement, while the benefit is not
Profit sharing is a popular form that does not require a fixed contribution rate. Contribution can be skipped in bad years.
SIMPLE- Saving incentive match plans for employees, allowed for companies with under 100 employees
401k plans (thrift plans)- contributions are excluded from employees income, permit hardship withdrawals
Self employed 401k plans- can be set up for employees with 0 full time employees, have higher contribution limits and can issue penalty free loans
Roth 401k- available as of 2006, employer match is put in a traditional 401k plan. Transfers between the two accounts are not permitted. Require the 70 1/2 withdrawals. No income limitations unlike regular Roth.
Employee retirement income security act of 1974
ERISA established to prevent abuse and misuse of pension funds
Does not apply to gov plans or payroll reduction plans
Employee is covered if over 21 and has one year of service (1000 hours)
Vesting- employees are entitled to entire retirement benefit within a certain number of years of service, even if they leave
Impartial treatment
Beneficiaries must be names to receive an employees benefits at death
Only applies to private sector plans and some unions
Trust Agreement
Defines how much is paid into a defined contribution plan
Inherited IrA
Will continue payout but is now based on the life expectancy of the new owner
Nonqualified deferred annuities
Contributions are made after tax so will only be required to pay taxes on accretion
Young employee would benefit most under a
Defined contribution pension planning
