Chapter 11- Retirement Plans 5-10 Questions

Question 1

Qualified Retirement Plans

Answer 1

Contributions tax deductible

Plan approved by IRS

Plan cannot discriminate

Tax on accumulation is deferred

All withdrawals taxed

Plan is a trust

Question 2

Nonqualified plans

Answer 2

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

Question 3

Nonqualified deferred compensation plan

Answer 3

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

Question 4

Nonqualified Payroll deduction plans

Answer 4

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

Question 5

Individual retirement accounts (IRA) NON-QUALIFIED

Answer 5

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

Question 6

IRA contributions

Answer 6

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

Question 7

FDIC Insurance on retirement accounts held at banks is

Answer 7

250k

Question 8

Ineligible funding for IRA

Answer 8

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

Question 9

Distributions from an IRA

Answer 9

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

Question 10

Rollover

Answer 10

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

Question 11

Transfer

Answer 11

Assets sent directly from one custodian to another

No limit on how many transfers can be done

Question 12

IRA distribution to an HSA (HSA is a qualified plan)

Answer 12

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

Question 13

Roth IRA (Non-Qualified plan)

Answer 13

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!

Question 14

IRS rules on conversions and re-characterization

Answer 14

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

Question 15

Conversion and re characterization rules

Answer 15

Cannot convert and reconvert in same tax year or during 30 day period of recharacterization

Question 16

Coverdell (Education IRA) (non-qualified)

Answer 16

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

Question 17

Section 529 plans

Answer 17

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

Question 18

Simplified employee pensions (SEP IRAs) QUALIFIED

Answer 18

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

Question 19

Keogh (HR-10) Plans QUALIFIED

Usually called HR-10 now

Answer 19

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

Question 20

Difference between a keogh plan and IRA

Answer 20

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

Question 21

Tax sheltered Annuities (403b plans) QUALIFIED PLAN

Answer 21

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

Question 22

Corporate pension (defined benefit)

Answer 22

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

Question 23

Corporate pension (Defined contribution plan)

Answer 23

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.

Question 24

Employee retirement income security act of 1974

Answer 24

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

Question 25

Trust Agreement

Answer 25

Defines how much is paid into a defined contribution plan

Question 26

Inherited IrA

Answer 26

Will continue payout but is now based on the life expectancy of the new owner

Question 27

Nonqualified deferred annuities

Answer 27

Contributions are made after tax so will only be required to pay taxes on accretion

Question 28

Young employee would benefit most under a

Answer 28

Defined contribution pension planning