Chapter 12 Retirement Plans and Education Saving Plans

Question 1

Inadvisable investments

Answer 1

IRA earning are tax deferred or tax exempted, so there is no benefit to investing in tax exempted securities such as municipal bonds and municipal bond funds.

Question 2

Inherited IRA’s

Answer 2

a non-spouse may not elect to become the owner of the account and may not rollover the IRA to another IRA.

Question 3

A trust

Answer 3

maximum payout period is based on the oldest beneficiary age

Question 4

Stretching the IRA

Answer 4

beneficiaries MUST withdraw all assets in the account within 10 years, there is NO required minimum withdrawal.

Question 5

Traditional IRA

Answer 5

Contribution Limit 6500
Cath-up limit once an individual is at least 50 years of age.
No- age limit to contribute as long as there sufficient earned income

You can open a Traditional IRA for a non-working spouse( Spousal IRA)

Contributions on a Traditional IRA that in excess, meaning the ( employee) contributed more than the allotted amount, will be subject to a 6% excise tax.

IRA Contributions- include earned income and alimony but not pensions, annuities or other deferred compensation.

If an extension is granted for the filing of a tax return , the IRA contribution must still be made not later than April 15th.

Distributions – are mandatory by age 72 and may begin at 59 ½. If withdrawn before 59 ½ a 10% penalty tax will occur except for death, disability, medical expenses, first time home purchases( up to 10,000), higher education costs, and medical premiums.

Rollovers- up to 60 days to invest benefits from retirement plan into a new account

Question 6

Roth IRA

Answer 6

Contributions are NOT tax deductible form gross income
Contribution Limit 6500
No- age limit to contribute as long as there sufficient earned income

Eligibility to Contribute-

Qualified distributions- MUST require two requirements

1. 5 year holding period , may not be made before the 5th year
   AND
   Is made after the IRA owner has reached 59 ½
   Is made as a result of the death or disability of the IRA owner
   Is used for qualified first time home buyer expenses
   Is used for educational expenses
   Is used for medical insurance premiums

Non-Qualified Distributions- occur a 10% penalty or take substantially equal periodic payments over the remaining life expectancy.

Rollovers- from one Roth IRA to another are tax-free. From a traditional IRA to a ROTH IRA, it will be taxed.

Question 7

Simplified Employee Pension(SEP) IRA

Answer 7

Low cost administration and tax deductible

Designed for small business owners

Contributions are tax deductible for their employer

Employees may also make contributions as well

Eligibility
MUST BE 21 years or older
Must have worked for employer during at least three of the past five years
Received at least $600 in wages in current tax year.

Earning/Distributions- same as a Traditional IRA

Contributions limits lesser of 25% of employees compensation or 58,000

Question 8

Saving Incentive Match Plan for Employees(SIMPLE)

Answer 8

Elective salary deferrals of their pre-tax compensation to the plan for employees
Limited to 100 or fewer employees

Matching contributions by the employer up to 3%
Non-elective contributions of up to 2%

Are deductible up to the due date of the employer’s tax return, to include extensions.

Contributions limits- salary reductions of up to 13,500 ( +3,000 catch up)

Question 9

Qualified Retirement Plans

Answer 9

A qualified plan is a retirement plan established and maintained by a private employer that meets requirements of the Employee Retirement Income Security Act (ERISA)

Examples are 401k plans and Profit-sharing plans

Income taxes are tax deferred on contributions and are taken from the plan

Question 10

Investment Policy Statement-

Answer 10

does NOT need to contain compensation arrangements for the IA.
Summary plan description
Tax treatment of specific investments held in the plan

Question 11

Safe Harbor 404(c)provisions

Answer 11

must choose at least three categories of investments which are diversified.
Must provide education and disclosures

CAN NOT offer securities of the company

Question 12

Defined Benefit Plan

Answer 12

calculated based upon compensation, years of service and age…

Use a predetermine formula , benefits high salaried employees near retirement

Uses an ACTUARY

Contributions Limits- lesser of $230,000 or 100% of average compensation for 3 highest years.

Question 13

401(k) plan

Answer 13

Many employers provide matching incentives where the employer will match employee contributions up to a certain percentage of compensation.

Contributions and Earning grow tax deferred, 100% of income up to 58,000
Rollovers can be made directly from a 401(k) to a Roth IRA.
Distributions- late distributions are subject to a 50% penalty tax on the insufficient distributions.
Taxed as ordinary income.

Exception: Required Minimum Distribution(RMD) from a 401(k) plan can be delayed until retirement if they continue to be employed and DO NOT own more than 5 % of the company.

401(k) plan- Part -time employees
* 21 years of age
worked at least 500 hours per year for three consecutive years
OR
One year of service ( 1,000 hour requirement )

Contribution Limits- $22,500 ( +7,500 catch up, if age 50 +)

Roth 401(k) plan- contributions to a Roth 401(k) are made on an after-tax basis and qualified distributions are tax free.

Contribution Limits- $22,500 ( +7,500 catch up, if age 50 +)

Question 14

Profit Sharing Plan

Answer 14

a plan by which a company shares it profits with its employees. Plan is designed to give employees incentive to be productive.

NOTE: deductible allowances may not be carried forward to the next tax plan year.

Question 15

Keogh Plan/ HR-10 plan

Answer 15

qualified, tax deferred retirement plan for self-employed individuals

Eligibility- 1,000 hours per hear, 21 years of age or older, 1 year of service to the company.

Question 16

403 (b) plans/Tax Sheltered Annuity (TSA)

Answer 16

used by certain tax-exempted( non-profit organizations) such as
Public Education Systems Hospitals, charitable and religious organizations.
Certain 501 1 c 3 organizations
Certain employers of ministers

Distributions to plan holders are taxable as ordinary income with a cost basis of zero.

Rollovers are allowed but employers managing such plans are NOT required.

Contribution Limits- $22,500 ( +6,500 catch up, if age 50 +)

Question 17

Non-Qualified Deferred Compensation Plans

Answer 17

a contract between an individual and their employer to defer compensation as agreed upon between the two parties

For example: Highly paid athletes, and executives who enter into large compensation contracts. An executive may agree to be paid 5 million a year with 1 million as DEFRRRED compensation

Plan is not under ERISA

Employer may discriminate to whom the plan is offered to.

Business failures could lead to no payments as plan assets could be subject to the company’s creditors.

Question 18

457(b) plan

Answer 18

a plan for employees of a state or local government or a tax exempt organization, deferred compensation.

Contributions and earning are tax deferred. Contribution Limits- $19,500 ( +6,500 catch up, if age 50 +)

Question 19

Payroll deductions plans

Answer 19

non-qualified plans that allow an employee to voluntarily elect to have their employer take deductions (after tax) from their paychecks to fund

Question 20

Money Purchase Plan

Answer 20

define contribution pension plan which requires a fixed percentage of compensation to be contributed to each eligible employee, annually by the employer only.

501( c) (3) entities- entities are non-profit organization and are exempt from paying federal income tax.

Lesser of 25% of compensation or 58,000

Question 21

Coverdell

Answer 21

Education Saving Accounts- Contribute only 2,000 per year, no more, until the age of 18 unless it is a special needs beneficiary. Assets in the account must be distributed or transferred by the age of 30, if not distributed within 30 days of age 30, account will be assessed a 10% penalty.

Contributions are NOT tax deductible, but withdrawals are tax free given for educational expenses.