Chapter 12- Retirement Plans and Education Savings Plans Flashcards
Can be invested in your IRA
Stock, bond mutual funds and other securities
certain US Gov. or state issued gold, silver platinum and palladium coins
Real estate
Can not be invested in your IRA
Life insurance
Collectibles
Inadvisable Investments in your IRA
Tax deferred securities like municipal bonds
Traditional IRA Rollovers must be completed within…
60 days to avoid tax liability
Maximum Amount of employee to participate in a SIMPLE
100 or fewer
Penalty for Earlier distributions from a SIMPLE
10% penalty unless within the first two years, than it is 25%
What is a qualified plan (retirement plan)
retirement plan that is established and maintained by a private employer that meets the requirements of the Employee retirement income security act (ERISA)
Tax benefits of a qualified plans
The Employer is entitled to current tax deduction for their contributions
Employee does not need to pay current income taxes on contributions made by employer
Contributions are still subject to social security, medicare and state and federal unemployment tax
IRAs and qualified plans
IRAs are NOT qualified plans. Both were created through ERISA but IRAs are subject to different specific rules that do not apply to qualified plans
Employer Choosing which retirement plan to open plans
Employer’s starting a plan can choose between an IRA based plan or a Qualified plan
Choice usually comes down to difficulty opening and cost of administering the plan
Qualified plan usually have…
Higher contribution limits but are more complex to administer
What does ERISA do
imposes federal standards for plans once they have been established
It does not require employer to have a plan or set minimum limits on the benefits offered
Rules that ERISA set in place
Disclosure
Standards - participation, vesting etc.
Accountability
Remedies
Guarantees
Safe harbor 404(c) provision
Employer and plan sponsor are not responsible for imprudent investment decision made in a self-directed plan so long as…
The participant had at least three categories of diversified investments and one of those choices can not include securities of the company sponsoring the plan
Must be given a certain level of education and discourse
Informed that they may make changes to their plan (offered at least quarterly)
401(k)s are also known as
CODA plans
cash or deferred arrangement plans
Cash Accumulation Plans
Capital Accumulation plans
403(b) plans are used by
tax-exempt non-profit organizations
1. Public education systems
2. Certain 501c 3 organizations
3. Certain employers of ministers
They CANNOT invest in limited partnerships
457(b) plans
deferred compensation plan for employees of a state or local government or a tax exempt organization (different rules for government vs. non-government
Private non-governmental 457(b) plans are offered to..
A select group of management or highly compensated employees
Who contributes to a Money Purchase plan
Employer has a fixed percentage of income that they have to contribute (can not change in good or bad years)
Employee may contribute as well
Age and income limitations and distribution of a Coverdell accounts
Maximum $2,000 in all accounts for an individual in a year
can only be made until the child reaches the age of 18, unless they are special needs
must be distributed or transferred before the beneficiary reaches the age of 30. If not done within 30 days of turning 30 a 10% penalty is imposed
Coverdell taxes in and out
Contributions are not tax deductible
Withdrawals are tax free
Uses for a coverdell
Elementary, secondary and higher education expenses
Combining both a Coverdell and 529 account
Can contribute to both in the same year but annual gift tax exclusion applies
Coverdell accounts and financial aid
If owned by the students there is a big impact
If owned by the parents there is a small impact
Distributions from coverdell do not count as income for the FAFSA
Pre-Paid tuition plans do not have
Investment Risk
