Chapter 16 Part 3 Flashcards
401 (k) plans are
a type of qualified plan that depends heavily on employee contributions. 401k plans allow employees to save a portion of their salary for retirement on a pretax basis. The earnings from their contributions grow on a tax-deferred basis until withdrawn by the employee. Employers may also choose to match a portion of their employees’ contributions. Employees are always fully vested in their own contributions, but employers may establish a vesting schedule for matching contributions. In most plans, the employees decide how to allocate their contributions from a menu of investment options selected by their employer.
401(k) Contribution Limits
The maximum annual, tax-deferred contribution that employees may make to a 401 (k) is $17,500. This atnount may increase since it is indexed for inflation. Currently, employees age 50 and older may contribute an additional $5,500 catch-up amount per year.
403(b) plans are
tax-deferred retirement plans that may be established only by certain tax-exempt, nonprofit organizations, such as churches and public school systems. The plans are also referred to as tax-deferred annuities or tax-sheltered annuity TSA plans.
403(b) plans resemble 40l(k) plans in that
employees may exclude contributions from their taxable income provided they do not exceed certain limits. Employers may also choose to match a portion of their employees’ contributions. Unlike 401 (k) plans, contributions are invested in a prudent manner. Funds in 403(b) plans may only be invested in: Annuity contracts; Custodial accounts holding mutual fund shares; Retirement income accounts (defined contribution plans maintaincd by churches or certain church-related organizations)
Simplified Employee Pension Plans
type of retirement plan designed to provide employers with an easier or simplified way to make contributions toward their employees’ retirement. This type of plan is also popular for selfemployed individuals to save toward their retirement. In order to set up a SEP, the employer must execute a formal written agreement slating it will provide benefits to all eligible employees. Each eligible employee must be given certain information about the plan. A SEP-IrA must be set up for or by each eligible employee in order to receive contributions.
Keogh (HR-10) Plans
restricted to individuals who earn income from self-employment. For example, a doctor or lawyer who earns all his income from self-employment would be eligible to open a Keogh plan. An individual who is employed by a corporation, but who has additional income from self-employment, would be eligible to set up a Keogh plan for the amount that he earns from
self-employment.
Keogh plans allow a maximum contribution of
100% of compensation or $52,000, whichever is less. The amount deductible is limited to the lesser of 20% of compensation or $52,000. Since George’s self-employment income is less than $52,000, he would be able to contribute 100% or $14,000.
If an employer establishes a Keogh plan for himself, he must include
employees in the plan if they meet certain requirements. If an individual establishes a Keogh plan and has employees who are eligible to be covered, he must make a contribution to the plan for his employees equal to the percentage that he contributes for himself. Eligible employees would include all employees who have been employed for one year, who have worked at least 1,000 hours during that year, and who are 21 years of age or older.
Contributions made to a Keogh plan, including those made on behalf of employees, may be claimed as a
deduction on the self-employed individual’s tax return. The contributed money, plus any investment gains, accumulates tax-deferred until the money is withdrawn from the account.
Distributions from a Keogh plan are taxed as ordinary income.
Funds in a Keogh plan that are withdrawn before the covered individual reaches age 59.5 are subject to
a 10% IRS penalty. The amount of the early withdrawal must also be included in ordinary income. Ultimately, distributions must begin by April 1 of the year following the later of (a) the calendar year in which the employee turns age 70.5, or (b) the calendar year in which the employee retires.
Nonqualified retirement plans do not need to be made
available to all employees and are not required to meet IRS requirements regarding contribution limits and vesting. Income generated by nonqualified plans does not generally accumulate on a tax-deferred basis. Examples of nonqualified plans include payroll deduction and deferred compensation plans
Nonqualified Plans Payroll Deduction Plans
allow employees to purchase life insurance, mutual funds, and variable annuities throngh after-tax deductions from their paychecks. The sales charges on plan investments are often lower than employees would pay if they purchased these products individually. Employers may voluntarily match a portion of employee contributions.
