Chapter 16 - Terms (Retirement)

Question 1

401(k) Plan

Answer 1

A deferred compensation plan available through a wide range of employers. Contributions to a 401(k) plan are tax-deferred to the employee (income tax is not charged on the amount of the contribution at the time it is made). Distributions from the plan are taxed as ordinary income to the recipient when received.

Question 2

403(b) Plan

Answer 2

A deferred compensation plan available to employees of many public educational institutions and tax-exempt organizations. Also known as a tax-sheltered annuity plan.

Question 3

457 Plan

Answer 3

A deferred compensation plan available to employees of many government entities and certain tax-exempt non-governmental entities.

Question 4

Active Participant

Answer 4

A taxpayer who is covered by a qualified employer-maintained retirement plan, or a qualified self-employed retirement plan, if even for only one day during the year.

Question 5

Annuity

Answer 5

A fixed sum payable to a person at specified intervals for a specific period of time or for life. Payments represent a partial return of capital and a return on the capital investment.

Question 6

Beneficiary

Answer 6

The owner or recipient of funds in an account, such as an IRA, or from an insurance policy or will.

Question 7

Compensation

Answer 7

Wages, commissions, tips, professional fees, and net self-employment income from services rendered; that is, earned income. For IRA purposes, compensation also includes alimony and separate maintenance payments.

Question 8

Contribution

Answer 8

(1) Gift to a qualified charitable organization, generally deductible on Schedule A. (2) Money placed in a retirement fund, such as an individual retirement arrangement or an employer-maintained retirement plan.

Question 9

Deferred Compensation

Answer 9

Compensation that will be taxed when received or upon the removal of certain restrictions on receipt, and not when earned. For example, contributions to a qualified retirement plan on behalf of an employee are considered deferred compensation. Such contributions will not be taxed to the employee until the funds are made available or distributed to the employee, usually upon retirement.

Question 10

Defined Benefit Plan

Answer 10

An employee benefit plan that provides a fixed, pre-determined benefit for employees at retirement. The most common type of defined benefit plan is a pension plan.

Question 11

Defined Contribution Plan

Answer 11

An employee benefit plan that provides a separate account for each person covered and pays benefits based on account earnings. The employee and/or the employer may contribute to the account. Examples include §401(k) plans and profit-sharing plans.

Question 12

Distribution

Answer 12

Money or property a taxpayer receives from a retirement plan, such as an individual retirement arrangement (IRA) or an employer-maintained retirement plan.

Question 13

Early Distribution

Answer 13

A distribution from a qualified retirement plan or individual retirement arrangement (IRA) before the plan participant has reached age 59½. Such distributions are subject to a 10% penalty tax if a qualified exception does not apply.

Question 14

Full Retirement Age

Answer 14

The age at which a worker qualifies to receive full social security benefits. The current full retirement age is 65 but is scheduled to gradually rise to 67 for those born in 1960 or later.

Question 15

Fully Taxable Pensions

Answer 15

Pensions for which taxpayers contributed none of the cost or have recovered their cost in previous years.

Question 16

Nonparticipating Spouse

Answer 16

The spouse of an active participant in an employer-maintained retirement plan who is not also an active participant in such a plan.

Question 17

Partly Taxable Pensions

Answer 17

Pensions funded through employer plans to which both pre-tax money and after-tax money has been contributed.

Question 18

Pension

Answer 18

Payments made periodically of (generally) a definite amount for a specified period (usually life) from an employer-maintained plan to workers who have met the stated requirements. Its primary purpose is to provide retirement income.

Question 19

Rollover

Answer 19

A qualified transfer of funds from one tax-favored account to another, usually of the same type. A rollover must take place within 60 days of receiving the funds.

Question 20

Roth IRA

Answer 20

A type of individual retirement arrangement in which contributions are not tax deductible, earnings grow tax deferred, and qualified withdrawals are tax free.

Question 21

Saver’s Credit

Answer 21

A term often used to reference the retirement savings contributions credit, a nonrefundable credit based on up to $2,000 in contributions to employer-sponsored retirement plans and traditional and Roth IRAs. The credit is allowed in addition to any deduction available for the contributions. It is computed on Form 8880, Credit for Qualified Retirement Savings Contributions.

Question 22

Simplified Method

Answer 22

The method of computing the taxable and nontaxable portions of a qualified employer plan by which the cost is recovered over a specified number of periodic payments. The number of payments is determined by finding a factor on a simple table. This method replaced the general rule, which was considerably more complex, for most pensions.

Question 23

Traditional IRA

Answer 23

An individual retirement arrangement, contributions to which may or may not be deductible depending on the taxpayer’s AGI and whether or not they are covered under an employer-sponsored retirement plan. Earnings within a traditional IRA grow tax-deferred. Distributions from a traditional IRA are taxable, except to the extent they represent nondeductible contributions and earnings.