Chapter 20- (5Qs) Retirement Plans And Educational Funding Flashcards
Individual Retirement Arrangement (IRAs)
- Traditional IRAs
- Max per individual is $5,500 or 100% of taxable compensation if less
- Tax deferred
- Deductibility is phased out
- May not contribute after 70 1/2 (must take contributions then)
- Alimony is considered compensation
- May make catch up contributions of 1,000 if over 50 due to the Economic Growth and Tax Relief Reconciliation Act of 2001 - Roth IRAs
- Not tax deductible
- Withdrawals of gains are tax free if in the account for 5 years and the client is over 59.5, disabled, dead, or buying their first home
- Contributions may be made after 70.5, no required distribution
- Must be under 131,000 AGI to contribute if single 193 if couple
- Ira contributions, alimony paid, self-employment tax and penalties are paid before AGI (does not include MUNI income)
- IRA to Roth conversion is taxable, but do not have to pay 10% early withdrawal fee if done in 60 days
MyRA
- New type of Roth IRA backed by the government
- Contribution and income limits are same
- Invested in US Treasuries
- Must be rolled into private sector IRA after 30 years or 15k is save
Simplified Employee Pensions (SEP)
Qualified plan
Allows employer to contribute directly to an IRA set up for each employee
Must be 21, 3 of last 5 years worked with company and $600 in comp
May contribute 25% of employee salary or 53,000
Taxable upon withdrawal
Withdrawals from traditional IRAs and SEP IRAs
Must begin April 1 following individual turning 70 1/2
59 1/2 to withdraw without 10% penalty
Must take Required Minimum Distribution by end of calendar year or face 50% penalty
Taxed as ordinary income
No penalty if withdrawn due to: Death, disability, first time purchase of home (up to 10K), education expenses for immediate family including grand children, med expenses upto 10% AGI
IRA Contributions
May be made between January 1st and April 15th of the following year
May not make a contribution after even if you have a tax extension
Contribution above 5500 are given a 6% penalty
IRA investments
Should be relatively conservative
Cannot include: life insurance, artifacts, tax free munis, short sales of stock, speculative options (covered calls are ok), margin trades
May have real estate, but may not allow prohibited persons to use (does not include bro’s and sisters)
IRA Rollovers
Complete within 60 calendar days
May move any qualified plan into a rollover IRA
Original account location must hold 20% as a withholding tax if not a direct transfer
Must still rollover the full 100% and apply for a refund on next tax return
May rollover a plan into an inherited nonspousal plan but must be direct transfer
IRA Transfers
Moving an IRA from one custodian to another
May make unlimited transfers per year
Inherited IRA
- Spousal Rollover
- May be rolled into your own IRA or be continued separately
- May not take penalty free distributions if rolling into your own
- If left separated then must start RMDs when deceased would have, based on your age - Nonspouse Beneficiary
- May take withdraw 100% now
- Take it out over 5 year period
- Establish an IRA account in deceased name FBO beneficiary and take RMDs over life
403 (B) Plans
Qualified Tax Deferred
Public Schools (must be state supported), nonprofits, zoos, museums, private hospitals
Contributions are deductible from a tax return
Typically develop into tax sheltered annuities, but can also by mutual funds
Also have guaranteed investment contracts that pay a rate slightly above bank cds
Independent contractors are not eligible
Max employer contribution is 53K or 100% of compensation
18k for employees
Must start distributions at 70.5
Corporate Sponsored Plans
ERISA regulates establishment and management of private plans
Established by a trust agreement
Include- Pension plans, profit-sharing plans, 401 K plans
Employee Retirement Income Security Act (ERISA)
Must cover employees over 21 working 1,000 hours per year
Must segregate funds from corporate assets
Employees must be entitled to benefits
Employees must be kept informed of plan benefits
Private Sector plans only
Fiduciary must take prudence in regards to the portfolio as a whole
Allowed to delegate investment responsibilities
Must take into account: General economic conditions Inflation/deflation Tax Total return from income and appreciation of capital
Section 404 of ERISA
Specific to retirement plans
May not delegate fiduciary duties but may delegate investment management
Must be as prudent as the average expert, not the average person
Transaction costs are not a determining factor for security selection
ERISA Investment Policy Statement
Strongly suggested but not mandated
Will not include specific security selection
Prohibited transactions by a plan fiduciary
Strictly prohibits any conflicts of interest
May not deal plan assets for his own account or with those parties opposing the plan
May not own employer assets totaling more than 10%
Any transactions with parties of interest in the plan (including employees)
May not loan assets to the employer even if it could affect the company
Safe harbor provisions (ERISA)
Provides safe harbor to trustee if the participant is in charge of selecting their portfolio
Must at least offer 3 investment class alternatives
Must allow employees to change their allocation at least quarterly
Make prospectuses and financial statements available
Summary Plan Description
Tells participant what the plan provides an how it operates
Defines when an employee can participate, how benefits are calculated
Does not deal with investment characteristics of the plan
Must be delivered free of charge
Defined Contribution vs Defined Benefit Plans
All qualified retirement plans fall into one of two categories
Defined Contribution- No specific end result, but tax deductible contributions
401k, profit share… max contribution 53k (no more than 25% reduction in employee pay), plan participant assumes risk
Defined Benefit- Specific retirement benefit but no specific level of contribution
Company assumes risk, takes into account years of service and last 5 years of service salary
Not affected by sex of employee unlike life insurance and annuities
Mandatory contributions, 100% deductible to the corporation
Type of defined contribution plans
- Profit Sharing plan
- Participate in profits of business
- No predetermined contribution plan needed
- Company’s can skip contributions in years of poor performance - 401 K plan
- Employee directed deduction of pay
- Still pay full FICA taxes
- Max deferral of 18,000 (catch up of 6) for employees
- Max combined annual contribution is 53,000 or 59 with catch up
- May make hardship withdrawals but may have to pay 10% early withdraw fee
- May take a loan of 50% of value or 50k whichever is smaller, not taxed, paid back in 5 years - Roth 401ks
- Employer contribution is into a regular 401k
- no income limitation on participation - Solo 401ks
- No other employees allowed outside of spouse and business owner
Safe Harbor 401 K plan
To avoid having to undergo annual top-heavy testing company’s can:
- Match employee contributions
- Use a non elective formula to give all employees a contribution
Net Unrealized Appreciation
Employees are able to defer appreciation of company stock upon a distribution to a brokerage account
If taking a lump sum as result of a trigger event in past year
Triggering events include:
- Separation from service
- reaching age 59.5 or
- Death
Section 457 Plans
Deferred compensation plan for employees of a state or certain tax-exempt organization (not churches)
Exempt from ERISA
- Not required to follow
- Not required to follow nondiscrimination rules
- Tax-exempt organizations can only cover highly compensated employees
- Tax-exempt employees may not roll into an IRA but can withdraw at anytime
- May make max contributions to both 403b and 457 (18,000 a piece)
SIMPLE Plans
Savings Incentive Mathc Plans for Employees
100 or fewer employees earning over 5k during calendar year
May not have other retirement plan
12,500 contribution max 3k add on
2% nonelective employer contribution
Qualified Plan Distributions vs IRAs/SEPs
IRA Seps
-Treating as single account in regards in RMDs
Qualified Plans
- Treated as separate from one plan to another
- Taxed on withdrawals for first time home purchases
- No required distribution if still employed by plan sponsor
Both
-May make equal payments over course of life and avoid IRA 10% penalty (may not transfer or rollover after starting)
Rollovers
May only make one rollover per 365 days
Trustee to trustee are not limited
Conversions from traditional to roth IRAs are not limited
Nonqualified corporate retirement plans
Does not have to meet non-discrimination rules
Not tax deductible for employers on contributions, rather it is based on when it is paid out
If done correctly, the employee is not taxed on contributions
2 types: payroll deduction plans and deferred compensation plans
Payroll deduction Plans
Deducted AFTER taxes are paid and invested
Deferred Compensation Plans
Defer payment until retirement
Contract between employer and employee
May include:
- Circumstances where benefit is forfeited
- No claim until retirement, death or disability
- May be void upon bankruptcy
Company directors may not participate
Coverdell Education Savings Accounts
2000 per beneficiary contribution limit
All cash on or before 18th birthday of beneficiary (unless special)
Earnings portion is not taxed if used for qualified EDU expense
10% penalty on top of regular taxes if not used for education
95k or 190k AGI is when contribution is phased out
Can contribute until April 15th of new year
May use for EDU expenses before college
Section 529 plans
2 types
- Prepaid Tuition Plans
- Usually have to be resident of state
- Pay tuition at today’s rate
- May or may not be able to use for other expenses - College Savings Plans
- Popular to do an age based portfolio for college expenses
- Any college, university regardless of state
- subject to market risk
- open to adults and children
Money not used for college expenses is hit with 10% penalty
May rollover to other immediate family members if within 60 days of distribution including first cousins
Earnings is taxable to recipient of said earnings
One rollover per 12 months
May be opened by anyone for anybody
May contribute 70,000 a year without gift tax (140 if married), may also take back money
May not use US Savings bonds
Custodial Accounts
Custodian enters all trades for the account and has full control but is not usually used to pay for child raising expenses
Require adult trustee
May gift as much as wanted
UTMA expanded the options available to be transferred to the account (real estate, intangible property), UGMA is smaller scale version
UTMA custodians may delay transfer of assets until 21 or 25 depending on state
UGMA/UTMA Account
Need Custodian Name, Minor Name and Social, and the state
Cash Account only
Options may not be bought s but covered call writing is allowed usually
Custodian may charge a reasonable expense
DONOR MAY NOT TAKE BACK THE GIFT
Minor can be beneficiary of more than one account
Minor has right to sue
Securities may not be solely in minors name
Donor or court of law appoints new custodians in case of death
Child pays taxes on account if income is in excess of 2,100 at parents tax rate until reaching 19 or 24 if full time student
Health Savings Account
May deduct HSA contributions
Portable even if you leave employer
Must be covered by high deductible health plan on first day of month
Cannot be enrolled in medicate
Cannot be claimed as a dependent
Must open separate HSA from spouse
Employee and Employer may contribute but must be in cash for both
Unit Test 4
C D -1 A -1 D D -1 C B C A B D D -1 C -1 C C B D C A -1 C
