Chapter 21 - Retirment Planning Flashcards
Retirement Planning
Additional 10% tax if withdrawn prior to age 59.5. Must start drawing before 70.5 or 72/73?
Qualified vs non qualified -
Qualified means they get tax deductions and are tax deferred. Employee must be over 21 and worked at the company for 1 year either full or part time (at least a 1,000 hours). More money into the retirement fund each paycheck. Qualified plans must comply with ERISA (Employee Retirement Income Security Act). Basically backed up by the government and comply with all the rules.
Non qualified is after tax dollars and deferred. Could be for high income earners that don’t qualify for qualified plans.
-Qualified plans have dollar limits on how much you can contribute
-Non qualified - no limits, as much money and from any source you choose.
-Required Minimum Distributions are required by 70.5 or will be subject to a 50% tax. Prior to 59.5 withdraws are subject to a 10% tax unless used for first home purchase(only 10K), certain medical expenses, qualified education expenses for yourself or children/grandchildren, expenses if you are totally and permanently disabled.
IRA - You take the initiative to setup and choose how to invest. Tax deductible and tax deferred unless you are also on an employee sponsored plan (401K) and if their adjusted gross income is above a certain level. (78K single, 129K married in 2022). When you withdraw the money, you pay income tax on the money (both contributions and growth).
ROTH IRA - If you don’t qualify for the traditional IRA deduction, you can choose a ROTH IRA. The money still grows tax deferred and you don’t have to pay any tax when you withdraw. You can wait longer than age 70.5 to withdraw. You can withdraw contributions prior to 59.5 tax free. Earnings can be withdrawn tax free after 59.5 if the account has been open at least 5 years (money is considered seasoned).
Employer Sponsored -
401K: for private companies. Matches, limits 22,500 personal contribution in 2023. 30K if you are older than 50.
403B (tax deferred annuity): for public schools and non profits. These investments go into annuity’s or other chosen accounts, with the same tax deferred rules as a traditional.
457 - setup for state and local government workers.
TSP (Thrift Savings Plan) - for Federal employees
Pensions -
Profit Sharing Pension - the profits of the company are invested in the employee retirement account. Subject to the earnings and investment strategy of the company.
Defined Benefit Pension - employer has a specific formula which guarantees each employee a specific retirement benefit .
Defined Contribution Pension- employer contributes a specific amount (such as 4%) each year to the retirement plan. Good news for the company is the contribution to the employee is defined each month, but the bad news is it doesn’t fluctuate with the profitability.
Small Business Plans
Keogh Plan (Also called HR10) - a self employed person with a business that is not incorporated can contribute to the IRS specified amount. The only is tax deductible for the business. TAX deductible.
SEPs- basically a Keogh but it is simpler and includes corporations. Not Tax Deductible. The employer makes all the contributions which can vary from 0-25% of earnings, The funds are placed directly into an IRA or indirectly into a deferred annuity that will then purchase the IRA. The employer must make the same proportional contribution for each employee, such as 10% of their salary or wage. The employee can then put there only money in which is immediately vested.
Simple Plans - contributions are tax deductible (paid with pre-tax dollars) but subject to FICA, Medicare, ect. Less costly to administer this plan. The employer must have less than 100 employees. The employer MUST match by either matching dollar for dollar up to 3% or contributing 2% of each employees compensation, regardless of whether the employee contributes.
Top Heavy Plans - 60% or more of the retirement benefits are reserved for key employees. The IRS and ERISA will require changes.
Fiduciaries - the people who manage the plan. Under strict rules with regards to carrying out duties, fees and diversifying investments.
Rollover vs transfer
Rollover - is bad. transfer is good. Rollover is moving from a qualified plan to a different source. You can’t rollover non-qualified plans without a 10% penalty.
A transfer or Direct Rollover doesn’t no require a tax because you never get the money, the company sends it directly to a new account with the new company.
