Chapter 4: Tax advantaged and Nonqualified plans

Question 1

What are the main differences between tax-advantaged and qualified plans?

4.1

Answer 1

• Some qualified plan benefits are not allowed under a tax-advantaged plan
• Tax-advantaged plans have different nondiscrimination rules

Question 2

How are distributions from a tax advantage plan taxed?

4.1

Answer 2

Always as ordinary income.

Tax-advantaged plans don’t get NUA treatment (unless from a plan before 1974.. unlikely)

Question 3

What employers are eligible for SIMPLE IRAs? 4.2

Answer 3

Employers with 100 or fewer employees that earn $5k or more Can only have this as an active plan (unless union employees)

Question 4

What are the allowed employee contributions? 4.2

Answer 4

Up

Question 5

How are SIMPLE plans vested? 4.2

Answer 5

Always 100%

Question 6

SIMPLE IRA Employer contributions must be… 4.2

Answer 6

Employer matches 3% of employee compensation. They can reduce this to 1% for two out of every five years. 2% nonelective contribution for each eligible employee, even if the employee isn’t making a deferral

Question 7

Can SIMPLE IRAs be funded with life insurance? 4.2

Answer 7

no

Question 8

What is the penalty on distributions of a SIMPLE IRA in the first 2 years?

Answer 8

25% penalty

Question 9

What is the covered compensation limit on SIMPLE IRAs?

Answer 9

EITHER: 1. Covered compensation limit of $290k applies in the 2% nonelective option only 2. If the employer offers the 3% match option, then they can contribute up to $13500 (450k salary)

Question 10

Who is a SEP IRA typically for? 4.2

Answer 10

For smaller, self employed owners

Question 11

How do you start a SEP?

Answer 11

Form 5305-SEP

Question 12

Are SEP contributions required to the employer? 4.2

Answer 12

No. But only employers can contribute

Question 13

Who is elibiligy for a SEP? 4.2

Answer 13

Must be 21 or older

Question 14

How much can be contributed to a SEP 4.2

Answer 14

Lesser of 25% of EE covered comp (max $290 OR $58000

Question 15

What are the advantages of a SEP IRA? 4.2

Answer 15

Easy to administer

Question 16

What are the disadvantages of a SEP? 4.2

Answer 16

Employer isn’t obligated to contribute Employee can’t contribute Might not create enough funds for retirement

Question 17

What are SARSEPs?

Answer 17

Similar to a SEP but employees can contribute New plans can no longer be established.

Question 18

What is a TSA/Section 403(b)? 4.3

Answer 18

Tax Sheltered Annuity Essentially a 401k for non-profits $19500 deferral limit, $6500 catch-up Available for tax-exempt or Section 501(c)(3) organizations Funding is in annuity contracts and mutual funds only

Question 19

What are the disadvantages of 403(b) plans? 4.3

Answer 19

Need to pass ACP test

Question 20

What are Section 403B Catch Up Provisions? 4.3

Answer 20

Special additional catch up is allowed for health, education, and (HER) If the participant has 15 years of service than they can contribute the lesser of either: $3000 $14000 reduced by amounts previously excluded under special catch-up $5000 times their years of service less the sum of all prior deferrals

Question 21

What are Section 457 plans?

4.4

Answer 21

• Available to state and local governments that are tax exempt (or private/non profit)
• Like a retirement plan, but it’s actually a deferred comp plan
• no 10% early withdrawal penalty
• Similar to 401(k)
  
  • $19500 limit
• SUbject to RMDs at age 72

Question 22

What is the special catch-up provisions for eligible section 457 plans?

4.4

Answer 22

• Applies three years before plan’s normal retirement age
• Limit on elective deferral lesser of
  
  • twice the amount of basic annual limit or
  • Sum of applicable annual plus amount by which applicable annual limit in preceding