M7: Retirement Planning Flashcards
A plan that allows an employee to defer salary to a tax-deferred profit sharing plan.
401(k) plan
Also known as a tax-sheltered annuity, a blank is available to employees of certain charitable, religious, educational, and other 501(c)(3) nonprofit organizations.
403(b) plan
That portion of the master or prototype plan document that contains all the alternatives and options that may be selected by an adopting employer.
Adoption agreement
Average monthly earnings of a worker used by Social Security to calculate a worker’s Primary Insurance Amount (PIA). This amount is adjusted for inflation to reflect an average in today’s dollars.
Average Indexed Monthly Earnings (AIME)
A defined benefit plan that provides for specific annual employer contributions that accumulate at a guaranteed investment return.
Cash balance pension plan
A vesting schedule in which the employee is 0% vested until after either three or five year of service, at which time the employee will be 100% vested.
Cliff vesting schedule
A small business that is sole proprietorship, a partnership, or a close corporation.
Closely held business
A retirement plan to which the participant (employee) can make contributions.
Contributory retirement plan
Pertains to eligibility for Social Security. A worker is blank if they have been credited with at least six quarters of coverage during the 13 calendar quarters ending with the quarter in which the worker dies or becomes entitled to retirement or disability benefits. Currently married status is needed for survivors to be eligible for benefits if the deceased worker was not fully insured.
Currently insured
An individual retirement account that allows the owner to deduct the amount of the contribution from current federal income taxes.
Deductible IRA
A nonqualified pension arrangement whereby an executive or highly compensated employee may have current compensation deferred until a later date, presumably when they retire. To receive future benefits, the employee may have to meet certain requirements established by the employer; however, the employer has an enforceable obligation to pay agreed-upon benefits to the employee.
Deferred compensation plan
A pension plan in which the benefits that an employee will receive upon retirement are specified in the plan. For example, the employee may be told that they will receive a monthly pension benefit equal to 60% of their compensation while working. To fund the plan, the employer then takes the promised compensation into account, as well as the length of time until retirement, the employee’s projected earnings, the prevailing level of interest rates, and numerous other factors.
Defined benefit pension plan
A plan in which the contribution that will be made is specified, such as a profit sharing plan. For example, an employer may specify that intends to contribute 10% of each employee’s salary to a pension plan. The benefit that the employee ultimately receives will be a function of the amount that was contributed by the employer, the length of time that contributions were made on the employee’s behalf, and investment returns.
Defined contribution plan
Pertains to retirement plans and IRAs. A direct transfer moves retirement benefits from one institution to another, also called a “trustee to trustee” transfer. The individual never has possession of the benefit dollars. This differs from a rollover, in which the individual may have possession of the funds for as long as 60 days before reinvesting funds in a second plan without tax consequences.
Direct transfer
Pertains to retirement plans. An early withdrawal is typically a distribution that is received before the recipient attains age 59 1/2, and often results in a 10% early withdrawal penalty.
Early withdrawal
A deferral of compensation made by the employee participant in a 401(k), 403(b), 457 plan, or SIMPLE plan.
Elective deferral
A federal law governing the operation of most private retirement plans. Qualified employer-sponsored retirement plans must comply with blank. This provides protection for the employee, whose retirement assets will be protected even if their employer goes bankrupt.
Employee Retirement Income Security Act of 1974 (ERISA)
Contributions made by the employer into a retirement plan. These can include matching contributions, nonelective contributions, discretionary employer profit sharing contributions, and required employer contributions to a qualified plan.
Employee contributions
The age at which full Social Security old age benefits are available. blank ranges from age 65 to age 67 depending upon the year an individual was born.
Full retirement age (FRA)
A pension plan in which the employer contributes an amount each year that is adequate to fund current and future pension liabilities (payouts).
Fully funded pension plan
Pertains to Social Security. A person is considered to have blank status if they have earned 40 quarters of coverage under Social Security. A blank person is eligible for survivors’ benefits for a qualified spouse, child, and/or dependent parent; a death benefit payment; and retirement benefits for themself, a qualified spouse, and a qualified child.
Fully insured
A vesting schedule whereby the employee becomes vested in increments of 20% over a period of time. Two-to-six year graded vesting vests in six years, starting with 20% after two years of service, 40% after three years, 60% after four years, 80% after five years, and 100% after six years of service.
Graded vesting schedule
A retirement plan that any individual with earned income can establish and fund. An individual may contribute no more than $6,500 (2023) in one year to the account (plus another $1,000 if age 50 or older). Depending upon the taxpayer’s circumstances, the contribution may be fully deductible, partially deductible, or not deductible. All investment earnings accumulate tax deferred until distributions are received at retirement. Tax penalties are assessed for early withdrawals from an IRA. Early withdrawals are generally classified as those that take place before an individual attains age 59 1/2.
Individual retirement account (IRA)
An adjective used to describe a qualified retirement plan available for unincorporated business. A blank can be a defined benefit plan, profit sharing plan, or ESOP, among others.
Keogh plan
The risk that one might outlive their savings.
Longevity risk
A retirement plan distribution that occurs at a single point in time.
Lump sum distribution
A contribution made by the employer to match a contribution (deferral) that has been made by the employee, such as into a 401(k) plan. With matching contributions, the employee must contribute to the plan in order to receive the match; employees who do not participate miss out on an opportunity for an immediate return on their contribution.
Matching contribution
A public assistance program designed to provide broad medical expense benefits, such as long-term care, to certain categories of needy individuals.
Medicaid
A Social Security benefit available to persons age 65 or over who are eligible for Social Security retirement benefits. It provides medical expense coverage, including hospital and supplementary medical insurance. Hospital insurance is available to all persons eligible for Social Security benefits who are age 65 or over (Part A), while supplementary medical coverage requires an additional premium (Part B).
Medicare (hospital and medical)
Insurance, sometimes sold to Medicare users by private companies; it is intended to supplement Medicare coverage.
Medigap
A type of defined contribution plan. Once established, employer contributions are mandatory each year. The maximum employer deduction for contributions to the plan may not exceed 25% of covered payroll.
Money purchase plan
The amount of gain beyond any contributions made to purchase employer stock. This gain is called blank and is taxed as long-term capital gain rather than ordinary income.
Net Unrealized Appreciation (NUA)
A pension plan in which only the employer makes contributions.
Noncontributory pension plan
An individual retirement account in which contributions may not be deducted from current taxable income.
Nondeductible IRA
A contribution made by an employer into a company retirement plan for all eligible employees, whether they have contributed to the plan or not.
Nonelective contribution
A retirement plan that has fewer restrictions than a qualified plan and that does not cover all employees.
Nonqualified plans
In qualified plans—normal retirement plans—blank is typically the age specified in the plan or age 65.
Normal retirement age
It provides protection for qualified participants and their beneficiaries against losses associated with retirement, death, disability, and illness. Commonly known as Social Security.
Old age, survivors, disability, and health insurance (OASDHI) program
A federal corporation that guarantees basic pension benefits in covered defined benefit plans.
Pension benefit guaranty corporation (PBGC)
There are two types of blank: defined benefit blanks and defined contribution blanks. A defined benefit blank is a qualified retirement plan that provides a specified retirement benefit to participants. A defined contribution blank is a qualified retirement plan that usually provides for periodic contributions specified in a written formula and an unspecified retirement benefit that is equal to the value of a participant’s account balance at retirement.
Pension plan
Any 12-month period during which a plan chooses to keep its records. In most cases, this period will be either the calendar year or the fiscal year of the plan sponsor.
Plan year
The amount of monthly Social Security income available at full retirement age (FRA) equals a worker’s blank.
Primary insurance amount (PIA)
A defined-contribution plan in which the employer is not required to make a set contribution amount each year, although contributions should be “substantial and recurring.” 401(k) provisions may be part of the blank.
Profit sharing plan
A pension plan that receives favorable income tax treatment by virtue of meeting federal requirements, such as nondiscriminatory funding practices.
Qualified pension plan
An individual or organization that has discretionary authority or control over a qualified plan trust, its assets, or its administration, or that—for compensation—provides investment advice regarding plan assets.
Qualified plan fiduciary
Pertains to Social Security. A quarter of coverage is a measurement used to determine a worker’s insured status (fully or currently) and, therefore, the amount and type of benefits available under Social Security.
Quarter of coverage
A mandatory distribution from a retirement plan is required each year after a plan participant has attained age 73.
Required minimum distribution (RMD)
Pertains to retirement plans. It involves moving funds from one retirement plan to another within a 60-day window.
Rollover
A nondeductible IRA with several unique features. Withdrawals are non taxable if left in the account for five years and the owner is over age 59 1/2, the owner may continue to make contributions to the account after they reach age 73 if they or their spouse is still working, and their is no required beginning date for withdrawals.
Roth IRA
An employer-sponsored retirement plan that can either be an IRA for each employee or part of a 401(k) plan. Available to employers with 100 or fewer employees who earn at least $5,000 a year and who have no other qualified plans.
Savings incentive match plan for employees (SIMPLE)
The OASDI and HI tax imposed on self-employed individuals.
Self-employment tax
A retirement plan used by small businesses that is relatively easy and inexpensive to administer. Individual retirement accounts (IRAs) are registered in the employee’s name, and the employer makes contributions in accordance with established agreements. Only employer contributions can be made to a blank, employee contributions are not allowed.
Simplified employee pension plan (SEP)
A government program whereby covered workers meeting certain past-service requirements, along with their qualified dependents, are eligible for limited retirement, medical, disability, and death benefits. The program is funded through a special tax on covered workers.
Social Security
A closely held business in which there is a single owner. The business is not considered a separate entity from the person for tax, liability, or other purposes.
Sole proprietorship
An IRA established for a non-working spouse using the earned income of the working spouse to meet contribution eligibility requirements.
Spousal IRA
A defined contribution plan whereby employees can purchase stock in the employer corporation.
Stock bonus plan
A special form of retirement plan under Internal Revenue Code Section 403(b) that is available only to full-time or part-time employees of public school systems or nonprofit organizations (under IRC Section 501[c]3).
Tax-sheltered annuity (TSA)
A party named in the plan document (or in the trust instrument itself) that is authorized to hold (or invest) the assets of the plan for the benefit of its participants. The trustee has a fiduciary responsibility toward the plan and its participants.
Trustee of a qualified plan
Gives the employee nonforfeitable rights to employer-provided contributions over time. blank gives the employee an incentive to perform well and remain with the company.
Vesting
