Retirement and Education Plans Flashcards
A retirement or education plan that can discriminate and does not need IRS approval. Dollars are invested on an after-tax basis. When money is withdrawn at retirement, investor pays taxes on amount of withdrawal that exceeds cost basis.
Nonqualified Plan
Type of nonqualified plan in which the employer promises to pay compensation to the employee in the future. Compensation is effectively deferred until a specified future date or retirement, and is authorized under IRS code 457
Deferred Compensation Plan
Nonqualified, tax-deferred account available to employees of public institutions, such as state and local governments, and to private, or nongovernmental, tax-exempt organzations, such as hospitals. Public governmental plans are funded by funds held in a trust. Private plans allow a select group to participate. It can be transferred into another retirement account, or even an IRA.
457(b)
Act that was passed to protect employees in the private sector against abuse and discrimination in pension and retirement plans, which established guidelines for the following:
- Eligibility rules for plan participation
- Proper account and administration of plan funds
- Vesting schedules for employer contributions
- Nondiscrimination
- Naming of beneficiaries
- Communication of plan rules and benefits to employees
Employee Retirement Income Security Act (ERISA)
What are the requirements for being an eligible employee in an ERISA plan?
Must be age 21 or older, full time or equivalent (1,000 hours) and 1 year or longer of service.
Purchase of options, or sale of short uncovered options in a qualified plan is generally not allowed, except for…?
Covered Call Writing
Pension fund managers may not purchase gold and silver, unless…
The Gold or silver purchased is coins minted by the US Government
Retirement account where anyone who has earned income is allowed to contribute but not past 70 1/2, can grow on a tax-deferred basis and is taxed upon withdrawal, and has a maximum contribution of $5,500 or 100% of earned income. In order to be tax deductible, needs cash contribution.
Individual Retirement Account (IRA)
In a marriage, if only one spouse is earning income and has already contributed to an IRA, the nonwage earning spouse may also contribute to a spousal IRA if…
The earned income from the wage-earning spouse is greater than the total contributions to both IRA.
What can the money in an IRA be used to purchase?
What can’t be purchased?
Can: Stocks, bonds, mutual finds or annuities
Can’t: Life insurance, art, antiques, stamps and margin trades
Provision that allows taxpayers who are age 50 or older to contribute addition $1,000 into IRA
Catch-Up Provision
A cash or asset contribution to a new IRA by an individual within 60 days of receiving an eligible rollover distribution from an old plan. Individual may roll over all or part of amount received, but is subject to 20% federal withholding on distribution from old plan. Individual deposits full amount into new plan, then files for refund of 20% withholding. Cannot be done more than once every 23 months.
Rollover
Movement of cash and/or assets that takes place directly between the trustee/custodian of an old plan and trustee of new plan. By directly transferring the distribution from one custodian to another, individual avoids 20% withholding.
Transfer
If an eligible person is not participating in a qualified retirement plan, then…
They can take a full deduction from taxable income up to limit
If an individual is a participant in an employer’s qualified retirement plan, then…
an income limitation test is done to determine how much of the contribution is tax-deductible
How long can IRA contributions be made for current tax year?
Up to April 15 of the following year
How is an excess contribution in an IRA treated?
6% penalty until it is removed, not deductible and earnings on excess do not accumulate tax-deferred
What happens when an individual withdraws from an IRA before age 59 1/2?
10% early withrawal penalty assessed by IRS
When is a premature distribution allowable?
- Death to account owner
- Permanent Disability
- Pay for medical insurance premiums if disabled for 12 weeks, or in excess of 7.5% of owner’s income
- If distributions are made in equal periodic installments for minimum 5 years, or age 59 1/2
- Pay for education expenses for the owner
- Down payment on first home, limited to $10,000
IRA that is a top choice for immediate tax savings because contributions can be deducted form year’s taxable income, and taxes are not due until withdrawals are made. Normal distributions can occur at any point after the account holder reaches 59 1/2.
Traditional IRA