Retirement Basics Flashcards
Understand the basic offerings for retirement and associated terms
Plan
A government approved and regulated system for saving money for use during retirement
Employer (ER)
The one who sets up and owns the retirement plan, otherwise known as the “plan sponsor”.
Employee (EE)
The individual who works for the employer & can enroll in the retirement plan. Also known as “participants”
Plan Administrator (PA) (Employer)
Designated person (who works for employer) who assumed fiduciary responsibility for a retirement plan & ensure all IRS regulations and plan rules are followed. Works with account manger.
What is an Account Manager (AM) (Transamerica)
Plan level contact that works for Transamerica for day to day inquiries. They work with the Plan Administrator.
Contribution
Money added to a retirement plan
Vesting Schedule
An incentive program set up by an employer which, when it is fully “vested”, gives the employee full ownership of certain assets – usually retirement funds or stock options. It is an employer’s way of giving employees a reason to stay with the company.
Compounding
The result of reinvesting interest or gains, rather than paying it out, so that the interest or gains in the next period is then earned on the principle sum plus previously accumulated interest or gains.
Distributions
The removal or withdrawal of money from a retirement account
Summary Plan Description (SPD)
Summary of the plan document that is required to be provided to participants about rules of the plan.
IRS
Internal Revenue Service. One of the two governing bodies who regulate retirement plans.
DOL
Department of Labor. One of the two governing bodies who regulate retirement plans.
E.R.I.S.A
Employee Retirement Income Security Act. Established in 1974, legislation that has led to the creation of tax qualified plans.
What does Title I of ERISA cover?
Basic eligibility, vesting, and disclosures. The most important title regarding the day-to-day business of administering retirement plans.
What are the three primary tax advantages of an employer sponsored plan?
Participants can contribute pre-tax income, earnings from investments grow tax free as long as funds remain in the account, when money is withdrawn at retirement, the money is taxed but the bracket will be much lower since you’re no longer working.
Defined Contribution Plan (DC)
Plan where responsibility is on the employee. They must contribute to the plan, manage the risks, and ensure they have enough for retirement.
VAT
Voluntary After-tax contributions- earnings are always taxable when withdrawn
Gains
Earnings from a plan
RAT
Roth After Tax contributions- Earnings can be withdrawn tax free if participant follows the Roth withdrawal rules. (If rules are not followed, participants pays taxes on the gains at time of withdrawal)
What are the two after tax contributions options?
RAT (Roth) and VAT (Voluntary)
What is a Defined Benefits plan (DB)
Commonly referred to as “pension plans.” Employer funded-employer takes all the risk
What are the two main types of DB Plans?
Traditional and Cash Balance
Which type of retirement plans are protected from creditors?
All of them
What are the main tax advantages of a DC plan?
Contributions come from pretax funds which lower taxable income, earnings grow untaxed, withdrawals at retirement are taxed at a lower rate
Who funds a DC plan?
Employer only, employee only, or both employer and employee
What is a Money Purchase Plans
Fully funded by the employer, required to make defined annual contributions based on a formula written into the plan document and SPD.
Profit Sharing Plans
Funded through employer contributions, contributions are based on company profits
403(b)
Plan exclusively offered by public schools and 501(c)(3) tax -exempt organizations.
501(c)(3) organization
An organization that is non profit and allowed tax deductions for donations. Examples include nonprofit charities or hospitals
Traditional 401(k)
A type of profit-sharing plan available to all non-government companies. Allow participants to contribute pre-tax money to an employer sponsored plan.
NQDC
Non Qualified Deferred Compensation.
G 457(b)
NQDC Plan only available to state and local government employers.
What are IRAs and Roth IRAs
Individual Retirement Account. Owned by the individual with no employer involvement.
ESOP
Employee Stock Ownership Plan. A plan investing primarily in the stock of the employer. Funded by contributing cash to buy company stock or contributing company shares directly.
415
“All Source” contribution limit. Overall limit on contributions from all sources, both employer and employee
402(g)
Contribution limit that only applies to funds individually contributed by employees. AKA elective deferral limit or salary reduction.
Separate from 415 since it is only employee money, but counts towards the 415 limit.
Catch-up limit
Contribution limit applied to catch-up contributions. IRS allows additional contributions above and beyond normal limits if over the age of 50.
What is the IRA and Roth IRA contribution limit?
6.5K limit combined per person limit
