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 403(b) plan 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
Refers to pension plans. A pension plan is advance funded when money in excess of that amount required to fund current pension payouts is other words, the employer is funding future benefits as well a current benefits.
Advance funded.
A type of qualified retirement plan that allocates employer contributions based on compensation and age.
Age-weighted profit sharing plan.
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.
Pertains to Internal Revenue Code Section 401(k), which allows special provisions to be included in a profit sharing or stock bonus plan. Under a CODA, articipants may elect to reduce compensation received currently and contribute the amount of salary reduction to
a pension or profit sharing plan.
Cash or deferred arrangement (CODA)
A vesting schedule in which the employee is 0% vested
until after either three or five years of service, at which time the employee will be 100% vested.
Cliff vesting schedule.
A small business that is a 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
currently insured 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 agreedupon 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 it 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. 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 90 Retirement Planning
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consequences.
Direct transfer
Pertains to retirement plans. An early distribution is typically a distribution that is received before the recipient attains age 59½, and oftentimes results in a 10% early withdrawal penalty.
Early distribution.
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 employersponsored retirement plans must comply with ERISA. 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)
A defined contribution plan in which employees may buy stock in their employer corporation at a discount. All fulltime employees meeting certain eligibility requirements must be allowed to participate.
Employee stock ownership plan (ESOP).
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
Employer contributions.
Unvested benefits left in a retirement plan by departing plan participants.
Forfeitures
The age at which full Social Security old age
benefits are available FRA 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 fully insured status if they have earned 40 quarters of coverage under Social Security. A fully insured person is eligible for survivors’ benefits for a qualified spouse, child, and/or dependent parent; a death benefit payment; and retirement benefits for himself or herself, 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 $6,000 (2019) 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 59½.
Individual retirement account (IRA)
An adjective used to describe a qualified retirement plan available for unincorporated businesses. A Keogh 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, that is intended to supplement Medicare coverage.
Medigap.
An amount that must be withdrawn from a retirement account once a certain age is reached, typically age 70½. Also called required minimum distributions (RMDs).
Minimum required distribution (MRD)
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 above and beyond any
contributions made to purchase employer stock. This gain is called NUA 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
Refers to the amount in a retirement plan that the employee would not have to forfeit if they were to leave the employer, in other words the employee’s vested amount.
Nonforfeitable
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⎯normal
retirement age is the earlier of the following:
the normal retirement age specified in the plan or
the later of age 65 or five years after plan participation began.
Normal retirement age
Old age, survivors, disability, and health insurance program. It provides protection for qualified participants and their beneficiaries against losses associated with retirement, death, disability, and illness. Commonly
known as Social Security.
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 pension plans: defined benefit pension plans and defined contribution pension plans. A defined benefit plan is a qualified retirement plan that provides a specified retirement benefit to
participants. A defined contribution pension plan 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 PIA.
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 profit
sharing plan.
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 70½.
Required minimum distribution (RMD)
A technique available to spouses who have both reached FRA. Enables a spouse to receive a spousal Social Security retirement benefit while allowing their own Social Security benefit to continue to grow.
Restricted application
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 not taxable if left in the account for five years and the owner is over age 59½, the
owner may continue to make contributions to the account after they reach age 70½, and there is no required beginning date for withdrawals.
Roth IRA.
An employersponsored retirement plan that can be either 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 tax reduction strategy that involves shifting
assets from individuals in high tax brackets to those in low tax brackets.
Shifting the tax burden to others.
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 SEP, 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.
An employee’s right to buy some of the employer’s stock at a set price. This right is formed when the employer gives a stock option as a fringe
benefit.
Stock option
A type of buy-sell agreement that obligates
a closely held corporation to purchase the interest of any deceased stockholder. This agreement is funded by insurance, and the corporation is the applicant,
premium payer, owner, and beneficiary of policies on all stockholders.
Stock retirement (entity) agreement
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. Vesting gives the employee an incentive to perform well and remain with the company.
Vesting.
