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)
