Retirement Plans Flashcards
Main difference between qualified & non-qualified plans
Whether the contributions are tax deductible
Name as many (there are 6) differences between a qualified and non-qualified plan
Qualified NonQualified
Contributions are tax deductible Contrib NOT tax ded
Plan approved by IRS Does not need IRS app
Plan cannot discriminate Can discriminate
Tax on accumulation is deferred Yes
All withdrawals are taxed Excess over tax basis txd
Plan is a trust Not a trust
Name 2 Nonqualified retirement plans & why used
Deferred compensation
Payroll deduction plans
Used to favor certain employees (typically executives)
What is nonqualified deferred compensation plan? Why risky?
Agreement with employee were employee defers receipt of current income in favor of payout at retirement. If co fails don’t get anything (become general creditor) & forfeit benefits if leave firm before retirement.
What is difference between Payroll and Salary Reduction Plan?
Payroll Reduction Plan is Nonqualified
Salary Reduction Plan are Qualified eg 401K Plan
IRA: Must be earned income. What is the penalty for paying in over the earned income?
6% excess contribution penalty
IRA: How can the dollar cap be exceeded?
If a person is over 50 yo
IRA: Are contributions tax deductible?
Fully deductible, regardless of income, if investor is ineligible to participate in any other qualified plan. If investor is eligible to participate, contributions are deductible if taxpayers AGI falls within income guidelines. AGI has a phaseout. Can still contribute but not tax deductible.
What is spousal IRA
If have non-working spouse can contribute twice the amount. Only if file joint tax returns.
IRA: Latest date to make contribution? What is max age for contribution?
April 15 of next year.
70 1/2 if have earned income
FDIC insurance on retirement accounts held at bank?
$250,000
IRA: What are some ineligible Investments or ineligible investment practices
ineligible investments:
Collectibles
Life Insurance
ineligible investment practices:
Short sales on stock
Speculative options strategies
Margin account trading
IRA: Distributions. When? Penalty if before? Exceptions?
Distributions can begin after 59 1/2 yo
Must begin by April 1 of the yr after 70 1/2 yo
Distributions before 59 1/2 subject to penalty of 10% plus regular income tax EXCEPT in event of:
Death
Disability
1st time homebuyer
Education expenses: taxpayers,spouse,child, grandchild
Medical premiums for unemployed indiv
Medical expenses in excess of defined AGI limits
IRA: What happens if person does NOT distribute starting at 70 1/2 yo?
50% ‘Insufficient Distribution Penalty’ applies.
Applicable to the amount that should havce been withdrawn based on IRS life expectancy tables.
IRA rollover: What can be rolled over; how often; when must it be completed
From one qualified plan to another;
Can only do once per year
Within 60 days
IRA: What if change employers; what are three options, taxes, # of transfers
May be distributed as a lump sum; employer will need to take 20% withholding tax. Still retains it’s tax deferred status.
Note: does not apply to rollovers made from individual IRAs
Direct transfer
No withholding tax
Umlimited transfers
HSA
On Individual IRA’s
One time distribution is allowed to a qualified HSA without income tax or penalties
HSA: What is it?
Qualified employer sponsored plans
Before Tax contributions to savings account for medical purposes.
Roth IRA: 2 common reasons to re-characterize or convert from Roth IRA and Traditional IRA
- Exceeding the earnings limitation on contributing to a Roth IRA
- Big decrease in value of account since original IRA to Roth. With Roth pay taxes on contribution so may be worth going back to IRA & no taxes due till distribution
IRA’s: What would constitute a ‘failed conversion’?
If convert IRA to Roth IRA or vice versa within same tax year or, within 30 day period following conversion.
Two main education saving plans
Coverdell (Education IRA)
Section 529 Plan
Coverdell Education IRA: Contributions per year? To what age? phased out? distributions taxed if what? If student turns 30 what happens?
$2,000 per student per year if younger than 18
Phased out for high income taxpayers
Tax free if for college, secondary or elementary
Student over 30:
1. Must be distributed to student, pays income tax and 10% penalty or
2. Rolled into a education IRA for another family member
529: What are two basic types?
Prepaid tuition plans for state residents (locks in current tuition at chosen college)
College savings plans for residents & non-residents
529: Who can start one? What are qualified expenses?
Any adult can for a future college student
Donor pays directly to school: tuition, room & board, books
529: How are they handled for tax - Federal & State?
Federal:
Contributions considered gifts (so limit up to gift tax)
Made with after tax dollars
States: Many states allow tax free contributions;
Contribution levels vary from state to state
Earnings accumulate on tax-deferred basis
Withdrawals are tax free for education expenses
States: Most permit tax free withdrawals
