Retirement Plans

Question 1

Main difference between qualified & non-qualified plans

Answer 1

Whether the contributions are tax deductible

Question 2

Name as many (there are 6) differences between a qualified and non-qualified plan

Answer 2

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

Question 3

Name 2 Nonqualified retirement plans & why used

Answer 3

Deferred compensation
Payroll deduction plans
Used to favor certain employees (typically executives)

Question 4

What is nonqualified deferred compensation plan? Why risky?

Answer 4

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.

Question 5

What is difference between Payroll and Salary Reduction Plan?

Answer 5

Payroll Reduction Plan is Nonqualified

Salary Reduction Plan are Qualified eg 401K Plan

Question 6

IRA: Must be earned income. What is the penalty for paying in over the earned income?

Answer 6

6% excess contribution penalty

Question 7

IRA: How can the dollar cap be exceeded?

Answer 7

If a person is over 50 yo

Question 8

IRA: Are contributions tax deductible?

Answer 8

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.

Question 9

What is spousal IRA

Answer 9

If have non-working spouse can contribute twice the amount. Only if file joint tax returns.

Question 10

IRA: Latest date to make contribution? What is max age for contribution?

Answer 10

April 15 of next year.

70 1/2 if have earned income

Question 11

FDIC insurance on retirement accounts held at bank?

Answer 11

$250,000

Question 12

IRA: What are some ineligible Investments or ineligible investment practices

Answer 12

ineligible investments:
Collectibles
Life Insurance

ineligible investment practices:
Short sales on stock
Speculative options strategies
Margin account trading

Question 13

IRA: Distributions. When? Penalty if before? Exceptions?

Answer 13

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

Question 14

IRA: What happens if person does NOT distribute starting at 70 1/2 yo?

Answer 14

50% ‘Insufficient Distribution Penalty’ applies.

Applicable to the amount that should havce been withdrawn based on IRS life expectancy tables.

Question 15

IRA rollover: What can be rolled over; how often; when must it be completed

Answer 15

From one qualified plan to another;
Can only do once per year
Within 60 days

Question 16

IRA: What if change employers; what are three options, taxes, # of transfers

Answer 16

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

Question 17

HSA: What is it?

Answer 17

Qualified employer sponsored plans

Before Tax contributions to savings account for medical purposes.

Question 18

Roth IRA: 2 common reasons to re-characterize or convert from Roth IRA and Traditional IRA

Answer 18

1. Exceeding the earnings limitation on contributing to a Roth IRA
2. 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

Question 19

IRA’s: What would constitute a ‘failed conversion’?

Answer 19

If convert IRA to Roth IRA or vice versa within same tax year or, within 30 day period following conversion.

Question 20

Two main education saving plans

Answer 20

Coverdell (Education IRA)

Section 529 Plan

Question 21

Coverdell Education IRA: Contributions per year? To what age? phased out? distributions taxed if what? If student turns 30 what happens?

Answer 21

$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

Question 22

529: What are two basic types?

Answer 22

Prepaid tuition plans for state residents (locks in current tuition at chosen college)
College savings plans for residents & non-residents

Question 23

529: Who can start one? What are qualified expenses?

Answer 23

Any adult can for a future college student

Donor pays directly to school: tuition, room & board, books

Question 24

529: How are they handled for tax - Federal & State?

Answer 24

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

Question 25

529: When does account control transfer to student; Can account balances be transferred to others?

Answer 25

Never, donor always has control

Yes

Question 26

529: Any income limitations to contributing

Answer 26

No

Question 27

ERISA: Abbreviation for? Who benefits from this? 6 significant provisions?

Answer 27

The Employee Retirement Income Security Act of 1974. Private sector retirement plans & certain union plans. NOT public or gov’t workers
PF-VC-NB: participation, funding, vesting, communication, non discrimination, beneficiaries