Retirement Plans Flashcards
Qualified plans
-meet federal requirements and receive favorable tax treatment
• Employer’s contributions are tax-deductible as a business expense.
• Employee contributions are made with pretax dollars – contributions are not taxed until
withdrawn.
• Interest earned on contributions is tax-deferred until withdrawn upon retirement
• The annual addition to an employee’s account in a qualified retirement plan cannot exceed the maximum
limits set by the Internal Revenue Service
features of Qualified Plans
Nonqualified Plans
- Do not need to be approved by the IRS
- Can discriminate in favor of certain employees
- Contributions are not tax-deductible
- Interest earned on contributions is tax-deferred until withdrawn upon retirement
Withdrawals by the employee are treated as _______ ________?
taxable income
10% penalty tax
When Withdrawals by the employee made
prior to age 59 ½.
_______________ are mandatory by April
1st of the year following age 70½,
Distributions
failure to take the required withdrawal results in a ___% ______ ___ on those funds.
50% excise
tax
Funds may be withdrawn prior to the employee reaching age 59 ½ without the 10% penalty tax if………………………..
- employee dies or becomes disabled
- a loan on the plan’s proceeds
- result of a divorce proceeding
- made to a qualified rollover plan
- employee elects to receive annual level payments for the remainder of his life
to protect the rights of workers covered under an employer sponsored
plan.
The Employee Retirement Income Security
Act of 1974 (ERISA)
Defined benefit plan
employer sponsored
-pay a specified benefit amount upon the employee’s retirement
do not specify the exact benefit amount until distribution begin
Defined Contribution Plans
employer sponsored
Profit-Sharing Plans
sets aside a portion of the firm’s net income for distributions to employees who qualify under the plan
Employers contribute to a plan based on the employee’s compensation and years of service, not company profitability or performance.
Pension Plans
Money Purchase Plans
- employers to contribute a fixed annual amount
- apportioned to each participant,
- benefits based on funds in the account upon retirement
These plans are similar to a profit-sharing plan, except that contributions by the employer do not depend on profits, and benefits are distributed in the form of company stock.
Stock Bonus Plans
Cash or Deferred Arrangement (401(k) Plans)
401(k) plans allow employers to make tax-deferred contributions to the participant
a special class of retirement plans available to employees of certain charitable, educational, or religious organizations.
Tax-Sheltered Annuity (403(b) Plans)
- an employee (including a self-employed individual) establishes and maintains an IRA to which the employer contributes
- much larger amount that can be contributed than IRA
Simplified Employee Plans (SEPs)
Savings Incentive Match Plan for Employees (SIMPLE)
-small businesses that employ no more than 100 employees who received at least $5,000 in compensation from the employer during the previous year
-employer must
not have a qualified plan in place.
-2% employer contributions
- for self-employed persons, such as doctors, farmers, lawyers, or other soleproprietors
- Defined contribution=max contribution of $49,000|yr
- defined benefit=max benefits $195,000/ yr
Keogh Plans
IRA
are established by an individual who has earned income to save for retirement
-allow for an individual to contribute a limited amount of money per year, and the
interest earned is tax-deferred until withdrawal.
-Withdrawals made prior to age 59 ½ are assessed an additional 10% penalty tax.
-must begin to receive payment
from their accounts no later than April 1 in the year following the attainment of age 70 ½
Traditional IRAs
Roth IRAs
- designed so that withdrawals are received income tax-free
- subject to the same limits as traditional IRAs, but are not tax-deductible
- interest not taxable as long as the withdrawal is a qualified distribution
_________ are a transfer of funds from one IRA or qualified plan to another
Rollovers
Rollovers are subjected to __% ______________ ___ if eligible rollover funds are received personally by a
participant in a qualified plan, unless the funds are deposited into a new IRA or qualified plan within __ ____ of
distribution.
20% withholding tax
60 days
Rollover contributions to an individual retirement annuity (IRA) are ________ by dollar amount
unlimited
-This law sets forth standards for funding, participating, vesting, disclosure, and tax treatment of retirement plans.
-This Act improves the pension system and encourages employees to increase contributions to their
employer-sponsored retirement plans
_requiring additional premiums for underfunded plans
-allowing employers to
automatically enroll employees in defined compensation plans
FEDERAL PENSION ACT OF 2006
1035 EXCHANGES
• The exchange of a life insurance policy for an annuity
• An annuity exchanged for another annuity contract
• A life insurance policy exchanged for another life policy
The exchange of an annuity for a life insurance policy is NOT permitted
