Retirement Plans Vocab & Notes Chap 9 Flashcards
A retirement or employee compensation plan established and maintained by an employer that meets specific guidelines spelled out by the IRS and consequently receives favorable tax treatment.
A Qualified plan
A federal law that sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans.
ERISA (The Employee Retirement Income Security Act of 1974)
A tax-qualified retirement plan in which annual contributions are determined by a formula set forth in the plan. Benefits paid to a participant vary with the amount of contributions made on the participant’s behalf and the length of service under the plan.
Defined contribution plans
Any plans whereby a portion of a company’s profits is set aside for distribution to employees who qualify under the plan.
Profit-sharing plans
Pension plans under which benefits are determined by a specific benefit formula.
Defined benefit plans
A retirement savings plan sponsored by an employer. It lets workers save and invest a piece of their paycheck before taxes are taken out. Taxes aren’t paid until the money is withdrawn from the account.
The 401(k) Plan
A retirement plan for certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers
The 403(b) Plan
A retirement plan designed to fund retirement of self-employed individuals;
Keogh plans
A type of qualified retirement plan under which the employer contributes to an individual retirement account set up and maintained by the employee.
Simplified employee pension (SEP)
A qualified employer retirement plan that allows small employers to set up tax-favored retirement savings plans for their employees.
SIMPLE
A personal qualified retirement account through which eligible individuals accumulate tax- deferred income up to a certain amount each year, depending on the person’s tax bracket.
Traditional IRA
_____________________ can give you tax benefits, but it depends on when you use them. When you put money into a Traditional IRA, you can deduct it from your taxes for that year. But when you take out money during retirement, you have to pay taxes on it as regular income. Anyone under 70 1/2 years old with earned income can open a Traditional IRA. Once you reach 70 1/2, you must start taking out a minimum amount each year. If you take out money before 59 1/2 years old, you usually have to pay a 10% extra tax, unless specific situations apply, like if you become disabled or need it for education expenses or buying your first home.
IRA Contributions/Withdrawals
With IRA Contributions/Withdrawals no cash withdrawals prior to the age of 59 1/2 are permitted without having to pay a 10% excise tax, with the 7 exceptions:
- if the owner dies or becomes disabled;
- if distribution is in equal payments over the
owner’s lifetime; - if higher education expenses for a dependent
are necessary; - to purchase a first home with up to $10,000
down payment; - if out-of-pocket medical expenses are in excess
of 7.5% of adjusted gross; - to pay health insurance premiums while
unemployed; or - to correct or reduce an excess contribution.
An individual retirement account allowing a person to set aside after-tax income up to a specified amount each year. Both earnings on the account and withdrawals after age 59 1/2 are tax-free. The funds are taxed as income before the contribution is made. These contributions are made with after-tax dollars. At the time of payout, the funds are tax free. Unlike the traditional IRA, it imposes no age limits. _______ withdrawals are either qualified or nonqualified. Also, unlike traditional IRAs, ___________ distributions are not mandatory and can therefore be inherited and passed down through generations.
Roth IRA
When you take money out of your account and don’t have to pay taxes on the earnings. To qualify for this, the funds must have been in the account for at least five years. If you make a withdrawal for specific reasons, you won’t have to pay any taxes on that money you take out.
Qualified Withdrawals
