Section 2 Flashcards
Defined Contribution Pension Plan
A qualified plan set up by larger employers with younger work forces.
The contribution is defined, meaning it is the same for all eligible employees
Smaller employers with older employees often utilize a defined BENEFIT plan, which sets a target benefit to be achieved at a certain age, then funds it accordingly
Length of service very important on a defined contribution plan, but is NOT A FACTO ON DEFINED BENEFIT PLANS
Municipal Bond interest income vs. capital gains
Interest income from municipal bonds is exempt from federal tax. If the municipal bonds are held in a mutual fund portfolio the interest is paid to the shareholders as a tax free dividend. However, capital gains on municipal bonds is taxable, so capital gains distributions made by municipal bond mutual funds are taxable as well. Remember, a capital gain will occur if the mutual fund sells municipal bonds held in their portfolio for more than they paid for them.
Qualified Mutual Fund Dividends
Qualified Dividends are generally those paid by U.S. corporations or mutual funds. Although they are taxed at long-term capital gain rates, they are not capital gains, which only occur upon sale or redemption. Since dividends are taxable when they are automatically reinvested to buy more shares, the investor’s cost basis will increase. Remember, cost basis is defined as the amount of after-tax dollars you invest.
Growth Portfolios
Growth portfolios invest in stocks of newly emerging companies, which are risky, pay little in dividends and have low price/earnings (P/E) ratios. They are most suitable for younger investors with longer time horizons.
Section 457 Plan
A section 457 plan is a non-qualified, salary deferred contribution plan established by state and local governments and employers with tax-exempt status.
Earnings grow on a tax-deferred basis, and contributions are not taxed until the assets are distributed from the plan to the employees
Funds Of Hedge Funds
Funds of hedge funds are mutual funds that invest in hedge funds, thus making hedge funds indirectly available to ordinary investors.
The shares of a fund of hedge funds do not trade, nor are they redeemable unless the company chooses to redeem them.
This makes the investment potentially ILLiquidity
Municipal Bonds are UNSUITABLE for retirement plans
Municipal bonds, which generate tax-free interest income, are unsuitable for retirement plans. One loses the federally tax-free income at distribution.
Qualified Profit Sharing Retirement Plan
Qualified profit sharing plans require contributions ONLY in profitable years. Qualified profit-sharing plans must be in writing and non-discriminatory (hence “qualified”)
Investment Company Act of 1940
The investment company act of 1940 requires funds to have a clearly defined investment objective.
The only action that can be taken to change the investment objective is a majority vote of the outstanding SHARES.
(SHARES vote, not share holders)
