Terms 2 Flashcards
Social Security
The Social Security Act of 1935 created a federal tax that is paid partially by employers and partially by their employees. The tax is invested in Social Security trust funds. Employees qualify for retirement benefits based on years worked, amounts paid into the fund, and retirement age
Traditional IRA
Personal, tax-deferred account that a person who has taxable earned income may set up. The IRS limits contribution amounts and deductibility. Spousal IRAs may also be available (the previously described person may contribute to an IRA for a spouse not earning taxable income). Account owners may convert Traditional IRAs to Roth IRAs
Roth individual retirement account (IRA)
Contributions are not tax deductible, but distributions (including earnings) can be tax free if certain circumstances exist. IRS limits contribution amounts
SEC
The Securities and Exchange Commission (SEC) oversees employer securities registration in company-sponsored retirement plans and sets standards to be sure fraud and market manipulation does not occur
IRS
Internal Revenue Service, issues regulations and technical guidance about the application of federal tax laws to retirement plans
Fiduciary
A person or entity ethically and legally bound to act in another’s best interest
Trustee
A person, company, or association holding assets in trust for a beneficiary
Plan sponsor
The person or group who establishes or maintains the plan. This includes an employer, employee organization, association, committee, joint board of trustees, or other similar group of representatives
Vesting
Vesting is the percentage of ownership that an employee has in the account. Employees are always 100% vested for their own contributions to the account because it is their money. However, any money that the employer contributes to an employee’s retirement (company match, profit sharing, or pension) does not belong to the employee until the employee is vested in that money. Vesting is typically based on an employee’s years of service with the company
Cliff vesting
The employee is 0% vested until the end of a designated time frame. At that point, the employee becomes 100% vested. If a plan uses this type of schedule, the maximum time frame until becoming fully vested cannot exceed 3 years
Graded vesting
Employees attain a greater percentage of vesting for each year of service until they become 100% vested. If a plan uses this type of schedule, the employee must be at least 20% vested by the end of the second year of service and 100% vested by the end of the sixth year of service
Immediate vesting
Many plans fully vest employer contributions immediately when the employer or matching contributions are made to an employee’s account. Almost all accounts become fully vested when an employee dies or becomes disabled. 100% vesting is mandatory if and when a plan is terminated, no matter where an employee might be on the vesting schedule. On the date the plan terminates, active employees become fully vested. However, if employees voluntarily terminate employment before the plan termination date, they might not become 100% vested unless the employer decides to vest certain terminated employees, or the Internal Revenue Service (IRS) requires that they become vested due to a discrimination issue
