Unit 11: Retirement Plans

Question 1

individual retirement accounts

Answer 1

must have earned income

non working spouse can make contributions base upon earned income of spouse (spouse IRA)

Question 2

IRA Contributions

Answer 2

thee is a cap on how much you can invest
up to 100% of earned income
subject to annual maximums
extra contributions -age 50 or over

Question 3

IRA deductibility

Answer 3

you can deduct your contributions from your taxes

phase out of deduction based upon the adjusted gross income (AGI)

No deduction if income is above the maximum AGI

Question 4

IRA funding

Answer 4

thee are some restrictions on the types of products in which IRA funds may be invested

investments can’t be put in:

• life insurance
• collectables: artwork, antiques, stamps, or coin collections

Question 5

special ages

Answer 5

age 50 ——-> can set up catch up contributions
age 59 1/2 –> no more of 10% penalty for taking out of IRA
age 70 1/2—> no more IRA contributions
age 72——–> IRS demands you start taking out contributions

Question 6

withdrawals prior to age 59 1/2

Answer 6

IRA withdrawals taken before this age may have a tax penalty and income tax is applied

there are ways the penalty can be waived:

• periodic payments made over the owner’s life expectancy
• certain medical expenses
• payment of health insurance premiums while unemployed
• certain higher education expenses
• down payment for a first time home purchase (10k maximum)
• birth and adoption expenses (5k maximum)
• distributions made under a divorce decree to an ex-spouse or dependent child
• correcting an excess contribution

Question 7

Rollovers and Transfers

Answer 7

there are only two ways to move IRA accounts from one company to another

rollover-money is withdrawn and sent to the owner
-owner has 60 days after receipt to put money in IRA
-If money is coming from an employer sponsored plan
+20% withheld and sent to IRS
-limited to one rollover every 12 months

Transfer-money sent directly from one plan to another

• no limit on the number of transfers
• no money withheld and sent to the IRS

rollovers are the old school way to do it. Most do transfers

Question 8

IRA required minimum distribution

Answer 8

72

first minimum withdrawal can be delayed until April 1st of the year following the year of the owner turns 72.

50% penalty on taxes owned if minimum distributions not taken

annual minimum withdrawals are based upon the owners lie expectancy

Question 9

Taxation of IRA withdrawals

Answer 9

fully taxed if all money in the IRA has not already been taxed

nondeductible contributions are distributed tax free

Question 10

distributions from IRA upon death

Answer 10

distributions vary depending on beneficiary

transfer to a spouse is not taxable

the entire value of the IRA is includable in the deceased owner’s estate for estate tax purposes

Question 11

Roth IRA

Answer 11

contributions are NOT tax deductible

contribution limits are the same as a traditional IRA

withdrawals are tax free:

• account open for 5 years
• not before age 59 1/2

Question 12

tax deductible

Answer 12

an expense that a taxpayer or business can subtract from adjusted gross income, which reduces their income, thereby reducing the overall tax they need to pay.

lowers your taxable income and thus reduces your tax liability.

Question 13

vesting

Answer 13

• determines when an employee owns the money in a retirement plan
• employees are always 100% vested in their own contributions
• employer contributions- employees must become vested in at least 6 years.

Question 14

Employer Sponsored Retirement Plans

Answer 14

tax advantages to employer and/or employer depending on how plan is funded

• employer contributions are tax deductible
• employee contributions are tax deductible
• interest earnings grow tax deferred

regulated by ERISA

participation - plans must benefit all regular employees, not just a few select ones

non-discrimination - plans may not provide benefits to executives and other highly paid individuals that are out of proportion to other employees

vesting

reporting and disclosure - each participant must receive in writing, a summary plan description, notification of any significant changes, and an annual report

fiduciary duty - anyone with control over the plan or its assets are fiduciaries. They must manage the plan solely in the best interest of its participants

Question 15

pension plans

Answer 15

pension plans are funded by employer every year of employment

defined benefit
-retirement benefit specified in the plan

defined contribution

• retirement benefit NOT specified
• contribution is specified

Question 16

profit sharing

Answer 16

the employer is NOT required to make a contribution every year. It depends on the company’s profits

contributions are made by the employer

based on company profits

contributions are not made every year

maximum contribution is 25% of total employee payroll

Question 17

Keogh (HR-10)

Answer 17

designed for:

• self-employed persons
• individual sole proprietors
• partnerships

may be a defined benefit or defined contribution plan

Question 18

401 k

Answer 18

employee may make contributions - salary (elective) deferral

employers may match contributions up to a specified percentage

Question 19

403 b

Answer 19

school employees

employees of nonprofit orgs

Question 20

simplified employee pension (SEP)

Answer 20

employer makes contributions on the employee’s behalf

higher contribution limits than a traditional IRA

employees must be 100% vested in the employer contributions

Question 21

savings incentive match plans for employees

Answer 21

employers with 100 or fewer employees

employees can contribute

100% immediate vesting for employer contributions

all employees earing 5k or more per years must be allowed to participate

25% early withdrawal penalty for first two years of participation

Question 22

ERISA

Answer 22

protects employees and beneficiaries

applies to qualified pensions and also group insurance

requires that certain information be made available to plan participants, beneficiaries, and the Department of Labor

Question 23

nonqualified plans

Answer 23

not regulated by ERISA

employers can design there plans any way they want

can discriminate in favor of higher paid employees

contributions usually not tax deductible