Unit 11: Retirement Plans Flashcards
IRAs
•must have earned income
•non-working spouse can make contributions based upon earned income of spouse (spousal IRA)
•annual contributions limited to the lesser of 100% of earned income for a flat dollar amount
•50+ catch-up
When are IRA contributions tax-deductible?
•if the individual or spouse is not covered by an employer-sponsored retirement plan
OR
•if the adjusted gross income (AGI) is under a certain limit
What are some products that IRA funds can be invested in?
•flexible premium annuities
•bank accounts
•brokerage accounts
•mutual funds
•US-minted gold & silver coins
What are some products IRAs CANNOT be invested in?
•life insurance
•collectibles (i.e., artwork, antiques, stamps)
•hard assets (i.e., precious gems & metals)
What are the 3 rules for rollovers (do NOT apply to transfers)?
- The money must be deposited within 60 days of its receipt by the owner, or it becomes taxable
- If the rollover is coming from an employer-sponsored plan it is subject to a withholding tax rate of 20%
- An IRA may be rolled over only once in any 12-month period
How are withdrawals from IRAs taxed?
•fully taxed if all money in the IRA has not already been taxed
•no deductible contributions are distributed tax-free
What tax advantages do all employer-sponsored qualified plans have?
•employer contributions are tax-deductible to the business
•employee contributions are tax-deductible to the employee
•neither employer nor employer contributions are taxable as current income to employees
•all (except for the Roth 401(k) feature) earnings grow tax-deferred
Employer sponsored retirement plans
•regulated by ERISA (employee retirement income security act of 1974)
•employer & employee contributions tax deductible
•interest earnings grow tax deferred
General requirements:
•participation-plans must benefit all regular employees, not just a few selected ones
•non-discriminatory
•vesting-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
•reporting & disclosure-each participant must receive in writing a summary plan description, notification of any significant changes, & an annual report
•fiduciary duty
What are defined benefit pension plans?
•designed to provide a specific benefit to an employee upon retirement
•employee payout at retirement typically depends on how long they worked & their salary
•may allow a lump-sum payout or a monthly “annuity payment”
What are defined contribution pension plans?
•do NOT specify what an employee will receive at retirement
•only specify how much the employee & employer can contribute
What are profit-sharing plans?
•contributions made by employer
•contributions dependent on the company making a profit
•contributions not made every year
•maximum contribution is 25% of the total employee payroll
•amount & timing of contributions at employer’s discretion
What are Keogh plans (HR-10 plans)?
•qualified retirement plans set up by self-employed persons & non-incorporated business such as sole proprietorships (individuals) & partnerships
•may be defined benefit OR defined contribution
What are simplified employee pension (SEP) plans?
•employer makes contribution on employee’s behalf
•higher contribution limits than traditional IRA
•employees must be 100% vested
What are savings incentive match plans for employees (SIMPLEs)?
•employers with 100 employees or less
•employees can contribute
•100% immediate vesting for employer contritions
•all employees earning $5k or more per year must be allowed to participate
•25% early withdrawal penalty for first 2 years of participation
What is Employee Retirement Income Security Act (ERISA)?
•enacted to protect the interests of participants in employee benefit plans as well as the interests of the participants’ beneficiaries
•applies to qualified pensions & also group insurance
•requires that certain information be made available to plan participants, beneficiaries, & the department of labor
