Unit 11 Retirement Plans Flashcards
Individual Retirement Accounts (IRAs)
-must have earned income
-non-working spouse can make contributions based upon earned income of spouse
IRA contributions
-up to 100% of earned income
-subject to annual maximums
-extra contributions - age 50 or over
IRA deductibility of contributions
-phase out of deduction based upon adjusted gross income (AGI)
-no deduction if income above maximum AGI
IRA funding
investment can’t be put in:
life insurance
artwork, antiques, stamps, or coin collections
withdrawals prior to age 59.5
-IRA withdrawals taken before age 59.5 may have a tax penalty and income tax applied
-penalty can be waived:
–down payment for a first home ($10,000 maximum)
–college education
–health insurance premiums while unemployed
rollover
money is withdrawn and sent to the owner. owner has 60 days after receipt to put money in the IRA. if the money is coming from an employer sponsored plan, 20% is withheld and sent to the IRS
limited to one every 12 months
transfer
money sent directly from one plan to another. no limit number you can do in a year. no money is withheld and sent to the IRS
IRA Required Minimum Distribution
-must start making minimum withdrawals at the applicable age (age 73 starting in 2023, age 75 starting in 2033)
-first minimum withdrawal can be delayed until April 1 of the year following the year the owner turns the applicable age
-25% penalty if the minimum distributions not taken
taxation of IRA withdrawls
-fully taxed if all money in the IRA has not already been taxed
-nondeductible contributions are distributed tax free
distributions from an IRA upon death
-distribution requirements depend on who the beneficiary is
-spouse may treat the IRA as their own
-transfer to a spouse is not taxable
individual beneficiaries may choose:
-lump sum distribution
-distributions over life expectancy (not available to all beneficiaries)
-distributions over the ten years following the owner’s death
the entire value of the IRA is included in the deceased owner’s estate for estate tax purposes
Roth IRA
-contributions are not tax deductible
-contribution limits are the same as traditional IRA
-withdrawals are tax free as long as account open for five years and not taking money out before age 59.5
employer sponsored retirement plans
-regulated by ERISA
-tax advantages to the employer and/or employee depend on how the plan is funded
–employer contributions are tax deductible
–employee contributions are tax deductible
–interest earnings grow tax deferred
-general requirements
–participation: plans must benefit all regular employees, not just a few selected ones
–nondiscrimination: plans may not provide benefits to executives and other highly paid individuals that are out of proportion to other employees
-vesting
-reporting and disclosure
-fiduciary duty
vesting
determines when an employee owns the money in a retirement plan
employees are always 100% vested in their own contributions, employees must become vested in employer contributions in at least 6 years
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
pension plans
defined benefit - retirement benefit is specified in the plan
defined contribution - retirement benefit is not specified, contribution is specified
profit sharting
-contributions are made by the employer
-based on company profits
-contributions are not made every year (depends on company’s profits)
-maximum contribution is 25% of total employee payroll
Keogh
designed for self-employed persons, individual sole proprietors, partnerships
may be a defined benefit or defined contribution plan
401(k) plans
employee may make contributions - salary (elective) deferral
employers may match contributions up to a specified percentage
403(b) plans
school employees
employees of nonprofit organizations
simplified employee pension (SEP) plans
employers make contributions on the employee’s behalf
higher contribution limits than a traditional IRA
employees must be 100% vested
savings incentive math plans for employees (SIMPLE)
employers with 100 or fewer employees
employees can contribute
100% immediate vesting for employer contributions
all employees earning $5,000 or more per year must be allowed to participate
25% early withdrawal penalty for the first two years of participation
non-qualified plans
not regulated by ERISA
employers can design these plans any way they want
can discriminate in favor of higher paid employees
contributions are usually not tax deductible
