CH 10 retirement plans

First-time homebuyers are able to withdraw up to how much from their qualified IRAs without incurring the 10% early withdrawal penalty?

$10,000 First-time homebuyers are able to withdraw up to $10,000 from their qualified IRAs without incurring the 10% early withdrawal penalty.

403(b) plans (tax-sheltered annuities)

Another type of employer retirement plan is the tax-sheltered annuity or 403(b) plan. A tax sheltered annuity is a special tax-favored retirement plan available only to certain groups of employees. Tax-sheltered annuities may be established for the employees of specified nonprofit charitable, educational, religious, and other 501(c) (3) organizations, including teachers in public school systems. Such plans generally are not available to other kinds of employees.

Tom has a qualified retirement plan with his employer that is currently considered to be 80% "vested". How can this be interpreted?

If Tom's employment is terminated, 20% of the funds could be forfeited In this situation, 80% "vested" means that 20% of the funds could be forfeited if Tom's employment is terminated.

In an individual retirement account (IRA), rollover contributions are

Unlimited by dollar amount Rollover contributions to an individual retirement account are unlimited by dollar amount.

XYZ Corp has implemented a qualified retirement plan. This plan may NOT discriminate

in favor of highly compensated employees

Premature IRA distributions are subject to a penalty tax of

10%

What is the maximum number of employees (earning at least $5,000) that an employer can have in order to start a SIMPLE retirement plan?

100 An employer can have a maximum of 100 employees earning at least $5,000 to be eligible for a SIMPLE retirement plan.

An officer for a corporation takes out numerous unsecured loans from the company's qualified retirement plan. Which of these rules is the plan in violation of?

Exclusive benefit rule The assets held in a company's qualified retirement plan must be maintained for the exclusive benefit of the employees and their beneficiaries.

Keogh Plan (HR-10)

qualified retirement plan designed for unincorporated businesses (self-employed) that allows the business owner (or partner in a business) to participate as an employee, only if the employees of the business are included. These plans may be set up as either defined contribution or defined benefit plans. In the first years following enactment of the Keogh bill, there was a great deal of disparity between the rules for Keogh plans and those for corporate plans. However, various laws have eliminated most of the rules unique to Keogh plans, thereby establishing parity between qualified corporate employer retirement plans and noncorporate plans. This change means that Keogh plans: ► are subject to the same maximum contribution limits and benefit limits as qualified corporate plans ► must comply with the same participation and coverage requirements as qualified corporate plans ► are subject to the same nondiscrimination rules as qualified corporate plans

In a qualified retirement plan, the yearly contributions to an employee's account

are restricted to maximum limits set by the IRS Annual limits to an employee's qualified retirement plan are based on maximum limits set by the IRS.

According to ERISA regulations, a Summary Plan Description must be provided to a new plan member within ___ days of the member's eligibility date.

90 days

Cash or deferred arrangements (401(k) plan)

Another form of qualified employer retirement plan is known as the 401(k) plan, whereby employees can elect to take a reduction in their current salaries by deferring amounts into a retirement plan. These plans are called cash or a salary deferral option because employees cannot be forced to participate. They may take their income currently as cash or defer a portion of it until retirement with favorable tax advantages. The amounts deferred are not included in the employees' gross income and earnings credited to the deferrals grow tax-free until distribution. Typically, 401(k) plans include matching employer contributions.

Roth IRA

The 1997 Taxpayer Relief Act introduced a new kind of IRA: the Roth IRA. Roth IRAs are unique in that they provide for back-end benefits. No income tax deductions can be taken for contributions made to a Roth, but the earnings on those contributions are entirely tax-free when they are withdrawn. An amount up to the annual contribution limit can be contributed to a Roth IRA for any eligible individual. Active participant status is irrelevant. individual can open and contribute to a Roth regardless of whether the individual is covered by an employer's plan or maintains and contributes to other IRA accounts. No more than this amount can be contributed in any year for any account or combination of accounts. Unlike traditional IRAs, who are limited to those under age 70 1/2, Roth IRAs, impose no age limits. At any age, an individual with earned income can establish a Roth IRA and make contributions. However, Roth IRAs subject participants to earnings limitations that traditional IRAs do not. High income earners may not be able to contribute to a Roth IRA since the maximum annual contribution that can be made begins to phase out for individuals whose modified adjusted gross incomes reach certain levels. Above these limits, no Roth contributions are allowed.

SIMPLE plan

The same legislation that did away with SARSEPs also created a new form of qualified employer retirement plan (or SIMPLE). These arrangements allow eligible employers to set up tax-favored retirement savings plans for their employees without having to address many of the usual (and burdensome) qualification requirements. SIMPLE plans are available to small businesses (including tax exempt and government entities) that employ no more than 100 employees who received at least $5,000 in compensation from the employer during the previous year . To establish a SIMPLE plan, the employer must not have a qualified plan in place. SIMPLE plans may be structured as an IRA or as a 401(k) cash or deferred arrangement.

A Keogh plan is a(n)

qualified retirement plan for the self employed

When funds are transferred directly from one IRA to another IRA, what percentage of the tax is withheld?

None There is no tax withheld on an IRA transfer that directly involves two IRAs.

An individual working part-time has a gross income of $5,000 for the year. If this individual has an IRA, what is the maximum deductible IRA contribution allowable?

5000

A 55 year old recently received a $30,000 distribution from a previous employer's 401k plan, minus $6,000 for income tax withholding. Which federal taxes apply if none of the funds were rolled over?

Income taxes plus a 10% penalty tax on $30,000 All withdrawals from a qualified retirement plan are taxable as current income. In addition, any withdrawals made before age 59 1/2 is subject to an additional tax penalty of 10% of the amount withdrawn.

Rollover IRA

Normally benefits withdrawn from any qualified retirement plan are taxable the year in which they are received. is an account that allows for the transfer of assets from an old employer-sponsored retirement account to a traditional IRA. The purpose of a rollover IRA is to maintain the tax-deferred status of those assets. However, certain tax-free "rollover" provisions of the tax law provide some degree of portability when an individual wishes to transfer funds from one plan to another, specifically to a rollover IRA.

Roth IRA contributions/withdrawals

An individual can open and contribute to a Roth regardless of whether the individual is covered by an employer's plan or maintains and contributes to other IRA accounts. No more than this amount can be contributed in any year for any account or combination of accounts. Withdrawals from Roth IRAs are either qualified or nonqualified. A qualified withdrawal is one that provides for the full-tax advantage that Roths offer (tax-free distribution of earnings). To be a qualified withdrawal, the following two requirements must be met: ► The funds must have been held in the account for a minimum of five years ► The withdrawal must occur because the owner has reached age 59 ½, the owner dies, the owner becomes disabled, or the distribution is used to purchase a first home. nonqualified withdrawal is one that does not meet the previously discussed criteria. The result is that distributed Roth earnings are subject to tax. This would occur when the withdrawal is taken without meeting the above requirements and the amount of the withdrawal exceeds the total amount that was contributed.

An individual participant personally received eligible rollover funds from a profit-sharing plan. What is the income tax withholding requirements for this transaction?

20% is withheld for income taxes

Withholding

ny rollover must be made directly from one IRA to another IRA or it will be subject to a 20% withholding. This is true even if the rollover occurs within the 60-day limit. The key here is the word directly. To escape the withholding rate, the rollover must take place without the plan's funds being in the recipient's control for even an instant. If such control does occur and the 20% is withheld, the recipient must make up this amount out of other funds or the amount withheld will be subject to income taxation and possible a penalty for premature distribution. The amount withheld is, of course, applied toward the tax liability, if any, of money distributed from the fund. The withholding rule also applies to a trustee-to-trustee transfer of rollover funds.

Traditional IRA

An individual retirement account, commonly called an IRA, is a means by which individuals can save money for retirement and receive a current tax break, regardless of any other retirement plan. Basically, the amount contributed to an IRA accumulates and grows tax deferred. IRA funds are not taxed until they are taken out at retirement. Depending on the individual's earnings and whether or not the individual is covered by an employer-sponsored retirement plan, the amount the individual contributes to a traditional IRA may be fully or partially deducted from current income, resulting in lower current income taxes.

profit sharing plan

Profit sharing plans are established and maintained by an employer and allow employees to participate in the profits of the company. They set aside a portion of the firm's net income for distributions to employee's who qualify under the plan. Since contributions are tied to the company's profits, it is not necessary that the employer contribute every year or that the amount of contribution be the same. However, the IRS states that to qualify for favorable tax treatment, the plan must be maintained with "recurring and substantial" contributions. The IRS also states that withdrawals of funds from a profit sharing plan may be subject to a 10% tax penalty in addition to income taxes if they are made before the age of 59 1/2.

qualified plans

those that meet federal requirements and receive favorable tax treatment. Employer contributions to a qualified retirement plan are considered a deductible business expense, which lowers the business's income taxes ► The earnings of a qualified plan are exempt from income taxation ► Employer contributions to a qualified plan are not currently taxable to the employee in the years they are contributed, but they are taxable when they are paid-out as a benefit (typically when the employee is retired and in a lower tax bracket) ► Contributions to an individual qualified plan, such as an individual retirement account or annuity (IRA), are deductible from income under certain conditions ►The annual addition to an employee's account in a qualified retirement plan cannot exceed the maximum limits set by the IRS ►A plan is considered to be "top heavy" if more than 60% of plan assets are attributable to key employees as of the last day of the prior plan year ►The exclusive benefit rule states that assets held in a company's qualified retirement plan must be maintained for the exclusive benefit of the employees and their beneficiaries ►The survivor benefits under a qualified retirement plan can be waived only with the written consent of a married worker's spouse

Tim is retired and has recently separated from his wife. He receives benefits from a qualified retirement plan through his former employer. The plan's trustee has decided to split these benefit payments between Tim and his estranged wife. This decision is likely in violation of which IRS rule?

Alienation of benefits . Alienation of benefits involves the assignment of a pension or retirement plan participant's benefits to another person. It is permitted only under exceptional circumstances per IRS rules, such as certain participant loans and certain domestic relations orders. With no domestic relations order, this trustee is likely in violation of this rule.

ERISA

ERISA imposes a number of requirements that retirement plans must follow to obtain IRS approval as a qualified plan, eligible for favorable tax treatment. This law sets forth standards for participation, coverage, vesting, funding, and contributions. ERISA also regulates group health insurance in the area of disclosure and reporting. Before the passage of ERISA, workers had few guarantees to assure them that they would receive the pension benefit they thought they had earned. An unfortunate, but common plight was the worker who had devoted many years to one employer only to be terminated within a few years of retirement and not be entitled to a pension benefit.