Chapter 13: Retirement Plans and Education Savings Plans
**The Employee Retirement Income Security Act of 1974 (ERISA) covers which of the following?-Retirement accounts of private sector employees.
ERISA covers Retirement Plans of private sector employees. Its primary purpose is to protect employees from the mishandling of retirement funds.
One of your clients wishes to discuss the investment of $60,000. The client wants to begin saving for college for his three young children and wishes to get the most growth and the best possible tax advantages. He is in the highest tax bracket and will be in his late forties when two of the three children will begin college. In the event that any of the children decide that they do not wish to go to college, the client does not want the children to have access to the funds. How should this client invest the money?-529
Each of the plans listed will either have tax consequences or does not meet the desired criteria other than the 529 Plan. UGMA accounts transfer directly to the minor when the child reaches the age of majority. Mutual funds will be subject to taxation on an annual basis. The Coverdell programs only allow $2,000 of contributions per year. So the 529 is the best plan for this client's children.
A client at the firm has a birthday of January 1st. The client has a Traditional IRA and he is concerned about required minimum distributions (RMDs) and the penalties associated with not taking RMDs. The client turns 72 this year. Which of the following is TRUE in this scenario?-Given that the client turns 72 this year, RMDs are not required until April 1st of the following year.
IRS rules specify that Required Minimum Distributions (RMDs) must begin by April 1st of the year following the calendar year in which the account holder reaches age 72. Because the client in this example turns 72 on January 1st of the current year, the client is not subject to RMDs until April 1st of the FOLLOWING year. Though some minimal exceptions to RMDs exist, these would not apply to someone who is employed in a part-time capacity at any employer and no exception exists simply due to a rollover from one Traditional IRA to another.
A 56 year old, self-employed individual withdraws $50,000 from his Keogh Plan. Which of the following statements is FALSE as to the tax consequences of the withdrawal?-Only the earnings portion of the withdrawal will be taxable
Only the earnings portion of the withdrawal will be taxable
In 2020, a single person who is not an active participant in a pension or profit-sharing plan has earned income of $70,000 and wants to establish an Individual Retirement Account. Which of the following is TRUE?-An IRA can be established and up to $6,000 can be contributed on a tax-deductible basis.
This person is not an active participant in a pension or profit-sharing plan. Therefore, he can establish an IRA and make a tax-deductible contribution up to $6,000 in 2020 (this amount is unchanged from 2019).
529-if student doesnt want education
account holder can request a refund - refund will be subject to random plan tax and earnings are subject to fed tax and 10% tx
roth 401k
after tax basis and qualified distributions are tax free
coverdell distributions
after tax contribution portion of a distribution is tax free - earnings not used for education gets 10% tax
distributions may begin
at 59 1/2, funds drawn before will be subject to 10% tax penalty except for death, disabilty, first time home purchase, education, medical insurace premiums
401k distributions
begin at 59 1/2, mandatory by 70 1/2- dsitrvutions are taxable as ordinary income
defined benefit plan
benefits are determined by predetermined formula - usaully on compensation, years or service and age - high salary employees benefit the most- actuary reviews
deductions are mandatory
by afe 70 1/2, required minimum distributions mist begin no later than april 1st following the calender year whih the owner reaches that year - late distributions get 50% tax penalty
529 withdrawls
can onlt be made by owner of account and not by beneficary
roth ira
contributions are not tax deductible --contribution dollars can be withdrawn at any time without penalities- contributions and earnings withdrawls upon retirement are tax free - benefits people who are old old and rich-can continue to contribute after age 70 1/2
529 plan info
contributions grow tax fee- distributions tax free- one student per acct - account holder can change beneficaries at any time as long as new beneficary is a qulified memeber of beneficary family
coverdell
eductaion savings - help parents and students save - cannot contribute more than 2000 a year for beneficary - can be made till beneficary is 18, assets must be distributed or transfeered before beneficary rwaches 30- or get 10% tax - contrbutiions not deductible but withdrawls are tax free
defined contribution plan
emploees of employeer or both make contribtuions0 cannot be caluclated in advance by a predetermined formula - depand on amount of contributions and performance of investments in acct
profit sharing plan
employees incentive to be productive- determination of amount is determined by employeers
tradtional IRA
encourage employed individuals to save for retirmenet by providing tax incentives- - contributitons usually tax deductible- taxes on contributions and earnings in the account are deffered
qualified retirement plan
established and maintained by a private employers- 40lk or profit sharing plans- usaully higher contribution limits
prepaid tution plan
family member locks in cost of school at a specific number of academic period or units at current price
education savings 529 plan
family memebrs contributes to account that will used for student to pay for tution, fees, books, supplies and room and board - value is based on investment performace- account owner as risk- earnings accumlate tax free- qualified withdrawls are tax free
IRA designed for
for people who recieve compensation- they are persoanl and controlled by the individual themselves
coverdell can be used to pay
higher education, seconary or elementary
ira tradtional deductions are permitted
individuals who are not active particpants in a retirement plan at work- may deduce all of their contributions up to contribution limits- individuals who are active with plans at work may be able to deduct contributionsn depending on taxpayers filing status and gross income
529 plan
maintained by state govt- allow individuals to set up to pay for students qualified education expenses- contributions are not deductible for federal income tax purposes - plans are tax advantged because any annual earnings and qualified withdrawaks are tax free at fed level
tradition ira contributions
may be made anually up to 100% of earned income not to excedd specific limits-people in 50s can add extra - contributions can not be made after age 70 1/2
distributer of 529 plan
must give investirs the offical statment, plan discolosure document, available to public
rollover
one account to another- must be done in 60 days
IRA
personal account for people who are employed that provides either tax deffered or tax free way ot saving for retirement -indiv can keep stocks, bonds, mutual funds and other investments in IRA
defined contribution plan 401k
portion of solary deffered - voluntary by employers- many employeers match, my have profit sharing programs-grow tax deffered
contribtions
pre-paid tutuion have max contributuions of the amount needed to prepay for set years of tutuion -savings plan contributions can be set at mmore than 300,000 depending on state- 529 plan contributions are not deductible
SIMPLE PLAN
simple way for small employers and employees to contribute toward retirement- allows employees to make elective salary deferrals of their pre tax compensation plan - small employers with 100 or few employees
able program
tax advantaged savings program to help support indiviuals with disabilities
keogh
tax deffed retiement plan for self employeed individuals
earnings
taxes on all earnings in IRA are deferred untill withdrawls are made from IRA
