Chapter 9

401k Plan

401K plan is where employees can elect to take a reduction in their current salaries by deferring amounts into a retirement plan. These pans 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.

Rollovers

Provide some degree of portability when an individual wishes to transfer funds from one plan to another, specifically to a rollover IRA. Rollover IRAs provide a way for individuals who have received a distribution from a qualified plan to reinvest the funds in a new tax deferred account and continue to shelter those funds and their earnings from current taxes. Rollover contributions to an IRA are unlimited by a dollar amount.They are used by individuals, for example, have left one employer for another an have received a complete distribution from their previous employer's plan.

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be taken for contributions made to a Roth, but the earnings on these contributions are entirely tax-free when they are withdrawn.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.

Profit Sharing Plans

They 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 profile, it is not necessary that the employer contributes every year or that the amount of contribution be the same.

Simplified Employee Pension

This plan is suited for the small employer. Due to the many administrative burdens and the costs involved with establishing a qualified defied contribution or defined benefit plan, as well as maintaining compliance with ERISA many small businesses have been reluctant to set up retirement plans for their employees.

Keogh Plans

a qualified retirement plan designed for unincorporated business that allows the business owner 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.

Defined Contribution Plans

address the amounts going into the plan currently and identify the participant's vested account. These predetermined amounts contributed to the participants account accumulate to a future point. The final amount available to a participant depends on the total contribution amount, plus interest and dividends.

403b Plans

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 501c organizations, including teachers in public school systems. They are not available to other kind of employees.

ERISA

It protects the rights of workers covered under an employer-sponsored plan. Before ERISA, workers had few guarantees to assure them that they would receive the pension benefit they thought they had earned.

IRA contributions/withdraws

There are a number of rules that discourage traditional IRA owners from withdrawing these funds prior to retirement. Traditional IRA owners are discouraged from perpetually sheltering their accounts from taxes by rules that mandate when the funds must be withdrawn.

Declined Benefit Plans

establishes a definite future benefit, pre determined by a specific formula. When the term pension is used, the reference is typically to a defined benefit plan. Usually the benefits are tied to the employee's year of service, amount of compensation, or both.

Simple Plans

Allows eligible employers to set up tax favored retirement savings plans for their employees without having to address many of the usual qualification requirements. SIMPLE plans are available to small businesses that employ no more than 100 employees who received at least $5000 in compensation from the employer during the previous year. To establish the SIMPLE plan, the employer must not have a qualified plan in place

Qualified Plan

Qualified plans are those that meet federal requirements and receive favorable tax treatments. -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 paid-out as a benefit -Contributions to an individual qualified plan, such as an individual retirement plan cannot exceed the max limits set by the IRS.

Traditional IRA

The IRA (individual retirement account) means by which individuals can save money for retirement and receive a current ta 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 individuals earnings and whether or not the individual is covered by an employer sponsored retirement plan, the amount the individual contributes to the traditional IRA may be fully or partially deducted from current income, resulting in lower current income taxes

Withholding

Any 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.

Roth IRA Contribution/Withdraws

Withdraws from Roth IRAs are either qualified or non qualified. A qualified withdrawal is one that provides for the full-tax advantage that Roth offers. To be a qualified withdrawal, the following two requirements must be met: -The funds have been held in the account for a min of 5 years. -The withdrawal must occur because the owner has reached age 59 1/2, the owner dies, the owner becomes disabled, or the distribution is used to purchase a first home. A Non-qualified Roth 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.