Retirement plans

Qualified plans have the following features

-Employer contributions are tax deductible as a business expense -Employee contributions are made with pretax dollars and are not taxed until withdrawn -interest earned on these contributions are tax deferred until withdrawn upon retirement -The annual addition to an employees account in a qualified retirement plan cannot exceed the maximum limit set by the Internal Revenue Service

1035 exchanges that can be made without current taxation include

-The exchange of life insurance policy for an annuity -Annuity exchange for another annuity contract -Life insurance policy in exchange for another life insurance

Non-qualified plans are characterized by the following

-do not need to be approved by the IRS -Can discriminate in favor of certain employees -Contributions are not tax deductible -Interest earned on these contributions or tax deferred until withdrawn upon retirement

What year was ERISA developed?

1974

What percent can an employer choose to make nonelective contributions of ?

2% of compensation on behalf of each eligible employee

What is the tax rollovers are subject to?

20% withholding tax, if eligible rollover funds are received personally by a participant in a qualified plan Unless the funds are deposited into a new IRA or qualified plan within 60 days of distribution

A summary plan description must be provided within how many days following a new plan members eligibility date

90 days

A 401(k) plan is also known as

A cash or deferred arrangement

What is a Keogh plans

A defined contribution or defined benefit plan for self-employed people, such as doctors, farmers lawyers, and other soul proprietors

Annual return/report (Form 5500)

A disclosure document that employee benefit plans used to satisfy annual report requirements under ERISA

How much can a defined contribution Keogh plan have?

A maximum contribution of $49,000 a year

What is a 403B plan

A special class of retirement plans available to the employees of a certain charitable educational or religious organization

Defined benefit plans pay

A specified benefit amount upon the employees retirement

What do target benefit plans have?

A target benefit amount

What is a profit sharing plan

A type of retirement plan that sets aside a portion of the firms, net income to share to employees who qualify under the plan

What are the two main goals of the provisions of the federal pension act of 2006?

Addressing employers pension funds And assisting employees who are trying to say for retirement

What do 401(k) plans do?

Allow employers to make tax deferred contributions to the participant

What does a money purchase plan do?

Allows employers to contribute a fixed annual amount, a portion to each participant with benefits based on funds in the account upon retirement

What is the benefit of the trustee to trustee transfer of rollover funds, being not subject to the withholding tax?

Allows the participant to avoid mandatory income tax withholding on the amount, transferred instead of personally receiving the funds, and then rolling them over

What is an SEP?

An arrangement where an employee establishes and maintains an IRA and the employer contributes. However, employer contributions are not included in the employees gross income.

Who are IRAs established by?

An individual who has earned income to save for retirement

When are distributions mandatory?

April 1 of the year following the age 70 1/2

What happens to withdraws made prior to age 59 1/2?

Are assessed an additional 10% penalty tax

What is the purpose of a SIMPLE plan

Are available to small businesses, including tax exempt, and government entities that employed no more than 100 employees who receive at least $5000 in compensation from the employer during the previous year

How does the federal pension act of 2006 address employer responsibilities?

By requiring extra premiums for underfunded plans Then requiring employers to obtain accurate assessments of the pensions financial obligations Also, closing loopholes where underfunded plans skip payments and prevent employers with underfunded plans from promising extra benefits without first funding those benefits

In a Keogh plan, contributions interest and dividends are what?

Contributions are tax deductible while interest and dividends are tax deferred

The primary type of qualified plans are

Defined benefit and defined contribution plants

What is the term pension referring to when used?

Defined benefit plan

What is a Roth IRA

Designed that withdraws are received income tax free

How do employers make the tax deferred contributions into the 401(k) plans?

Either by placing a cash bonus into the employees account on a pre-tax basis, or the individual taking a reduce salary with the reduction, place to pre-tax in the account

What should a surviving spouse who inherits an IRA benefit from a deceased spouse quality plan do?

Eligible to establish a rollover IRA in their own name

What does ERISA stand for?

Employee Retirement Income Security Act of 1974

What is a pension plan?

Employers contribute to a plan based on the employees, compensation and years of experience, not the companies profitability or performance

Vested can also mean

Forfeiting of something

How often May contributions vary?

From year to year

Withdraws made by the employee before the age 59 1/2 are

Given an additional 10% penalty tax

How does the FPA help employees

Helps them save for retirement so you're qualified plans by -Allowing employers to automatically enroll employees in defined compensation plans -Provide more accurate information about accounts -Increase access to professional advice about investments -Allow for direct deposit of income tax refunds into IRAs -Allow active military to make early penalty, free withdrawals -Increase limits on contributions to qualified plans -And provide for better portability for those plans

What is the only way the funds can be withdrawn before the age 59 1/2 without receiving the 10% penalty tax?

If the employee dies or becomes disable If a loan taken on the plans proceeds If the withdrawal is the result of a divorce proceeding If the withdrawal is made to qualified rollover plan Or, if the employee Alex to receive annual level payments for the remainder of his life

What is the purpose of the federal pension act of 2006

Improves the pension system and encourages employees to increase contributions to their employer, sponsored retirement plans

Who are defined benefit plans mostly funded by?

Individual and group deferred annuities

What are the exceptions to withdrawing before the age 59 1/2 without paying the 10% penalty tax?

Interest is still taxable however, funds may be withdrawn due to -death -disability -first time homebuyers up to $10,000 -education no dollars maximum -health insurance -premiums if unemployed - qualified medical expenses

What is the maximum defined benefit a Keogh plan can have?

Maximum benefits of $195,000 a year

The employer must not have what plan in place an order to establish an SIMPLE plan

Must not have a qualified plan in place

What are qualified distributions in a Roth IRA?

Must occur after five years in the event of death or disability of an individual Up to $10,000 for first time homebuyers Or at the age 59 1/2

Interest on contributions in a Roth IRA are what?

Not taxable as long as the withdrawal is a qualified distribution

What is Cliff vesting?

Only 100% vested after a period of time (e.g., 5 years) with no gradation.

What makes a plan consider top-heavy

Only if more than 60% of qualified retirement plan assets are in key employee accounts

How do you avoid penalties in a traditional IRA?

Owners must begin to receive payment from their accounts no later than April 1 in the year, following the attainment of the age 70 1/2

The qualified plans must be

Permanent in writing communicated to employees defined contributions or benefits and cannot favor highly paid employees, executives, or stockholders

What are the two main types of defined contribution plans?

Profit sharing, and pension plans

What is a qualified plan

Retirement plans that mean federal requirements receive favorable tax treatment

What does SIMPLE stand for ?

Savings Incentive Match Plan for Employees

Who do SEP's is also include?

Self-employed individuals

What is the federal law pension act of 2006

Sets forth standards for funding, participating vesting, closure, and tax treatment of retirement plans

What is a stock bonus plan?

Similar to profit-sharing plans, except that contributions by the employer do not depend on profits and benefits, are distributed in the form of company stock

SEP's are also known

Simplified employee plans

What are contributions subject to in a Roth IRA?

Subject to the same limits as traditional IRAs, however, are not tax deductible

Qualified plans provide

Tax benefits, and must be approved by the IRS

Employee contributions are

Tax deductible and not treated as taxable income to the employee Made with pretax dollars Any interest earned on both employer and employee contributions are tax deferred Only pay taxes on the amounts at the time of withdrawal

403B plan is also known ass

Tax, sheltered annuity

Withdraws by the employee are treated as

Taxable income

In a traditional IRA all withdrawals are

Taxable income, however some individuals made deduct contributions from their taxes based on their adjusted gross income(AGI)

What is the benefit in the defined benefit plan based on?

The employees length of service or earnings

What happens if an individual or spouse does not have an employee retirement plan in a traditional IRA

The entire contribution is tax deductible, regardless of AGI

What must profit sharing plans provide participants with?

The formula that employer uses for contributions

What is the maximum contribution in a defined contribution plan?

The lesser of the employees earnings or $49,000 per year

What is the difference between an SEP and an IRA?

The much larger amount that can be contributed in an employee's SEP plan is the lesser of the 25% of the employees annual compensation

Who normally owns the 403B tax sheltered annuity

The participating employee

What is an unlimited, marital deduction?

The transfer of the decedents IRA account balance to a surviving spouse which generally exempt the transfer from estate taxes

What do traditional IRAs allow?

They allow for an individual to contribute a limited amount of money per year, and the interest earned is tax, deferred until withdrawal

What are the contribution limits in a traditional IRA

They are indexed annually currently at $5000 per year with $6000 for individuals age 50 or older

What happens to funds that are transferred directly from one qualified IRA to another qualified IRA?

They are not subject to withholding tax This allows the participant to avoid mandatory income tax withholding on the amount transferred

What happens to roll over contribution to an IRA?

They are unlimited by the dollar amount

Why are qualified retirement plans required to allow the enrollment of all employees over age 21 with one year experience

To comply with ERISA minimum participation standards

What is the overall purpose of ERISA?

To protect the rights of workers, covered under an employer sponsored plan

What is ERISA?

To provide minimum benefit standards for pension and employee benefit plans, including fiduciary, responsibility, reporting, and disclosure, practice, and vesting rules

What are rollovers?

Transfer of funds from one IRA or qualified plan to another

How long are contributions and interest tax deferred?

Until withdrawal

When are the account funds taxable?

Upon withdrawal

When do defined contribution plans specify the exact benefit amount?

When the distribution begins

What happens if you fail to take out those required withdrawals

Will result in a 50% excise task on those funds

What is the only exchange not allowed in the 1035 exchanges?

You cannot exchange an annuity for a life insurance policy

What is graded vesting?

qualified retirement plan participants become incrementally vested over a period of years of service

Alienation of benefits

the assigning of a pension or retirement plan participant's benefits to another person

Exclusive benefit rule

this 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