XCEL Solutions 2-15 Exam- Ch. 9

Nonqualified 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of certain employees -Contributions are not tax-deductible -Interest earned on contributions is tax-deferred until withdrawn upon retirement

Features of a Qualified Plan:

-Employer contributions are tax-deductible as a business expense -Employee contributions are made with pre-tax dollars -Interest earned on contributions is tax-deferred, until withdrawn upon retirement

1035 Exchanges

-The exchange of a life insurance policy for an annuity -An annuity exchanged for another annuity contract -A life insurance policy exchanged for another life policy *The exchange of an annuity for a life insurance policy is NOT permitted

ERISA (Employee Retirement Income Security Act of 1974)

A federal law that sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans *Qualified retirement plans must allow the enrollment of all employees over age 21 with one year experience

Traditional IRA

A personal qualified retirement account through which eligible individuals accumulate tax-deferred income up to a certain amount each year depending on the person's tax bracket

SIMPLE (Savings Incentive Match Plan for Employees)

A qualified employer retirement plan that allows small employers to set up tax favored retirement savings plans for their employees -Available to small businesses with less than 100 employees

A Qualified Plan

A retirement or employee compensation plan established and maintained by an employer that meets specific guidelines spelled out by the IRS and consequently receives favorable tax treatment *Meet federal requirements and receive favorable tax treatment (must be approved by the IRS) -Exclusive benefit of employees and beneficiaries -Provide tax benefits and must be approved by the IRS -Must be permanent and in writing, communicated to all employees, cannot favor highly paid employees, executives, or stockholders

403(B) Plan

A retirement plan for certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers

401(K) Plan

A retirement savings plan sponsored by an employer. It lets workers save and invest a piece of their paycheck before taxes are taken out -Taxes aren't paid until the money is withdrawn from the account

Defined Contribution Plans

A tax-qualified retirement plan in which annual contributions are determined by a formula set forth in the plan. -Benefits paid to a participant vary with the amount of contributions made on the participant's behalf and the length of service under the plan -Do not specify the exact benefit amount until distribution begins -Two types: profit-sharing and pension plans *Retirement plan where you put in your own money (401k, 403b, etc)

Simplified Employee Pension (SEP)

A type of qualified retirement plan under which the employer contributes to an individual retirement account set up and maintained by the employee -A mix of IRA and profit-sharing plan *Qualified plans for small employers

Money Purchase Plans

Allow employers to contribute a fixed annual amount, apportioned to each participant, with benefits based on funds in the account upon retirement -Target benefit plans have a target benefit amount

Cliff Vesting

An employee becomes fully vested in a retirement plan after a specified period of time.

Graded Vesting

An employee becomes partially vested in a retirement plan after an initial period of time, then becomes vested in an additional percentage each year until fully vested.

Rollovers

An individual retirement account established with funds transferred from another IRA or qualified retirement plan that the owner had terminate

Profit-Sharing Plans

Any plans whereby a portion of a firm's net income is set aside for distribution to employees who qualify under the plan

Keogh Plans

Designed to fund retirement of self-employed individuals; name derived from the author of the Keogh Act under which contributions to such plans are given favorable tax treatment -for self-employed persons, such as doctors, farmers, lawyers, etc. and may be defined contribution or defined benefit plans

Vesting Rules

Determine how participants achieve ownership of contributions made by employers -Two types: cliff vesting and graded vesting

Pension Plans

Employers contribute to a plan based on the employee's compensation and years of service, not company profitability or performance

Defined Benefit Plans

Pension plans under which benefits are determined by a specific benefit formula -Based on employee's length of service and/or earnings -Defined benefit plans are mostly funded by individual and group deferred annuities -Max benefit is employee's average annual salary, not to exceed $195,000 *A retirement account where your employer ponies up all the money and promises you a set payout when you retire

IRA contributions/ Withdrawals

Provide generous tax breaks. Traditional IRA contributions are tax deductible on both state and federal tax returns for the year you make the contribution, while withdrawals in retirement are taxed at ordinary income tax rates -Withdrawals must start no later than April 1 following the year in which the participant reaches the age of 70 1/2 and the law specifies a minimum amount that must be withdrawn every year -No cash withdrawals prior to age 59 1/2 are permitted without a 10% excise tax with the following exceptions: *if the owner dies or becomes disabled *if distribution is in equal payments over the owner's lifetime *if higher education expenses for a dependent are necessary *to purchase a first home with up to $10,000 down payment *to pay health insurance premiums while unemployed *to correct or reduce an excess contribution

Qualified Withdrawals

Provide the tax-free distribution of earnings -Funds must be held in account for 5 years min to be qualified -No portion of withdrawal is subject to tax if: owner reached age 59 1/2, owner dies or becomes disabled, or distribution is used to purchase a first home -Mandatory withdrawals at age 70 1/2, failure to do so will result in a 50% tax penalty on those funds

Stock Bonus Plans

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

Federal Pension Act of 2006

This law sets forth standards for funding, participating, vesting, disclosure, and tax treatment of retirement plans. -This Act improves the pension system and encourages employees to increase contributions to their employer-sponsored retirement plans. -The provisions of the act have two main goals: addressing employers pension funds and assisting employees who are saving for retirement.

If more than 60% of a qualified plan's assets are in key employee accounts, the plan is considered _______?

Top Heavy

Nonqualified Withdrawal

When a withdrawal is taken without meeting the above criteria and the amount of the withdrawal exceeds the total amount contributed -Earnings from the contributions become taxable

Roth IRA

an individual retirement account allowing a person to set aside after-tax income up to a specified amount each year. Both earnings on the account and withdrawals after age 59½ are tax-free.