Chapter 11 Retirement plans

Roth IRA

-Contributions not tax deductible -Contribution limits same as traditional IRA -Qualified distributions are tax free *Account has been open for at least five years *age 59 1/2, death, disability, or first-time homebuyer

IRA funding

-Investment can't be put in *Life insurance *artwork, antiques, stamps, or coin collections *gold or silver bullion

IRA Required minimum distribution

-Must start making with minimum withdrawals at age 70 1/2 -first minimum withdrawal can be delayed until April 1 of the year the owner turns 70 1/2 -50% tax penalty owed if minimum distributions not taken -annual minimum withdrawals are based upon the owners life expectancy

Individual Retirement Account (IRA)

-Owner must be under age 70 1/2 -must have earned income -non-working spouse can make contributions based upon earned income of spouse (spousal IRA)

IRA Deductible Contributions

-Phase out of deduction based upon adjusted gross income (AGI) -No deduction if income above maximum AGI

Keogh (HR-10)

-Qualified retirement plan -Self employed, sole proprietors, unincorporated businesses -earned income when business has gross profit -Max 25% or $52,000 -ER must contribute same for all employees -Tax deferred growth -Taxed as ordinary income -May make nonqualified contributions, but goes toward max -Excess contribution 10% penalty -Full time (1000 hours) -At least 21 -Worked 1 year at employer

distributions from an IRA upon Death

-Transfer to spouse is not taxable -Individual beneficiaries may choose not to take distributions for up to five years following the owner's death, but under this option the entire IRA fund must be distributed by that time -The entire value of the IRA is includable in the deceased owner's estate for estate tax purposes

profit sharing

-contributions made by employer -based on company profits -contributions not made every year -maximum contribution is 25% of total employee payroll

Savings Incentive Match Plan for Employees (SIMPLE)

-employers with 100 employees or less -employees can contribute -100% immediate vesting for employer contributions -all employees earning $5,000 or more per year must be allowed to participate -25% early withdrawal penalty for first two years of employment

Which of the following products cannot be used to fund an IRA?

Life Insurance

employer-sponsored retirement plan

-regulated by ERISA (Employee Retirement Income Security Act of 1974) -Employer contributions tax deductible -employee contributions are tax deductible -Interest earnings grow tax deferred -general requirements **participation- plans must benefit all regular employees, not just a few selected ones **non-discriminations- plans may not provide benefits to executives and other highly paid individuals that are out of proportion to other employees -vesting **Determines when an employee owns the money in a retirement plan **employee are always 100% vested in their own contributions **employer contributions- employees must become vested in at least 6 years -Reporting and disclosure- Each participant must receive, in writing, a summary plan description, notification of any significant changes, and an annual report -fiduciary duty- anyone with control over the plan or its assets are fiduciaires. they must manage the plan solely in the best interest of its participants

Defined benefit

-retirement benefit specified in the plan

Rollovers and Transfers

-rollover- money is withdrawn and sent to the owner *owner has 60 days after receipt to put money in IRA *if money is coming from an employer sponsored plan **20% withheld and sent to the IRS *Transfer- Money sent directly from one plan to another **no limit on the number of transfers **No money withheld and sent to the IRS

IRA contributions

-up to 100% of earned income -subject to annual maximums -extra contributions- age 50 and over

Premature distribution from a qualified plan or an IRA can result in the amount being taxed as income plus a penalty tax of

10%

At what age can people begin making catch-up contributions to their individual retirement plans?

50

at what age is an individual no longer subject to early withdrawal penalties under an IRA?

59 1/2

a rollover from on IRA to another or from a qualified plan to an IRA must be accomplished within how many days if the owner is to avoid an income tax liability on the amount rolled over?

60

401 (k) retirement plan

A qualified retirement plan that allows eligible employees of a company to save and invest for their own retirement on a tax deferred basis -Employee may make contributions - Salary (elective deferral) -Employers may match contributions up to a specified percentage

403(b) plan

A tax-deferred retirement plan for teachers, hospital workers, ministers, and some other public employees

ERISA (Employee Retirement Income Security Act)

Federal law that increased the responsibility of pension plan trustees to protect retirees, established certain rights related to vesting and portability, and created the Pension Benefit Guarantee Corporation -Protects employee and beneficiaries -plan applies to qualified pensions and also group insurance -ERISA requires that certain information be made available to plan participants, beneficiaries, and the department of labor

All of the following individuals meet eligibility requirements for setting up an IRA EXCEPT

Mitch is unemployed but does receive rental income of $2,000 a month

Which of the following requirements of all employer-sponsored qualified retirement plans states that plans must benefit all regular employees, not just a select few?

Participation

Which of the following early withdrawals from an IRA would be subject to a 10% penalty?

Premature withdrawal at age 55 in order to pay off a credit card

Which of the following employee sponsored retirement plans does not require the employer to make a funding contribution every year?

Profit-Sharing plans

Non-Qualified Plans

Retirement plans that do not meet the requirements of ERISA are known as non-qualified plans These plans often discriminate in favor of the highly paid employees and often have no vesting prior to retirement age The contributions paid in by employers are not tax deductible until the employee actually receives the funds

Simplified Employee Pension (SEP)

Tax-deferred account to which the self-employed and employees of very small businesses can contribute. -employer makes contribution on Employee's behalf -higher contribution limits than traditional IRA -employees must be 100% vested

Kim is required to take a $2,000 minimum annual distribution from her IRA. She fails to comply and only takes a $1,000 distribution. Because of this failure, Kim will be subject to

a 50% penalty tax

Curtis knows that when her retires after age 65, he will receive 80% of his salary as a pension. This is an example of

a defined- benefit plan

Delbert is self-employed and sets up a retirement plan for himself. Delbert most likely sets up

a keogh plan

Carmen owns a business with 200 employees that provides a retirement makes contributions on the employee's behalf. Carmen's plan is most likely

an SEP

Which of the following organizations would be eligible to offer a 403(B) arrangement?

public school system

defined contribution plan

retirement plan in which the employer sets up an individual account for each employee and specifies the size of the investment into that account -retirement benefit NOT specified -contribution is specified

All of the following statements about profit-sharing plans are correct EXCEPT

the amount of annual contributions is set by employee