Chapter 7: Qualified Plans

In a defined contribution plan

The contribution is known and the benefit is unknown

Qualified plans are designed for

Benefits of employees and must use a benefit or contribution formula not discriminating in favor of the prohibited group (officers, stockholders, or highly paid employees) AND they have a vesting requirement. These plans must be permanent, written and binding, and communicated to employees.

Only qualified plan NOT for retirement

529 College Fund

Funds moved from a Traditional IRA into a ROTH are

Taxable income in the year of the move

All of the following would be different between qualified and nonqualified retirements plans except

Taxation on accumulation

ROTH and 259 are

Not taxable distributions - All other qualified plans are taxable

Has less than 25 employees

SEP

How are contributions to a tax-sheltered annuity treated with regards to taxation?

They are not included as income for the employee, but are taxable upon distribution

Penalty free withdrawals of $5000 to defray costs of having or adopting a child

401(k)

Can allow for higher contributions than a SIMPLE plan in most instances

SEP

457 Deferred Compensation Plan

Plan for government employees except federal employees (thrift plans) or members of Congress

Start-up and ongoing cost very low

- SIMPLE - SEP

Similarities between Roth and Traditional IRA

- Contribution maximums - 6% penalty for over/excess contributions

Traditional IRA - Distributions

1. Distributions cannot begin before age 59 ½; 2. Early distributions are assessed 10% penalty - EXCEPTIONS: a. Down payment on 1st home b. College education c. Severe medical expenses of the annuitant d. Death of annuitant - {distributions to non-spouse beneficiaries must be made within 10 years. "Stretching" the RMD from an inherited account over your own lifetime has been eliminated.}

In Traditional IRA distributions are Ordinary Income and are

100% taxable - The Secure Act changed this to age 72 for those turning 70.5 in the year 2020 and after

Allows employees to take a reduction in their current salaries by deferring amounts into a retirement plan

401(k)

Employers get a maximum tax credit of $500 per year if they create a

401(k) plan with automatic enrollment

Earnings are not subject to Federal Tax and are usually not subject to state tax

529 College Fund

Employer can decide whether to make contribution year-to-year

SEP

Maximum contribution (lesser of 25% of salary or IRS dollar limit changeable each year)

SEP

Employees elect to defer part of their salaries into an IRA account [there are maximum limits, and it could also be set up as a §401(k) plan

SIMPLE

Mandatory company match (generally 3%) every year

SIMPLE

529 College Fund Benefits

- Federal tax benefits - State tax benefits - Donor retains control of funds - Low maintenance - Simplified tax reporting - Flexible - Substantial deposits allowed - Gift and estate tax benefits

Lifetime maximum* contributions (and be careful of gift tax limits) (*currently $520k in New York)

529 College Fund

Differences between Roth and Traditional IRA

- Contributions are NOT tax deductible - Distributions are received tax free as long as after age 59 ½ and ROTH in existence for at least 5 years - No 70 ½ rule (72 beginning in year 2020) - No 10% early distribution penalty (could be penalty on earnings/interest withdrawn in first 5 years)

Qualified Plans

Are annuities used to accumulate money for later use that are IRS sanctioned. They provide tax breaks for plan's participants. ERISA, (Employee Retirement Income Security Act/Agency) is the Federal Agency that sets plan requirements.

A traditional IRA is an individual retirement account that allows individuals to

Direct pretax income, up to specific annual limits, towards investments that can grow tax deferred (no capital gains or dividend income is taxed)

To receive full benefit, employee must be

Fully vested (Death Benefit Plan/Define Contribution Plan)

Traditional IRA contributions

Into plan are tax deductible

Completely funded by the company via a uniform contribution rate - no employee salary deferrals

SEP - BUT: employee can still contribute to their own separate IRA account

An overall limit on contributions of employee and employer combined

SIMPLE

Cannot have more than 100 employees

SIMPLE

Types of Qualified Plans

1. Individual - Traditional IRA - ROTH IRA 2. Self-employed or Business Owners (not for independent contractors) - KEOGH/HR-10 Plan 3. Small Businesses - SIMPLE: Savings Incentive Match Plan for Emplyees - SEP: Simplified Employee Pension 4. Corporations - Defined benefit plan - Defined contribution plan 5. 401K Plan 6. Specialized Plans - 403(b) Tax Sheltered Annuity - 457 = Deferred Compensation Plan - 529 = College Fund

KEOGH/HR-10 Plan

- A tax deferred pension plan available to self employed individuals or unincorporated biz for determined purposes - Can be a defined benefit or defined contribution plan although most are defined contribution (fund retirement with pretax dollars) - Contributions into plan are tax deductible - Contribution maximum is up to 100% of annual profits or IRS dollar limit - To contribute: a. Must work at least 1000 hours / year -or- b . Own at least 10% of the business.

Defined Contribution Plan

- Plan is described by what employer promises to put into retirement plan - Profit sharing plan / 401(k) plan - These plans favor younger employees.

Contributions are State tax deductible ($5,000/$10,000 single/married filing jointly)

529 College Fund

Under a defined benefit retirement plan, who determines what benefits a retired employee will receive?

Employer

An employer has sponsored a qualified retirement plan for its employees where the employer will contribute money whenever a profit is realized. What is this called?

Profit sharing plan

Must be the only retirement plan company has

SIMPLE

Roth IRA

Tax break later - The money you deposit has already been taxed. You pay no taxes when you make withdrawals after age 59 1/2

Traditional IRA

Tax break now - You get your tax break up front and pay no taxes on the money you put in until you withdraw it - 6% penalty for over/excess contribution - Distributions must begin before age 70 1/2 - RMD = Required Minimum Distribution

Distributions used for college received

Tax free

Defined Benefit Plan

- Employer sets up plan - This employee retirement plan is described by what employee will receive when they retire as long as they qualify - These plans favor older employee - Uses IRS formulas to calculate the rate of contributions

403(b) Tax Sheltered Annuities

- Retirement plan for employees of non-profits and schools - Usually employees must pay Social Security and Medicare tax on their contributions - Contributions are excluded from employee's current income

Employee is 100% vested IMMEDIATELY

- SIMPLE - SEP

No annual filings with the IRS

- SIMPLE - SEP

Very little paperwork to start and easy to administer

- SIMPLE - SEP

Under a SIMPLE plan, which of the following is TRUE regarding taxation on both contributions and earnings?

They are tax deferred until withdrawn

Traditional IRA contribution maximums

You may continue contributing beyond age 70 ½ as long as you have earned income (beginning 2020