Qualified Plans (Life insurance)

prepaid tuition plan

A form of Section 529 plan (along with college savings plans) set up to "pre-pay" a child's education. These plans guarantee a regular plan of savings will mature to guaranteed paid semesters of college. Future college tuition can be "locked in" at today's prices.

keogh plan

A qualified retirement plan designed for unincorporated businesses (sole proprietorships and partnerships) that allows the business owner or partner to participate in the plan as an "employee." Keogh plans can be set up as either a defined benefit plan or a defined contribution plan. Keoghs are treated the same way as corporate plans with respect to maximum contribution and benefit limits, participation and coverage requirements, and nondiscrimination in coverage, contributions, and benefits.

section 529 plan

A qualified retirement plan whose goal is to provide a way to save and invest in a tax-favored way for a child's college education.

roth conversion

Converting a traditional IRA to a Roth IRA.

Kyle set up a Section 529 college savings plan and named his only son, Joe, as beneficiary. Which of the following statements is correct? Joe can control how the funds in the account are used. Kyle controls how the funds in the account are used. Both Joe and Kyle share control over the funds in the account. Joe will have control over the funds in the account only when he reaches the age of majority.

Kyle controls how the funds in the account are used.

Which statement regarding defined contribution qualified plans is NOT correct? Participants can choose to receive the benefit at retirement as annuitized income. The retirement benefit, when paid, is usually fully taxable. Participants can choose to receive the benefit at retirement as a lump-sum payment. The retirement benefit from defined contribution plans typically does not include contributions from the participant.

The retirement benefit from defined contribution plans typically does not include contributions from the participant.

rollover IRA

Transferring funds from one qualified account or traditional IRA to another qualified account or IRA. Received funds must be rolled over within 60 days to avoid current income taxation.

qualified retirement plan

a formal retirement plan set up by an employer to provide its employees with future benefits. It does so in a way that meets certain IRS imposed requirements. By meeting these qualifying standards, the plan is granted advantageous tax treatment. Such tax treatment favors both the employer and the employees

A Section 529 plan can take one of two forms:

a prepaid tuition plan a savings plan

matching contributions

a provision in most 401K plans that allows employers to match every 1 employee contribution with a 50 cent or more contribution

defined benefit plan

a type of qualified employer plan in which the employer makes contributions to provide a specified benefit at the participants retirement.

defined contribution plan

a type of qualified retirement plan that defines that an employer makes on an employees behalf. The benefit the employee finally receives at retirement will be whatever the contributions, plus their interest earnings, grow to.

catch up contributions

additional amounts that 401K participants age 50 and older can choose to defer into their 401k

Hannah participates in her company's retirement plan, which provides for 100 percent vesting after four years with no vesting prior to that. What is this type of vesting schedule called?

cliff vesting

Jim, age 20, plans to withdraw $3,000 from his Section 529 college savings plan this year to pay for some of his college expenses. He can withdraw the money tax free to pay for all of the following, EXCEPT room and board. tuition. clothes. books.

clothes.

SIMPLE plans

designed solely for small businesses and are known formally as "SAVINGS INCENTIVE MATCH PROGRAM FOR EMPLOYEES"

pre tax dollars

employee contributions made directly into a qualifies retirement plan before income taxes are assessed.

A qualified employer retirement plan is a

formal arrangement set up by an employer to provide its employees with future retirement benefits.

Brad invested $8,000 in a savings plan that lets him lock in the cost of a future college tuition at today's prices. What type of plan is this?

prepaid tuition plan

457 plans

qualified retirement plans reserved for employees of state and local government units. Under these plans, eligible employees are allowed to make elective salary deferrals into the plan on a pre tax basis.

Under a graded vesting schedule,

the participant gradually becomes vested over the first seven years of participation, as shown in the table.

Whether an IRA contribution can be deducted from the worker's taxes depends on

whether the IRA owner is covered by an employer-sponsored retirement plan and what the IRA owner's income level is if covered under an employer-sponsored retirement plan.

Under a cliff vesting schedule, the participant is

0 percent vested in a plan's contributions or benefits for the first four years of participation. Then, in the fifth year, he or she is 100 percent vested.

college savings plan

A form of Section 529 plan (along with pre-paid tuition plans) that builds funds for college in a tax-advantaged way. This plan takes the form of a state-managed investment account. To this account, parents (or grandparents) can contribute funds. When the funds are withdrawn, they and the interest they earned are not taxable.

Roth IRA's

An alternative to a traditional IRA, Roth IRAs provide for "back-end" benefits. This means that contributions to a Roth account cannot be deducted and are taxed. But the earnings on those contributions, when withdrawn, are entirely tax-free.

Brian earned $100,000 this year and contributed $10,000 to his 401(k) plan account. His employer contributed an additional $2,000 on his behalf. All the following statements regarding this are correct, EXCEPT Brian's contributions to his 401(k) plan account are made with pre-tax dollars. Brian's taxable income will be reduced by the amount that both he and his employer contributed to his 401(k) plan account. Brian's taxable income will be reduced by the amount he contributed to his 401(k) plan account. Brian will not be taxed this year on the amount that his employer contributed to his account.

Brian's taxable income will be reduced by the amount that both he and his employer contributed to his 401(k) plan account.

Jason, age 27, is single, works for a small computer company, and earns $125,000 a year. Because the company does not have any retirement plan for its employees, Jason set up and contributed to a traditional IRA this year. Which of the following statements is correct? Jason cannot take a deduction for his IRA contribution because he is not covered by a qualified employer plan. Jason can deduct part of his IRA contribution this year. Jason cannot take a deduction for his IRA contribution because his adjusted gross income is too high. Jason can deduct the full amount that he contributes to his traditional IRA.

Jason can deduct the full amount that he contributes to his traditional IRA.

Diane invested $6,000 two years ago in a Section 529 college savings plan for her daughter, Cathleen, age 5. The account earned $400 the first year and $450 the second year. Which of the following statements is correct? Income tax on the earnings must be paid this year at Diane's tax rate. Income tax on the earnings must be paid this year at Cathleen's tax rate. Income tax on the earnings must be paid this year at the combined rate of Diane and Cathleen. No income tax must be paid on the earnings this year.

No income tax must be paid on the earnings this year.

Defined benefit plans provide a specific, defined benefit for plan participants when they reach retirement age. All of the following statements regarding defined benefit plans are correct EXCEPT: Individual accounts are typically NOT set up for individual employees in a defined benefit plan. Tax laws limit the amounts that plan participants can receive. When the plan participant reaches retirement, the employer typically uses plan funds to buy an annuity. The employee typically contributes a portion of the plan funding, through pre-tax contributions.

The employee typically contributes a portion of the plan funding, through pre-tax contributions.

Which of the following statements is correct about earnings building within an individual's qualified plan account? The employee-participant must pay federal income tax on the earnings. The employee-participant pays no income tax on the earnings until they are withdrawn. The employee-participant must pay state income tax on the earnings. The employee-participant must pay federal and state income tax on the earnings.

The employee-participant pays no income tax on the earnings until they are withdrawn.

profit sharing plan

a form of defined contribution plan that allows employees to share in the profits of the employer. The employer is the sole contributor to the the plan.

SEP (Simplified Employee Pension)

a form of defined contribution plan under which an employer sets up individual retirement accounts for each participating employee. The employer makes contributions to these accounts on behalf of the employee.

401K

one of the most popular types of qualified employer plans. A plan that allows both the employer and employees to contribute to the plan. Employees can defer part of their wages into the plan.