Unit 11: Retirement Plans

Simplified Employee Pension (SEP) Plans

- Employer makes contribution employee's behalf. - Higher contribution limits than traditional IRA. - Employees must be 100% vested

Keogh (HR-10)

- Individual sole proprietors - Partnerships

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

- Jan is 55 and works full time at a restaurant earning wages in tips - Sal is 21 and just started a full time commissioned position as a sales representative - Michelle works 10 hours a week at a book store and is paid hourly NOT - Mitch is unemployed but does receive rental income of $2,000 a month

Fiduciary Duty: General Requirements (Employer Sponsored Retirement Plans)

- anyone with control over the plan or its assets are fiduciaries. They must manage the plan solely in the best interest of its participants

Profit Sharing

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

Roth IRA

- contributions not tax deductible - contribution limits same as traditional IRA - qualified distributions are tax free - account has been open for at least 5 years - age 59.5, death, disability, or first-time homebuyer

Rollover (Rollovers & Transfers)

- definition: money is withdrawn and sent to the owner - owner has 60 days after receipt to put money in IRA - if money is coming from an employer sponsored plan (20% withheld and sent to the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) - limited to one rollover every 12 months

Transfer (Rollovers & Transfers)

- definition: money sent directly from one plan to another - no limit on the number of transfers - no money withheld and sent to the IRS

Vesting: General Requirements (Employer Sponsored Retirement Plans)

- determines when an employee owns the money in a retirement plan - employees are always 100% vested in their own contributions - employer contributions, employees must become vested in at least six years

Reporting and Disclosure: General Requirements (Employer Sponsored Retirement Plans)

- each participant must receive, in writing, a summary plan description, notifications of any significant changes, and an annual report

401 (k)

- employee may take contributions, salary (elective) deferral - employers may match contributions up to a specified percentage

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

- employers are not required to make a funding contribution every year - the maximum amount that an employer may contribute is limited to 25% of the company's payroll for all employees - plan contributions are dependent on the company making a profit NOT - the amount of annual contributions is set by employee

Savings Incentive Match Plans 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 CAN BE USED - bank accounts - mutual funds - flexible premium annuities

Individual Retirement Accounts (IRA)

- must have earned income - non working spouse can make contributions based upon earned income of spouse (spousal IRA)

IRA Required Minimum Distribution

- must start making with minimum withdrawals at age 72 - first minimum withdrawal can be delayed until April 1 of the year following the year the owner turns 72 - 50% tax penalty owed if minimum distributions not taken - annual minimum withdrawals are based upon the owners life expectancy

Non-Qualified Plans

- not regulated by ERISA - can discriminate in favor of higher paid employees - contributions usually not tax deductible

IRA Deductibility of Contributions

- phase out of deduction based upon adjusted gross income (AGI) - no deduction if income above maximum AGI

Non-Discrimination: General Requirements (Employer Sponsored Retirement Plans)

- plans may not provide benefits to executives and other highly paid individuals that are out of proportion to other employees

Participation: General Requirements (Employer Sponsored Retirement Plans)

- plans must benefit all regular employees, not just a few selected ones

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

ERISA (Employee Retirement Income Security Act)

- 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

Employer Sponsored Retirement Plans

- regulated by ERISA (employment retirement income security act of 1974) - employer contributions tax deductible - employee contributions tax deductible - interest earnings grow tax deferred

Defined Contribution

- retirement benefit NOT specified - contribution is specified

Defined Benefit

- retirement benefit specified in the plan

403 (b)

- school employees - employees of nonprofit organizations

Distributions from an IRA upon Death

- transfer to a spouse is not taxable - the entire value of the IRA is includable in the deceased owner's estate for estate tax purposes

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?

59.5

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

60

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

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

a Keogh plan (HR-10 plans) definition: these plans are qualified retirement plans set up by self-employed persons and nonincorporated businesses such as sole proprietorships (individuals) and partnerships

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

a defined-benefit plan definition: these pension plans are designed to provide a specific benefit to an employee upon retirement. Typically depends on how long they worked and their salary.

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

an SEP definition: these plans have significantly less paperwork and easier administration than qualified retirement plans

IRA Funding

investment can't be put in - life insurance - artwork, antiques, stamps or coin collections - gold or silver bullion

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

profit-sharing plans definition: a defined contribution plan that does not require an employer to make a funding contribution every year

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

public school system