Chapter 20: Retirement Plans, ERISA Issues, & Education Funding

Keogh Plan

Participants must work for the business. - This may include a sole proprietor, a partner who works in the business, or an employee (But Not a limited partner who contributes no personal services meaning there is no compensation paid). - any distributions will be taxed as ordinary income - 10% penalty tax on withdrawals made prior to reaching age 59½. - Contributions to a Keogh must be based on self-employment income

Safe Harbor requirements of ERISA Section 404(c) relieve the trustee of a 401(k) plan of liability if

- Ability to select from at least 3 different investments - Allowed to make selection changes no less frequently than quarterly. - allow each participant control over her investments - Must furnish participant with full performance and risk information.

Non-Qualified Plans

- Contributions NOT deductible - IRS Approval required - Can Discriminate (executives) - Accumulation may be tax deferred - Excess over cost base taxed - Trust NOT required - NOT Subject ERISA 1) Deferred Compensation - 457 Plans 2) Payroll Deduction

Qualified Retirement Plans

- Contributions are Tax Deductible - Approved by IRS - Cannot Discriminate - Tax on Accumulation is deferred - All withdrawals taxed - Plan operates as a Trust 1) Keogh (HR-10) 2) 403(b) Plans 3) Defined Benefit Plan (Traditional Pension Plan) 4) Defined Contribution Plans - Money Purchase Pension Plan - Profit-Sharing Plan - 401(k) Plan

Qualified Pension Plans

- They must not discriminate. - They must have a vesting schedule. - They must be in writing. - An employer must update the status of all employees at least annually

Qualified Tuition Programs

- Unless there is a change in beneficiary. assets in the QTP may be moved from the plan of one state to the plan of another as frequently as once per 12 months - A college savings plan is a type of QTP where the owner of the account contributes cash to the account so that the contributions can grow tax deferred - Prepaid tuition plans are plans where prepayment of college tuition is allowed at current prices for enrollment in the future

Roth IRAs

- are not subject to the minimum distribution rules upon the participant attaining age 70½. - distributions need not be made until the death of the owner/participant - For a withdrawal to be entirely tax free, it must be made after a 5-year holding period and after the participant reaches age 59½. - $1,000 catch-up benefit for contributors who are 50 or older. - Contributions are not tax deductible

The penalty for failure to make the correct amount of RMD is

50% of the difference between the minimum required amount and the actual distribution

A basic difference between a Section 457 plan established on behalf of a governmental entity and one established by a private tax-exempt organization is that

A governmental plan must hold its assets in trust or custodial accounts for the benefit of individual participants

Which of the following assets will have the greatest effect on minimizing financial assistance when an individual is applying to college and using the FAFSA application?

An UTMA account

Section 529 Plans

Considered a security - No earning limits - Contribution limits are higher than Coverdell's - Funds withdrawn for qualified education expenses are always free of federal income tax - The maximum contribution limits are determined on a state level

Non-Qualified Corporate Retirement Plans

Contributions are not exempt from current income tax - Corporation need not comply with nondiscrimination rules that apply to qualified plans. - The accounts do not provide for tax deferral on earnings because these plans are rarely funded

An individual may withdraw from an IRA before the age of 59½ without a penalty tax in the case of

Death or Disability

Section 457 Plans are used for

Municipal employees as well as for independent contractors performing services for those entities

Traditional IRAs

The income and capital gains earned in the account are tax deferred until the funds are withdrawn - Contributions are fully Tax Deductible

The Uniform Prudent Investors Act of 1994

The legal guide for fiduciaries, who must act with skill and caution in the best interest of their clients

RMDs can be deferred if

The rule is that you can only defer RMDs in the plan of the employer where you are currently employed

UTMA vs. UGMA

UGMA: The property that may be transferred into an UGMA account is generally limited to cash and securities - ownership transferred at states age of majority UTMA account: almost any kind of property—real or personal, tangible or intangible—can be transferred to the custodian - Some states permit delaying the transfer until as late as age 25 - Greater Flexibility of investment options

A Government Section 457 Plan must hold its assets in

trusts or custodial accounts for the benefit of individual participants

An Investment Policy Statement (IPS) would likely include

- Expected returns of the recommended strategy and the expected range of these returns - Recommended allocations among differing asset classes - Methods of performance measurement - Determination for meeting future cash flow needs - Strategies used for selecting specific stocks in the equity portion of the portfolio - Income needs and risk tolerance are included in determining the objectives, and time horizon is a constraint NOT Included in the IPS is fees advisor may earn or investment selection

Money purchase plans

Have required contributions - Employer must make a contribution to the plan each year for the plan participants - Employee participation by making voluntary contributions to the plan is optional - Plan states the contribution percentage that is required

You can only defer RMDs when

In the plan of the employer where you are currently employed.

The Employee Retirement Income Security Act (ERISA)

Is a federal regulation that protects the retirement funds of corporate employees in the private sector.

Section 403(b) Plan

Only employees of schools, church organizations, and nonprofit organizations are eligible to participate in 403(b) plans

When can you claim a loss in a Roth IRA on your tax return

Only if the proceeds upon liquidation are less than the cost basis, you itemize deductions, and the loss is above 2% of the AGI -

What Education Plan offers the greatest amount of control to the donor

Section 529 Plan

The 457 Plan allows participants to withdraw funds at

any time, not just after age 59½, without incurring the 10% tax penalty. Income taxes would, of course, be due, but no penalty

The SEC has jurisdiction over

exchanges, SROs, and all persons required to be registered under federal law

A money purchase pension plan

is a defined contribution plan established by the employer, thereby making the contributions mandatory - Voluntary employee contributions are optional - Employer contributions are required

A payroll deduction plan

is a retirement plan not subject to eligibility, vesting, or funding standards as required by ERISA plans

A plan would be considered top heavy if

more than 60% of the plan assets are held in the accounts of employees meeting the definition of key employee

To comply with Section 404(c) of ERISA

the plan must offer at least 3 different investment choices, including a stable value option, an income option, and a conservative growth option

Coverdell Education Savings Accounts (Education IRA)

- Allow after tax contributions of up to $2,000 per student, per year, for children until their 18th birthday - If the accumulated value in the account is not used by age 30, the funds must be distributed and subject to income tax and a 10% penalty, or rolled over into a different Coverdell ESA for another family member - The maximum contribution is $2,000 per beneficiary - A beneficiary's unused balance may be rolled over to an ESA account for another child - The beneficiary may be the contributor's child or grandchild or child of a friend of the contributor - Excess distribution representing earnings that is not used to meet qualified education expenses is taxable to the beneficiary who took the distribution

UTMAs

- No earnings limits for making UTMA contributions - Withdrawals for other than qualified education expenses are not subject to any penalties - No limit to the amount that can be contributed to an UTMA

Deferred Compensation Plans

- The employer cannot take a tax deduction for the compensation deferred until it is paid out or otherwise taxable to the employee - Most deferred compensation arrangements are unfunded - These arrangements usually are unsecured promises made by an employer to an employee to pay the employee part of his compensation in the future

Participant Loans in a 401(k) Plan

- The maximum allowable loan amount is the lesser of $50,000 or 50% of the participant's vested account balance. - Unless the loan is taken out for the purpose of a mortgage on the participant's principal residence, repayment must be completed within 60 months of obtaining the loan. - Payback of the loan will be through payroll deduction. - Default on the loan will result in the IRS treating the loan as a distribution.

IRA contributions

Between January 1 and April 15, contributions may be made for the current year, the past year, or both