Chapter 9 - Retirement Plans

Features of Qualified Plans

-Employer contributions are tax-deductible as a business expense -employee contributions are made with pretax dollars -interest earned on contributions is tax-deferred, until withdrawn upon retirement

Defined Contribution Plans

do not specify the exact benefit amount until distribution begins

Savings Incentive Match Plans for Employees (SIMPLE)

-SIMPLE plans are also available to small businesses with less than 100 employees -the employer makes tax deductible contributions equal to 2% of the eligible employees' compensation or matching the employee's contribution up to 3% -contributions are fully vested immeidately -early withdrawals are subject to a 25% penalty

Features of NonQualified Plans

-They do not need to be approved by the IRS -they can discriminate in favor of employees -contributions are not tax deductible -interest earned on contributions is tax-deferred until withdrawn upon retirement

Keogh Plans

-aka HR-10 are for self-employed people such as doctors, farmers, lawyers. or other sole-proprietors -Keoghs may be defined contribution or defined benefit plans -defined contribution Keoghs have a maximum contribution of 49,000 per year, while defined benefit Keoghs have maximum benefits of $195,000 per year. -Contributions are tax-deductible, and interest and dividends are tax-deferred

What is the max # of employees (earning atleast 5,000) that an employer can have in order to start a SIMPLE retirement plan? a.25 b. 50 c. 100 d. 250

100

An individual participant personally received eligible rollover funds from a profit-sharing plan. What is the income tax withholding requirements for this transaction?

20%

Traditional IRAs

allow for an individual to contribute a limited amount of money per year, and the interest earned is tax-deferred until withdrawal -contribution limits are indexed annually -withdrawals made prior to age 59 1/2 are assessed an additional 10% tax penalty -withdrawals are mandatory at age 70 1/2 and failure to take the required withdrawal results in a 50% tax penalty

Rollovers

are a transfer of funds from one IRA or qualified plan to another -rollovers are taxable at 20% unless the funds are deposited into a new IRA or qualified plan within 60 days of distribution

An employer that offers a qualified retirement plan to its employees is eligible to a. avoid ERISA regulations b. make tax-deductible contributions to the plan c. make tax deductible contributions to key employees only d. make partial tax-deductible contributions to the plan

b

A retirement plan that sets aside part of the company's net income for distributions to qualified employees is called a a. rollover plan b. 403(b) plan c. profit-sharing plan d. salary reduction plan

c. profit sharing plan

Qualified Plans

retirement plans for the exclusive benefit of employees and beneficiaries -qualified plans provide tax benefits and must be approved by the IRS -the plans must be permanent and in writing, communicated to all employees, can be defined contributions or benefits, and cannot favor highly paid employees, executives, or stockholders

Simplified employee pension plans

-aka SEPs are qualified plans for small employers -mix of an IRA and profit-sharing plan -each employee has their own IRA -the employer makes contributions into employees' IRA -an employer may deduct up to 25% of the total contributions made to all employees

ROTH IRAs

-designed so that withdrawals are tax-free -contributions to ROTH IRAs are subject to the same limits as traditional IRAs, but are not tax-deductible -interest on contributions is not taxable as long as the withdrawal is a qualified distribution -qualified distributions must occur after 5 years in the event of death or disability of the individual. first-time homebuyers, or at the age of 59 1/2. -Individuals with higher incomes may not contribute to a Roth IRA

The employment retirement income security act (ERISA)

-enacted to provide minimum benefit standards for pension and employee benefit plans, including fiduciary responsibility, reporting and disclosure practices and vesting rules

Individual Retirement Plans (IRAS)

-established by an individual to save for retirement

Defined Benefit Plans

-pay a specified benefit amount upon the employee's retirement -the benefit is based on the employee's length of service and earnings -the max benefit is the employees average annual salary, not to exceed $195,000 -defined benefit plans are mostly funded by individual and group deferred annuities

Two most popular defined contribution plans

-profit sharing -stock bonus or money purchase plans

Withdrawals and taxation

-withdrawals by the employee are treated as taxable income -withdrawals by the employee made prior to age 59 1/2 are assessed an additional 10% penalty tax -withdrawals are mandatory at age 701/2 and failure to take the required withdrawal results in a 50% tax penalty on those funds

A 55 year old recently recieved a $30,00 distribution from a previous employers 401k plan, minus$6000 withholding. Which federal taxes apply if non of the funds were rolled over? a. only income taxes on $30,000 b. only income taxes on $24,000 c. income raxes plus a 10% penalty tax 0n 30,000 d. income taxes plus a 10% penatly tax on 24,000

c

Tom has a qualified retirement plan with his employer that is currently considered to be 80% "vested". How can this be interpreted? a. 20% of the funds are subject to taxes b. 80% of the funds are invested in a separate account c. if toms employment is terminated, 20% of the funds would be forfeited d. if toms employment is terminated, 80% of the funds would be forfieted

c

Taxation of Benefits

contributions made with taxed dollars are not taxed upon withdrawal -tax deferred interest is taxable income upon withdrawal

Which of the following is TRUE about a qualified retirement that is "top heavy"? a. more than 30% of plan assets are in key employee accounts b. more than 40% of annual additions are for key employee accounts c. mroe than 50% of plan assets are in key employee accounts d. more than 60% of plan assets are in key employee accounts

d

in an individual retirement account (IRA), rollover contributions are a. subject to capital gains tax b. subject to ordinary income tax c. partially limited by dollar amount d. not limited by dollar amount

d

Post-tax dollar contributions are found in a. 401K investments b. traditional IRA investments c. SIMPLE investments d. roth IRA investments

d. roth

Vesting Rules

determine how participants achieve ownership of contributions made by employers -two kinds include cliff vesting graded vesting

Tax Benefits of qualified plans

employers contributions are tax-deductible and not treated as taxable income to the employee -employee contributions are made with pre-tax dollars and any interest earned on both employer and employee contributions are tax deferred -employees only pay taxes on the amounts withdrawn