Retirement Plans
WHICH of the following is considered to be an educational IRA? ROTH Coverdell Traditional 403(b) plans
Coverdell Coverdell Education Savings Accounts (ESAs) were created to help students and parents save for education expenses. The maximum contribution amount (for 2012) is $2,000. The beneficiary must be a person under age 18 or have special needs.
IRA Distributions 2
Distributions (i.e., withdrawals) from the IRA should start sometime between age 59½ and before April 1 of the year after the owner of the IRA reaches age 70½. When money is withdrawn, the portion attributable to deductible contributions and earnings is taxed as ordinary income. If the money is withdrawn prematurely, prior to age 59½, a 10% penalty is also charged, unless the person: is disabled. dies. uses the funds: as a life income annuity; for qualified higher-education expenses; for a first-time home purchase (i.e., a home purchased more than two years after owning any other home); if unemployed, to pay health insurance premiums; or to pay certain medical expenses. The amount of the expenses must be those that, if the person is age 65 or older, exceed 7.5% of his adjusted gross income or, if under age 65, exceed 10% of the adjusted gross income.
Contributions to a SIMPLE Plan
Employees do not contribute to a SIMPLE plan; it is funded by the employer. Contributions an employer can make to an employee's SEP-IRA cannot exceed the lesser of: 25% of the employee's compensation; or $52,000 for 2014 ($53,000 for 2015) Note Elective deferrals (employee contributions) and catch-up contributions are not permitted in SEP plans.
Which of the following is true regarding qualified pension plans? Employer contributions are tax deductible by the employer and not immediately taxable income for the employee. Earnings are taxed in the year earned. Companies hiring older employees would prefer to set up defined benefit programs instead of defined contribution programs. Employee contributions are vested at a gradually increasing rate.
Employer contributions are tax deductible by the employer and not immediately taxable income for the employee. Qualified plans qualify for two tax breaks: (1) Contributions are tax deductible by the employer but are not considered taxable income to the employee until withdrawn. (2) Earnings in the plan are taxed only when withdrawn and not in the years earned. Defined benefit plans would require larger contributions for older employees nearer to retirement, so they would be less favored by employers with new employees who are older. Employee contributions are vested immediately (since they are made by the employee); employer contributions vest on a schedule.
Investment of Contributions: IRA
IRA funds: may be invested in annuities, certificates of deposit, stocks, bonds or mutual funds. may not be invested in life insurance or collectibles. may be transferred directly from one IRA to another an unlimited number of times per year. may be rolled over (i.e., withdrawn and then placed) into another IRA or retirement plan. Rollovers must be completed within 60 days and may occur no more than once each year. For Example If Rick moves his investments from his current IRA custodian to another IRA custodian and has the funds transferred directly from the old company to the new company, that is a transfer he can perform any number of times. If he has the money from one account paid to him and he holds it until he places it into another account, that is a rollover. He can perform a rollover only once per year. He must put the money into the new account within 60 days from the date he got it from the prior account, or the funds will be subject to a 10% penalty in addition to the taxes owing on the withdrawal.
Income Limits on Tax Deductibility
If neither spouse is an active participant in an employer-sponsored qualified retirement plan, contributions are fully tax-deductible. However, if either spouse is an active participant in an employer-sponsored plan, income limits as set forth below apply to the deductibility of contributions. The limits for all tax-filing situations are detailed as well.
2015: Covered by a Retirement Plan at Work
Single/Head of Household $61,000 or less- Fully Deductible Greater than $61,000 but less than $71,000- Partial Deduction $71,000 or more- No Deduction Married Filing Jointly or Qualifying Widow(er) $98,000 or less- Fully Deductible Greater than $98,000 but less than $118,000- Partial Deduction More than $118,000- No Deduction Married Filing Separately Less than $10,000- Partial Deduction $10,000 or more- No Deduction
2014: NOT Covered by a Retirement Plan at Work
Single/Head of Household/Qualifying Widow(er) Any Amount- Fully Deductible Married Filing Jointly or Separately with a spouse who IS NOT covered by a retirement plan at work Any Amount- Fully Deductible Married Filing Jointly with a spouse who IS covered by a retirement plan at work $181,000 or less- Fully Deductible Greater than $181,000 but less than $191,000- Partial Deduction $191,000 or more- No Deduction Married Filing Separately with a spouse who IS covered by a retirement plan at work $10,000 or more- No Deduction
top-heavy plans.
Special rules apply to top-heavy plans. These are plans in which the total of the value of key employee accounts exceeds 60% of the total value of all employee accounts in the plan. A key employee is a more than 5% owner of the employer or a highly compensated 1% owner or officer of the employer. If the plan is top-heavy it must provide: a minimum benefit or contribution for each non-key employee. either a 3-year cliff vesting or 6-year grading vesting schedule.
Anyone with earned income may contribute to one or more regular and/or Roth individual retirement accounts a total of up to the lesser of: $10,000 or the amount of his income subject to taxes. 100% of his earnings annually up to the maximum established by the Internal Revenue Code. 100% of his earned income not to exceed $25,000 per year. 50% of his earned income not to exceed $114,000 per year.
100% of his earnings annually up to the maximum established by the Internal Revenue Code. A person cannot contribute to any type of IRA unless he has taxable earned income. A person may contribute up to 100% of his earned income up to an annual limit established by the Internal Revenue Service in the Internal Revenue Code.
Roth IRA 2
An alternative to a regular IRA is a Roth IRA. The income of the purchaser must be below a specific amount (which is adjusted each year). A person who is a participant in an employer-sponsored retirement plan will likely include a Roth IRA in his retirement portfolio. Contributions are not tax-deductible; earnings are tax-free, not just tax-deferred, because a Roth IRA is funded with after-tax dollars. Rules related to Roth IRAs include the following: The owner must hold a Roth IRA for at least five years in order to receive a tax-free distribution. Funds may be withdrawn tax-free after the five years if the annuitant is: 59½; disabled or deceased; or using the funds for: higher-education expenses; or a first-time home purchase. There is no requirement to withdraw funds by or after age 70½. If funds are withdrawn prematurely, the earnings portion is subject to income tax and a 10% penalty; the portion made up of contributions is not taxed. For Example Because Rick Aster is a participant in Star Publishing's retirement plan and he earns a significant income, he would not be able to deduct his full contribution to a regular IRA each year. So he has set up a Roth IRA. He puts in $3,000 per year as a nondeductible ("after-tax") contribution. When he withdraws the funds from the account, he will NOT be taxed on any money withdrawn (not even the earnings from the account), as long as he is over 59-½ and had held the account for five years. He figures he would want to withdraw $15,000 per year from the account starting at age 60. If he does, he will pay no tax on any of that money. He can withdraw any amount, or NOTHING, even if IRS tables show that a person his age should withdraw $20,000 per year, since the IRS is not going to tax any of the money in or taken from the account. Roth IRAs never allow deductibility on the premiums placed into the account. A person's ability to contribute to a Roth IRA is based on his adjusted gross income (AGI). If that income exceeds the maximums as established by the IRS, he may not contribute to a Roth IRA for that tax year.
Value Upon Death
The value of the portion of an IRA distributed to a beneficiary upon the death of the IRA annuitant is included in his gross estate values and may be subject to estate tax. If the annuitant dies before distributions are made, the full value of the IRA is included in his estate. If he dies after distributions have started, the amount included in the estate will depend on the annuity payout option selected by the beneficiary. If the option is a life annuity with period certain or a joint life annuity, the value included in the estate is the amount still due to be paid out. If it is a straight life annuity, the IRA has no value, since no payments are due after the annuitant's death. In terms of tax consequences, a beneficiary of a regular IRA must include in his gross income any distributions received minus the amount of premiums that were not deducted on the owner's income tax forms (non-deductible contributions).
If X did not begin taking distributions from his regular IRA until age 73, the tax effect on his distributions would be a 6% penalty the first year. a 10% penalty in addition to the tax on the distribution. a 50% penalty on the amount that should have been withdrawn in addition to the tax on the distribution. no penalty, but tax on the distribution.
a 50% penalty on the amount that should have been withdrawn in addition to the tax on the distribution. There is a penalty of 50% of the amount that should have been withdrawn if the distribution does not begin prior to April 1 of the year the owner turns age 70-1/2. This is the Required Minimum Distribution penalty (RMD).
A tax-sheltered annuity (403b) may be purchased for employees of any of the following EXCEPT public schools. charitable or religious organizations. labor unions. nonprofit educational organizations.
labor unions. A tax-sheltered annuity is an annuity established by an employer in which the amount paid for premiums may be deducted from one's taxable income (as with contributions to Keogh Plans or IRA's). Such annuities are only available to employees of public school systems and tax-exempt charitable, educational or religious organizations- those filing under section 501(c)(3) of the Internal Revenue Code.
Failure to withdraw the required minimum distribution from a qualified plan will result in a federal penalty of 10% of the amount that should have been withdrawn. 50% of the amount that should have been withdrawn. 6% of the amount that should have been withdrawn. zero percent if the participant was permanently disabled.
50% of the amount that should have been withdrawn. Failure to withdraw the Required Minimum Distribution (RMD) from most qualified plans will result in a federal penalty of 50% of the amount that should have been distributed, but wasn't. The 10% penalty applies to unqualified withdrawals before age 59 1/2. The 6% penalty applies to IRAs that have contributions in excess of the maximum amounts. Permanent disability does not apply to required minimum distribution.
Review 2
The simplified employee pension plan (SEP) is a program under which an employer may contribute to IRAs for the employees. The employer must contribute equal percentages of income for each eligible employee up to a maximum amount of the employee's compensation. A tax-sheltered annuity (TSA) is a plan only available to employees of public school systems and nonprofit tax-exempt charitable, educational or religious organizations. A 401(k) is a plan established by an employer to enable employees or their beneficiaries to share in company profits. The company's contributions to the plan may vary based on its financial condition and may be made from other than profits. Contributions may be either in addition to salary or in the form of a salary reduction. An Employee Stock Ownership Plan (ESOP) is a qualified benefit plan in which an employee gets shares of company stock and part ownership in the company where he works. A savings incentive match plan for employees (SIMPLE) may be used by an employer who has 100 or fewer employees who received at least $5,000 of compensation from the employer for the year, and who has no other retirement plan.
Taxation of Economic Benefit
When life insurance is included in a qualified plan, the employee is considered to have received an economic benefit, and the one-year term cost of the pure insurance (the amount of coverage less any cash value) is taxable income.
A tax-qualified plan must meet certain requirements. It:
- must be in writing. - must use documents approved by the IRS. - must be communicated to the employees. - must be non-discriminatory. It cannot discriminate in favor of highly compensated employees (i.e., 5% owners or employees earning over an amount specified by the IRS in the past year), by: - excluding eligible employees; - having too many highly compensated employees in the plan in relation to the total number of employees in the plan; - providing highly compensated employees with too much of the total benefits provided by the plan; or - making loans to highly compensated employees in amounts greater than amounts available to other employees. - must have its assets held in trust for the exclusive benefit of the employees and/or their beneficiaries (i.e., fully funded). - cannot revert to the employer. - must have a vesting schedule meeting IRS requirements (vesting gives the employee ownership of funds contributed by the employer): - Employee contributions are vested immediately (since they are made with the employee's funds). - Employer contributions for the employee vest on a schedule showing the percentage of funds the employee will own at any time. Vesting Gives an employee ownership of a certain percentage of funds contributed by the employer, generally based on the employee's years of service.
If X prematurely withdraws funds prior to age 59 1/2 from a regular IRA to pay off credit card debt, he must pay a penalty of $100 8% of the balance. 5% or $50, whichever is less. 10% of the amount withdrawn
10% of the amount withdrawn In the case of a premature withdrawal, the penalty is 10% of the amount withdrawn. This is in addition to the regular tax imposed on the funds received. The policyowner would receive the earnings first from any premature withdrawal and would therefore have a taxable event.
G must pay a tax penalty if he withdraws benefits from his regular IRA before age 55. 59 and one-half 65. 70 and one-half
59 and one-half Because regular IRA's are intended to be retirement plans, penalties are imposed if the funds are withdrawn prior to age 59 and one-half, except in the case of death, disability, use of funds to purchase a first home, use of funds for college education, to pay for health insurance premiums if unemployed or withdrawal as a life annuity.
An employee has left his job and his 401(k) money with his employer until he decides to roll the funds over to another account. He would normally have ____ days to roll over the funds to avoid potential penalties and taxation. 30 60 90 120
60 Before age 59 1/2, funds can be rolled over from one plan to another tax-free, provided the rollover is direct (between institutions) and can do this an unlimited times per year. If it is not direct (paid to the participant only), 20% is normally withheld and the rollover is completed within 60 days. This may only be done once per year.
Review 4
A Coverdell Education Savings Account (Coverdell ESA) is a trust or custodial account set up in the United States solely for paying qualified education expenses for the designated beneficiary of the account. The Thrift Savings Plan (TSP) offers Federal employees and members of the military the same type of savings and tax benefits that many private companies offer under 401(k) plans. The TSP is a defined contribution plan administered by the Federal Retirement Thrift Investment Board, an independent government agency. Funds may be rolled over from one IRA to another IRA, or from a TSA or another qualified retirement plan to a regular IRA. A rollover from the trustee of one plan to the trustee of another is a direct rollover or transfer and may occur any number of times in a year. A rollover in which the funds are distributed to the participant before being rolled into the new account may occur only once per year per account. In addition, if the rollover is not completed within 60 days, the distribution is taxed as ordinary income and may be subject to the 10% penalty for premature distribution. When life insurance is included in a qualified plan, the employee is considered to have received an economic benefit, and the one-year term cost of the pure insurance (the amount of coverage less any cash value) is taxable income.
Education IRS
A Coverdell Education Savings Account (Coverdell ESA) is a trust or custodial account set up in the United States solely for paying qualified education expenses for the designated beneficiary of the account. There are certain requirements to set up a Coverdell ESA: When the account is established, the designated beneficiary must be under the age of 18 or be a special needs beneficiary. The account must be designated as a Coverdell ESA when it is created. The document creating and governing the account must be in writing, and it must meet certain requirements. Contributors must contribute by the due date of the contributor's tax return (not including extensions). There is no limit to the number of accounts that can be established for a particular beneficiary; however, the total contribution to all accounts on behalf of a beneficiary in any year cannot exceed $2,000. In general, the designated beneficiary (typically the child) of a Coverdell ESA can receive tax-free distributions to pay qualified education expenses. The distributions are tax-free up to the amount of the beneficiary's qualified education expenses. If a distribution exceeds the beneficiary's qualified education expenses, a portion of the earnings is taxable. Amounts remaining in the account must be distributed when the designated beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary. Certain transfers to members of the beneficiary's family are permitted. Contributions are not deductible, but amounts deposited grow tax free until distributed. The beneficiary must be someone under 18 years of age or have a special need. The maximum annual contribution for a Coverdell ESA is $2,000 per child.
Taxation of Life Insurance Distributions
A qualified plan may provide a death benefit funded by insurance, provided the death benefit is only an incidental benefit (i.e., small in value in relation to the retirement benefit). When life insurance is purchased under a qualified plan, the portion of the death benefit equal to any policy cash value as of the date of death is taxable as a distribution from the plan, while the remainder of the benefit representing the pure insurance amount is not.
tax-qualified plan
A tax-qualified plan allows a person to deduct his contributions to the retirement plan from his taxable income. Employer contributions are: tax deductible by the employer. not considered taxable income to the employee until he withdraws funds from the plan. Earnings in the tax-qualified plan are tax deferred. All tax-deductible contributions ("pre-tax contributions") and earnings are taxed only when withdrawn from the plan, not in the years earned. For Example Rick Aster earned $40,000 last year. His employer, Star Publishing, has a tax-qualified retirement plan. Each year it contributes 3% of Rick's salary ($1,200) to the plan for the year. Rick had Star also take 10% of his salary ($4,000) and put it into the plan. As a result, Rick will pay no tax on the $5,200 contributed to the plan until he retires and takes money out of the plan. Star Publishing can deduct the $1,200 it contributed to the plan for Rick as a business expense on its tax return for the year the contribution was made.
IRA Contributions
An IRA provides an employee with tax benefits similar to those of a qualified plan but is not sponsored by an employer. Anyone with earned income may contribute a total of up to the lesser of 100% of earnings or an IRC maximum per year to one or more regular and/or Roth individual retirement accounts. Contributions for a year may be as late as the tax filing date of the following year (usually April 15). In addition, up to the maximum may be contributed to a separate spousal IRA for a nonworking spouse when a couple files a joint tax return. Any contributions in excess of allowable limits are charged a 6% penalty per year. IRA contributions to a regular IRA are fully tax deductible without regard to the amount of a person's income if the person is not an active participant in an employer-sponsored retirement plan. A person who is a participant in such a plan may make deductible contributions if his income is below certain limits; he may make nondeductible contributions if his income is above those limits. Whether the contributions are tax deductible or not, the earnings in the IRA will accumulate on a tax-deferred basis, with no tax owed on them until they are withdrawn. IRA funds may be invested in annuities, certificates of deposit, stocks, bonds, or mutual funds. They cannot be invested in life insurance or collectibles. The funds may be transferred directly from one IRA to another an unlimited number of times per year. They may also be rolled over (taken and then placed) into another IRA or retirement plan. Rollovers must be completed within 60 days and may occur no more than once each year. For Example If Rick moves his investments from one mutual fund to another or from stocks to bonds, that would be a transfer he can perform any number of times. If he has the money from one account paid to him and holds it until he places it into another account, that would be a rollover. He can perform that only once per year. Also, he must put the money into the new account within 60 days from the date he got it from the prior account.
IRA Contributions 2
An individual retirement account, or IRA, provides an employee with tax benefits similar to those of a qualified plan. However, it is not sponsored by an employer. Anyone with earned income may contribute to one or more regular and/or Roth individual retirement accounts a total of up to the lesser of: 100% of his earnings; or an IRC maximum per year. Contributions for the year may be made: up to the tax filing date of the following year (usually April 15). if a couple files a joint tax return, into a separate spousal IRA up to the maximum contribution for a nonworking spouse. Any contributions made in excess of allowable limits are charged a 6% penalty per year. Contributions to a regular IRA are fully tax deductible: if the person is not an active participant in an employer-sponsored retirement plan, without regard to the amount of the person's income. if the person is a participant in such a plan, only if his income is below certain limits. If the person is a participant in his employer's retirement plan and his income is above the limits, he may still contribute to an IRA, although the contributions will not be tax-deductible. Whether the contributions are tax-deductible or not, the earnings in the IRA will accumulate on a tax-deferred basis, with no tax owed on them until they are withdrawn.
Roth IRA
As an alternative to a regular IRA, an individual can make contributions to a Roth IRA, provided his income is below a specific amount (which is adjusted each year). A person who is a participant in an employer-sponsored retirement plan would likely use a Roth IRA. These contributions are not tax deductible, but all earnings in the Roth IRA are tax free, not just tax deferred. The owner must hold a Roth IRA for at least five years. After the five years, funds may be withdrawn tax free if he is 59-½, disabled, deceased, or using the funds for higher education expenses or a first-time home purchase. Otherwise, if funds are withdrawn prematurely, the portion made up of earnings in the IRA is subject to income tax and a 10% penalty; the portion made up of contributions is not taxed. With a Roth IRA there is no requirement to withdraw funds by or after age 70-½.
IRA Distributions
Distributions (withdrawals) from the IRA should start sometime between age 59-½ and April 1 of the year after the person reaches age 70-½. When money is withdrawn, the portion attributable to deductible contributions and earnings is taxed as ordinary income. If the money is withdrawn prematurely (prior to age 59-½) a 10% penalty is also charged, unless the person: is disabled. dies. uses the funds as a life income annuity. uses the funds for qualified higher education expenses. uses the funds for a first-time home purchase (a home purchased over two years from owning any other home). uses the funds to pay health insurance premiums (if unemployed). uses the funds to pay medical expenses (over 7.5% of gross income). If distributions do not start before April 1 of the year after the person reaches age 70-½, or do not satisfy the minimum distribution required (based on the participant's life expectancy), there is a penalty of 50% of the amount that should have been withdrawn. For Example When Tater was 55, he was fired from his job and withdrew $10,000 from his IRA. That year he had to pay tax on the $10,000 plus a penalty of $1,000 (10% of the $10,000). Now that he is 60, he can take funds out of the IRA without the penalty but still has to pay tax on any funds taken out. Winona is 71. She hates taking money out of her IRA. She wants to leave it for her kids, but according to IRS tables relating to her life expectancy, she should have taken out $16,000 last year. She only took out $9,000. As a result, her accountant says she has to pay ordinary income tax on the $9,000 plus a penalty of $3,500 (50% of the additional $7,000 she should have taken out). The value of the portion of an IRA distributable to a beneficiary upon the death of an IRA annuitant is included in the annuitant's estate, and may be subject to estate tax. If the annuitant dies before distributions are made, the full value of the IRA is included in the annuitant's estate. If the annuitant dies after distributions have started, the amount included in the estate will depend on the annuity payout option selected by the beneficiary. If the option was a life annuity with period certain or joint life annuity, the value included in the estate is the amount still due to be paid out. If it was a straight life annuity, the IRA would have no value, since no payments are due after the annuitant's death. Beneficiaries of a regular IRA must include in their gross income, any distributions received less the amount attributable to nondeductible contributions.
Review
Employer-sponsored retirement plans may be nonqualified or tax qualified. A nonqualified plan, such as a deferred compensation plan, does not require IRS approval and allows for discrimination, so all qualified employees need not be included. In a deferred compensation plan, the employer does not give the employee the funds until an agreed-upon time, e.g., at retirement, or upon death or separation from the employer. Tax-qualified plans include corporate pension, profit sharing and stock bonus plans, Keogh plans, 401(k) plans and 403(b) tax-sheltered annuities, and are subject to, among other things, the Employees Retirement Income Security Act (ERISA). Qualified plans may be defined benefit plans or defined contribution plans. In a defined benefit plan, the amount of the employee's benefit upon retirement is defined (fixed) (e.g., upon retirement the employee will receive a pension of $50,000 per year). In a defined contribution plan, the amount of the employer's contribution to the plan each year is defined by a predetermined formula. A tax-qualified plan allows a person to deduct his contributions to the retirement plan from his taxable income. Earnings in the tax-qualified plan are tax deferred. All tax-deductible contributions ("pre-tax contributions") and earnings are taxed only when withdrawn from the plan, not in the years earned. Taxation of distributions is usually age related. The portion of distributions taken in installments after age 59-1/2 that is not recovery-of-cost basis is taxed as ordinary income, for the year received. If taken in a lump sum, it is taxed on a five-year forward-averaging basis (i.e., 1/5 is taxed each year for five years). Distributions must start by April 1 of the year following the year the individual reaches age 70-1/2 and, if taken in installments, be at a rate to be paid out by the end of the life expectancy. Failure to do so results in a penalty of 50% of the amount that should have been taken, but was not.
Retirement Plans
Following World War II, there was a great demand from returning veterans to be assured that they would be taken care of by their country, and Social Security wasn't meeting that demand. As a result, employers began offering their employees plans that would take care of them upon their retirement. This served as a way for employers to attract and retain loyal employees and has served its purpose well. Over the years, various plans have surfaced in an attempt to work within the rules laid out by the IRS. Those plans have provided millions of workers an affordable and easy way to provide for their retirement. Employer-sponsored retirement plans may be nonqualified or tax qualified.
Rollovers and Transfers (IRAs and Qualified Plans)
Funds may be rolled over from one IRA to another IRA, or from a TSA or another qualified retirement plan to a regular IRA. A rollover from the trustee of one plan to the trustee of another is a direct rollover or transfer and may occur any number of times in a year. A rollover in which the funds are distributed to the participant before being rolled into the new account may occur only once per year per account. In addition, if the rollover is not completed within 60 days, the distribution is taxed as ordinary income and may be subject to the 10% penalty for premature distribution.
IRA Distributions 3
If distributions do not start before April 1 of the year after the person reaches age 70½, or if they do not satisfy the required minimum distribution based on the participant's life expectancy, there is a penalty of 50% of the amount that should have been withdrawn. For Example When Tater was 55, he was fired from his job and withdrew $10,000 from his IRA. That year he had to pay tax on the $10,000 plus a penalty of $1,000 (10% of the $10,000). Now that he is 60, he can take funds out of the IRA without the penalty but still has to pay tax on the amount withdrawn. Winona is 71. She hates taking money out of her IRA because she wants to leave it for her kids. According to IRS tables relating to her life expectancy, she should have taken out $16,000 last year, but she only withdrew $9,000. As a result, Winona's accountant says she must pay ordinary income tax on the $9,000 plus a penalty of $3,500 (50% of the additional $7,000 she should have withdrawn).
When Jean, an IRA account owner died, all of the money in her IRA was distributed to her beneficiary. WHICH of the following would best describe the effect of this distribution? Jean's estate was increased by the value paid to the beneficiary and the beneficiary would have to pay taxes on the amount received minus any non-deducted premiums paid by Jean. There was no effect on Jean's estate and the beneficiary would be taxed on the entire distribution. Jean's estate increased by the amount of premiums paid into the IRA and the beneficiary received the distribution tax-free. Jean's estate increased by the amount paid to the beneficiary and the beneficiary received the distribution tax-free.
Jean's estate was increased by the value paid to the beneficiary and the beneficiary would have to pay taxes on the amount received minus any non-deducted premiums paid by Jean. The value of the portion of an IRA distributed to a beneficiary upon the death of the IRA annuitant is included in his estate and may be subject to estate tax. If the annuitant dies before distributions are made, the full value of the IRA is included in his estate. In terms of tax consequences, a beneficiary of a regular IRA must include in his gross income, any distributions received minus the amount of premiums that were not deducted on the owner's income tax forms (non-deductible contributions).
Qualified plans may be defined benefit plans or defined contribution plans:
Qualified plans may be defined benefit plans or defined contribution plans: In a defined benefit plan, the amount of the employee's benefit upon retirement is defined (fixed) (e.g., upon retirement the employee will receive a pension of $50,000 per year). In this plan, the amount to be contributed to the plan is not fixed. It will be whatever amount is needed to create the defined retirement amount. This plan would require larger contributions for older employees nearer to retirement, so it is less favored by employers with older employees. In a defined contribution plan, the amount of the employer's contribution to the plan each year is defined by a predetermined formula. For Example Star Publishing's plan is a defined contribution plan, since Star contributes a fixed percentage (3%) of Rick's salary to the plan each year. The $1,200 Star contributed will vest in Rick over time. The company has a five-year "cliff-vesting plan." This means Rick will not be able to take the $1,200 if he leaves the company within the first five years of employment. The $4,000 of Rick's salary he put into the plan will vest immediately. If Rick leaves the company, he can take the $4,000, regardless of the length of his employment.
WHICH of the following employer-sponsored retirement plans is for smaller employers under which contributions may be made to IRAs on behalf of the employees? 401(k) plans 403(b) plans KEOGH plans Simplified Employee Pensions (SEP) plans
Simplified Employee Pensions (SEP) plans The simplified employee pension plan (a SEP) is a program for smaller employers or self-employed persons under which an employer may contribute to IRAs for its employees. All employees who are 21 or older and have three years of employment with the employer are eligible to participate in the plan. The employer must contribute an equal percentage of each eligible employee's income up to a maximum amount as set by the Internal Revenue Code (IRC). The employer is not required to make contributions every year. Rules for taxation of distributions are the same as for regular IRAs. A 401(k) is a profit-sharing and salary reduction plan, a 403(b) plan is a Tax-Sheltered Annuity (TSA) for non-profit employers, and a KEOGH plan is primarily for self-employed individuals.
2014: Covered by a Retirement Plan at Work
Single/Head of Household $60,000 or less- Fully Deductible Married Filing Jointly or Qualifying Widower $96,000 or less- Fully Deductible Greater than $96,000 but less than $116,000- Partial Deduction $116,000 or more- No Deduction Married Filing Separately Less than $10,000- Partial Deduction $10,000 or more- No Deduction
2015: NOT Covered by a Retirement Plan at Work
Single/Head of Household/Qualifying Widow(er) Any Amount- Fully Deductible Married Filing Jointly or Separately with a spouse who is NOT covered by a retirement plan at work Any Amount- Fully Deductible Married Filing Jointly with a spouse who IS covered by a retirement plan at work $183,000 or less- Fully Deductible Greater than $183,000 but less than $193,000- Partial Deduction More than $193,000- No Deduction Married Filing Jointly with a spouse who is NOT covered by a retirement plan at work Less than $10,000- Partial Deduction $10,000 or more- No Deduction
Review 3
The Keogh Plan is a qualified retirement plan available for self-employed persons, such as sole proprietors, partners in a business, or professionals (doctor, lawyer, etc.) and their employees. Such a plan cannot be established by a corporation or its stockholders. An IRA provides an employee with tax benefits similar to those of a qualified plan but is not sponsored by an employer. Anyone with earned income may contribute up to the lesser of 100% of earnings or an IRC maximum per year to one or more IRA acconts. IRA contributions to a regular IRA are fully tax deductible if the person is not an active participant in an employer-sponsored retirement plan. IRA funds may be invested in annuities, certificates of deposit, stocks, bonds, or mutual funds. The funds may be transferred directly from one IRA to another an unlimited number of times per year. They may also be rolled over into another IRA or retirement plan. Rollovers must be completed within 60 days and may occur no more than once each year. Distributions (withdrawals) from the IRA should start sometime between age 59-½ and April 1 of the year after the person reaches age 70-½. If the money is withdrawn prematurely (prior to age 59-½) a 10% penalty is also charged, unless the person is disabled, dies, or under certain other circumstances. If distributions do not start before April 1 of the year after the person reaches age 70-½, or do not satisfy the minimum distribution required (based on the participants life expectancy), there is a penalty of 50% of the amount that should have been withdrawn. As an alternative to a regular IRA, an individual can make contributions to a Roth IRA, provided his income is below a specific amount (which is adjusted each year). A person who is a participant in an employer-sponsored retirement plan would likely use a Roth IRA. These contributions are not tax deductible, but all earnings in the Roth IRA are tax free, not just tax deferred. With a Roth IRA there is no requirement to withdraw funds by or after age 70-½.
Thrift Funds and Thrift Accounts
The Thrift Savings Plan (TSP) offers federal employees and members of the military the same type of savings and tax benefits that many private companies offer under 401(k) plans. The TSP is a defined contribution plan administered by the Federal Retirement Thrift Investment Board, an independent government agency. Assets in the TSP are called the Thrift Savings Fund.
All of the following are tax-qualified retirement plans EXCEPT IRA's Keogh plans. 403b plans. deferred compensation plans.
deferred compensation plans. Tax-qualified plans are retirement plans established to qualify for special tax treatment. This involves the ability to contribute funds to the retirement plan and deduct the amount of the contribution from one's taxable income. IRA's, Keogh plans and 403b (tax-sheltered annuity) plans all have this feature. Deferred compensation plans are not tax qualified; as soon as the employee receives the funds or has them placed in his account, he would be taxed on the money.
Y has a qualified retirement plan under which he is to receive $60,000 per year upon retirement. The amount needed to fund the plan changes each year. This type of plan is called a defined contribution plan. money purchase plan. deferred compensation plan. defined benefit plan.
defined benefit plan. In a defined benefit plan, the amount the employee will receive upon retirement is defined. The amount needed to be contributed to the plan is not fixed; it will change to be whichever amount is needed to create the retirement amount. For example, if the plan provides for purchase of an annuity paying the employee $500 per month upon retirement, the employer must contribute whatever amounts are needed to give the insurer enough funds so that it can pay the $500 per month.
An employer-sponsored retirement plan in which the amount of a person's retirement benefit has been defined is a(n) defined retirement plan. pick-and-choose plan. defined benefit plan. money-purchase plan.
defined benefit plan. An employer-sponsored retirement plan in which an employee's retirement benefit has been pre-defined is called a defined benefit plan. "Pick-and-choose" plans, such as a Section 162 Executive Bonus Plan or a Deferred Compensation Plan allow for discrimination and let the employer "pick and choose" who gets into these plans while company-sponsored plans do not allow for discrimination; if an employee qualifies, he must be allowed into the plan.
Z has a retirement plan under which his employer contributes an amount equal to 3% of the income for each eligible employee. This would be a(n) defined benefit plan. defined contribution plan. deferred compensation plan. annuity purchase plan.
defined contribution plan. In a defined contribution plan, the amount the employer will contribute to the plan each year is defined by a predetermined formula, e.g., 3% of salary.
With a regular IRA earnings are tax deferred until withdrawn only if contributions were tax deductible. earnings are tax deferred until withdrawn even if contributions were not tax deductible. life insurance can be used to fund the IRA. distributions are not taxable after age 70 1/2.
earnings are tax deferred until withdrawn even if contributions were not tax deductible. Whether contributions to an IRA are tax deductible or not, the earnings in the IRA accumulate on a tax-deferred basis, and are then taxable upon withdrawal, at any age. When money is withdrawn, the portion of that money attributable to deductible contributions and earnings is taxed. IRA's cannot be funded with (invested in) life insurance or collectibles. They may be funded with mutual funds, banks, savings, or credit union accounts or CD's, bank trust accounts or fixed or variable flexible-premium annuities.
401(k)
is a plan established by an employer to enable employees or their beneficiaries to share in company profits. The company's contributions to the plan may vary based on its financial condition and may be made from other than profits. Contributions may be either in addition to salary or in the form of a salary reduction. The employer's contribution must be allocated to all participants on an equal basis according to a predetermined formula (based on salary and/or length of time in the plan). An employee may exclude up to an annual IRC maximum, and employers may match all or a percentage of that up to a total of 25% of the employee's compensation. Contributions are paid into a trust for the benefit of the employees and vest with the employees on the same basis as pension plans. For Example Paul works for a private school system. His employer deducts 10% of his salary from his paycheck each month to invest in his 401(k) mutual fund account. He pays no tax on the contribution or the earnings in the account until he receives money from the account. Contributions to a 401(k) Cash or Deferred Arrangement The limit on annual contributions in 2015 for a 401(k) are: 100% of earned income, not to exceed $18,000; and As a "catch-up" contribution, an additional $6,000 may be contributed if the account owner is aged 50 or older
tax-sheltered annuity (TSA)
is a plan only available to employees of public school systems and nonprofit tax-exempt charitable, educational or religious organizations. It differs from a regular annuity in that contributions to the TSA are deductible from the employee's taxable income and are not taxed until they are distributed as annuity payments. Annual elective deferrals may be up to a maximum set by the IRC under a salary reduction agreement. In addition, employer contributions and after-tax contributions may be added. The total of all contributions cannot exceed 100% of the employee's compensation or $41,000. Funds are usually invested in annuities or mutual fund shares. Earnings are tax deferred. When received, the entire benefit payment is taxed, the same as with a regular IRA. For Example Winona works for a public school system. Her employer deducts 10% of her salary from her paycheck each month to invest in her 403B mutual fund account. She pays no tax on the contribution or the earnings in the account until she receives money from the account. Contributions to a Tax-Sheltered Annuity (403b) The limit on annual contributions for 2015 is the lesser of: $53,000, or 100% of the taxpayer's compensation for the most recent year of service.
simplified employee pension plan
is a program under which an employer may contribute to IRAs for the employees. All employees 21 or older with three years of employment with the employer are eligible. The employer must contribute equal percentages of income for each eligible employee up to a maximum amount of the employee's compensation as set by the Internal Revenue Code (IRC). However, the employer is not required to make contributions every year. Rules for taxation of distributions are the same as for regular IRAs. For Example At Art Sand's Crafts Shoppe, Art and Amber have set up a SEP to cover themselves and their two employees. Two years ago, they contributed 10% of salaries to themselves and their employees. Last year they had financial difficulty, so they contributed nothing. This year is better, so they plan to contribute 5%.
Employee Stock Ownership Plan (ESOP)
is a qualified benefit plan in which an employee gets shares of company stock and consequently part ownership in the company where they work.
Keogh Plan
is a qualified retirement plan available for self-employed persons, such as sole proprietors, partners in a business, or professionals (doctor, lawyer, etc.) and their employees. Such a plan cannot be established by a corporation or its stockholders. Retirement plans for self-employed people were formerly referred to as "Keogh plans" after the law that first allowed unincorporated businesses to sponsor retirement plans. Since the law no longer distinguishes between corporate and other plan sponsors, the term is seldom currently used. All full-time employees 21 or older with at least one or two years of service (depending on the plan's vesting schedule) must be covered by the employer's plan. A Keogh Plan may be established as a defined contribution plan or a defined benefit plan, in the same manner as corporate retirement plans. Annual contribution limits for a defined contribution plan are the lesser of 100% of earned income or a maximum set by the IRC. Annual contribution limits for a defined benefit plan are whatever amount is necessary to pay for an annual benefit of up to the lesser of a specified maximum or 100% of the person's compensation for his three highest consecutive years. Contributions to the plan are tax deductible for the employer and not taxable income for the employee. Funds may be invested in mutual funds; bank, bank trust, savings and credit union accounts or CDs, or flexible-premium variable or fixed annuities. Earnings on the investments in the plan are tax deferred. When funds are withdrawn, the entire withdrawal is taxable. For Example Dell, Lea and Meadow, partners in Goin' to Seed, have set up an HR-10 retirement plan for themselves and their one full-time employee, Dale. They can do this since they have a partnership and not a corporation. Their plan provides that each can contribute up to 25% of their earnings from the company to their Keogh Plan, and they will contribute an amount equal to 25% of Dale's salary to Dale's account. They pay no tax on the money that they put into the plan, but they will pay tax on all of the money they take out of the plan upon retirement. Contributions to a KEOGH Plan Contributions are limited to 25% of a person's earnings not to exceed $53,000 for 2015 with a maximum annual income of $265,000 that may be considered.
Taxation of distributions
is usually age related. The portion of distributions taken in installments after age 59-1/2 that is not recovery-of-cost basis is taxed as ordinary income, for the year received. If taken in a lump sum, it is taxed on a five-year forward-averaging basis (i.e., 1/5 is taxed each year for five years). Before age 59-1/2, funds can be rolled over from one plan to another tax-free, provided the rollover is direct. If it is not direct, 20% is withheld and the rollover is completed within 60 days. The portion of other distributions before 59-1/2 that is not recovery-of-cost basis is taxed as ordinary income and is subject to a 10% penalty, unless the participant is totally disabled, or the funds are used to pay for unreimbursed medical expenses that exceed 7.5% of adjusted gross income, or they are used to pay medical insurance premiums, or they are taken as a life annuity. Distributions must start by April 1 of the year following the year the individual reaches age 70-1/2 and, if taken in installments, be at a rate to be paid out by the end of the life expectancy. Failure to do so results in a penalty of 50% of the amount that should have been taken, but was not.
A person purchased a ROTH IRA because he could contribute to the IRA after age 70 1/2 if he was still earning income. All of the following relate to a ROTH IRA EXCEPT it has no required minimum distribution. it allows tax-deductibility on the premiums paid into the account. the growth in the account is tax-deferred. the entire distribution is tax-free once the account has been open for at least five years and the account holder is at least 59 1/2.
it allows tax-deductibility on the premiums paid into the account. ROTH IRAs do not allow tax-deductibility on the premium paid. The account will grow on a tax-deferred basis and will be distributed entirely tax-free once the account holder is 59 1/2 and has had the account open for at least five years.
savings incentive match plan for employees (SIMPLE)
may be used by an employer: who has 100 or fewer employees who received at least $5,000 of compensation from the employer for the year; and who has no other retirement plan. It can be established as an IRA for each eligible employee or as part of a 401(k) plan. Each employee may contribute a percentage of his compensation (up to an IRC annual maximum) to the plan under a salary-reduction arrangement. The plan must be set up so that each year the employer will either: match the employee's contributions on a dollar-for-dollar basis, up to 3% of compensation; or make a 2% nonelective contribution on behalf of all eligible employees. For Example Lisa works for a small computer programming company. Her employer contributes 2% of her salary for her and all other eligible employees into a SIMPLE retirement plan. In addition, Lisa can contribute her own money to the account. She pays no tax on the contribution or the earnings in the account until she receives money from the account.
Tax-Qualified
plans include corporate pension, profit sharing and stock bonus plans, Keogh plans, 401(k) plans and 403(b) tax-sheltered annuities, and are subject to, among other things, the Employees Retirement Income Security Act (ERISA). ERISA was designed to protect retirement plan participants, ensure pension equality and heighten fiduciary standards. To be eligible for tax-favored treatment, ERISA requires detailed reporting and disclosure of plan structures and requires sponsors to provide participants with plan descriptions and benefit statements.
Y might choose a Roth IRA over a regular IRA because contributions are tax deductible. contributions may not continue after age 70 ½ qualified distributions are not taxable. distributions are not taxed unless deferred until after age 70 ½
qualified distributions are not taxable. The advantage of a Roth IRA is that qualified distributions are not taxable if the account holder is at least age 59 ½ and has had the account open for at least five years. Contributions for a Roth IRA are not tax deductible. Contributions for a Roth IRA may continue after age 70 ½ if the account holder has earned income. ROTH distributions are not taxed even if deferred until after age 70 ½.
Cash accumulations are tax deferred in all of the following EXCEPT whole life policy. deferred annuity. IRA. savings account.
savings account. Insurance, annuities and IRAs accumulate cash value on a tax-deferred basis. Savings account interest is taxable each year.
nonqualified plan
such as a deferred compensation plan, does not require IRS approval and allows for discrimination, so all qualified employees need not be included. With such a plan, any contributions by an employee are not tax deductible. Any benefits received by the employee would be taxable income to the employee upon receipt. In a deferred compensation plan, the employer does not give the employee the funds until an agreed-upon time (e.g., at retirement, or upon death or separation from the employer). Until then, the funds promised to the employee may be placed in a company reserve account. One way to fund this plan is with key person life insurance. The employer will be able to deduct the payments made to the employee but not the cost of the premiums. The employee or his family will be taxed on the income or insurance settlement payments as they are received. For Example Thumbs Up Sausage set up a nonqualified deferred compensation program for Jack because it did not want to contribute to retirement plans for any other employees. Under the plan, it agreed to pay Jack $15,000 per year for life when he retires at age 65. It funded the plan by buying a $300,000 key person life insurance policy on Jack. Thumbs Up is the policyowner and beneficiary. If Jack lives to retirement, Thumbs Up can borrow or withdraw cash value to pay all or part of the promised income to him. If he dies before retirement, the policy proceeds can be used to pay Jack's family a specified death benefit.
Under a defined contribution KEOGH (HR-10) plan the contribution amount is specified. the amount of the benefit is specified. contributions are calculated to produce a predetermined benefit. the contributions are made with after-tax income.
the contribution amount is specified. Keogh Plans, also known as "HR-10" plans, may be established as defined contribution plans or defined benefit plans. Under a defined contribution plan, the contributions are defined by set formulas; the benefits are not fixed, as they will depend on the earnings on the contributions. Under a defined benefit plan, the benefit is fixed and the contributions will vary based on what is needed to provide the specified benefit. Keogh plans are tax qualified, so contributions are tax deductible, and not after-tax income.
