Xcel Retirement plans ch.10

Catch-up Contributions

Additional amounts that 401(k) participants age 50 and older can choose to defer into their 401(k) this making a "catch up" contribution

Pension Protection Act of 2006

- Strives to improve the pension system and expand opportunities to build retirement nest eggs - Beginning in 2010 anyone can convert funds from a 401(k) plan to a traditional or Roth IRA

What are the changes that are established for Keogh Plans

- are subject to the same maximum contribution limits and benefits limits as qualified corporate plans - must comply with the same participation coverage requirements as qualified corporate plan - are subject to the same nondiscrimination rules as qualified corporate plans

IRA Participation

Anyone under the age of 70 1/2 who has earned income may open a traditional IRA and contribute up to the contribution limit or 100% compensation each year which ever is less

An example of a tax-qualified retirement plan would be a(n) A. equity compensation plan B. defined contribution plan C. executive index plan D. 1035 exchange plan

Defined contribution plan

Rules of Traditional IRA withdrawals

Traditional owners must begin to receive payments from their accounts no later than April 1 following the year in which they reach the age of 70 1/2. Minimum withdrawal amount must happen every year. Failure to do that will result in a 50 % exercise tax

(1035 exchange) All the following are types of insurance policy exchanges that can be made without current taxation:

- The exchange of life insurance policy for an annuity - An annuity exchanged for another annuity contract - A life insurance policy exchanged for another life insurance -The exchange of an annuity for a life insurance policy is NOT permitted

Qualified Roth Withdrawals requirements

- The funds must have been held in the account for a minimum of five years - The withdrawal must occur because the owner has arched age 59 1/2, the owner dies, the owner becomes disabled, or the distribution is used to purchase from home

A defined benefit plan must meet the following basic requirements to qualify for federal tax purposes

- The plan must provide for systematic payment of benefits to employees over a period of years (usually for life) after retirement. Thus the plan has to detail conditions under which benefits are payable and the option under which benefits are paid -The plan must provide primary retirement benefits. The IRS will allow provision for death or disability benefits, but these benefits must be incidental to retirement -The maximum annual benefit an employee may receive in any one year is limited to an amount set by the tax law -The appropriate choice of a qualified corporate retirement plan (Defined contribution of defined benefits) requires an understanding of the operation and characteristics of each plan as they relate to the employers objectives

Section 529 Plans

- state provided - can be funded by after tax dollars - can pay prepaid tuition - All earnings exempt from federal taxes - If withdrawn for unqualified withdrawl, 10% penalty

Non-Qualified Plans are characterized by the following:

-Do not need to be approved by the IRS -Can discriminate in favor of certain employees - Contributions are not tax-deductable -Interest earned on contributions is tax-deffered until withdrawn upon retirement

Qualified Plans Vs NonQualified

-Employer contribution to a qualified plan are considered a deductible business expense which lowers the business's income tax -The earnings of a qualified business plan are exempt from income taxation -Employers contribution to a qualified plan are not currently taxable to employees in the year they are contributed, but they are taxable when they are paid-out as a benefit (typically when the employee is retired and in a Lower tax bracket) -Contributions to an individual qualified plan , such as an individual retirement account or annuity (IRA), are deductible from income under certain conditions -the annual additional to an account in qualified retirement plan cannot exceed the maximum limits set by the IRS -A plan considered to be "top heavy" if more than 60% of plan assets are attributable to key employees as of the last day of prior plan year -The executive benefit rule states that assets held in a company qualified retirement plan must be maintained for the executive benefit of the employees and their beneficiaries -The survivor benefits under qualified retirement plan can be waived only with a written consent of a married workers spouse

Qualified Plan

A retirement plan that meets the IRS guidelines for receiving favorable tax treatment. Also provide tax benefits and must be approved by the the IRS. The plan must be permanent, in writing, communicated to employees, defined contributions or benefits , and can not favor highly paid employees, executives, or stock holders. The primary types of qualified plans are DEFINED BENEFIT and DEFINED CONTRIBUTION PLAN -To comply with ERSIA minimum participation standards, qualified retirement plans must allow the enrollment of all employees over age 21 with one year of experience. -If more than 60 percent of a qualified retirement plan's assets are in key employee accounts, the plan is considered "top heavy"

Simplified Employee Pension (SEP)

Arrangment where an employee establishes and maintains an IRA to which the employer contributes. Employer contributions are not included in the employees gross income. For SMALL employers qualified retirement plan under which the employer contributes to an individual retirement account set up and maintained by the employee

Savings Incentive Match Plan for Employees (SIMPLE)

Available to small businesses that employ no more than 100 employees who receive at least $5,000 in compensation for the employer during the previous year. Employers can choose to make nonelective contributions of 2% of compensation, and the employer must not have a qualified plan in place qualified employer retirement plan that allows small employers to set up tax-favorable retirement savings plans for their employees Available to small businesses that employ no more than 100 employees who receive at least 5,000 in compensation from the employer during the previous year

Roth IRA

Designed so withdrawals are received income tax-free. Contributions to are subject to the same limit of Traditional IRAs, but are not tax-deductible. Interests are not taxable as long as withdrawal is a qualified distribution. No income tax deductions can be taken for contributions made to a Roth, but earning contributions are entirely tax-free when they are withdrawn private retirement plan that taxes income before it is saved, but which does not tax interest on that income when funds are used upon retirement

defined contribution plan

Does not specify the exact benefit amount until distribution begins . The maximum contribution is the lesser of the employee's earnings or $49,000 per year. A tax qualified retirement plan in which annual contributions are determined by a formula set forth in the plan. Benefits paid to a participant vary with the amount of contributions made on the participants behalf and the length of service under the plan addresses the amount going into a plan currently and identify the participants vested(nonforfeitable) account. there are 4 types of these plans: profit sharing, stock bonus plans, money purchase plan, pension plan 2 main types of plans are Profit sharing and Pension Plan

Which of these statements concerning Traditional IRAs is CORRECT? A. Earnings are not taxable when withdrawn B. Earnings are taxable when withdrawn C. Contributions are never tax-deductible D. Contributions are always made by the employer

Earnings are taxable when withdrawn

Which of the following is NOT a federal requirement of a qualified plan? A. Must benefit a broad cross-section of employees B. Employee must be able to make unlimited contributions C. Vesting schedule must be defined D. Employer establishes the plan

Employee must be able to make unlimited contributions

Tax Benefits of Qualified Plans

Employer's contributions are tax-deductible and not treated as taxable income to employees. Employee contributions are made with pre-tax dollars, and any interest earned on both employer and employee contributions are tax deferred . Employee only pay taxes on amounts at the time of withdrawals.

Pension Plans

Employers contribute to a plan based on the employee's compensation and years of service, not company profitability or performance.

ERISA (Employee Retirement Income Security Act)

Main Purpose is to protect the rights of workers covered under an employersponser plan Federal law that sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans. Purpose is to protect the rights of workers covered under an employer-sponsored plan Church, government, and collectively bargained plans are specifically exempt from ERISA regulations

Primary difference between a SEP and an IRA:

Much larger amount of cash can be contributed to an employees SEP plan is the lesser of 25% of the employee's annual compensation

Spousal IRA

Persons eligible to set up IRAs for themselves may create a separate spousal IRA for nonworking spouse. They are able to contribute up to an the annual maximum to the spousal account. Even in the event that the working spouse is in an employer-sponsered plan

Dana is an employee who deposits a percentage of her income into her individual annuity. Her company also contributes a percentage into a separate company pension plan. What kind of annuity is this considered?

Qualified retirement annuity

Keogh Plan

Qualified retirement plan designed for incorporated businesses (self-employed) that allows business owner (or partner in a business) to participate as an employee, only if the employees of that business are included designed to fund retirement of self employed individuals: name derived from author of the Keogh Act (HR-10), under which contributions to such plans are given favorable tax treatment

Which of these retirement plans do NOT qualify for a federal income tax deduction? A. SIMPLE Plan B. Traditional IRA C. Keogh Plan D. Roth IRA

Roth IRA

No Required Distributions (Roth)

Roth IRA do not require mandatory distributions. There is no minimum distribution requirements for accounts . Funds can remain in the account as long as the owner desires, also can be passed on to the beneficiaries

salary reduction plan

SARSEPs incorporate a deferral/salary reduction approach in that the employee can elect to have employer contributions directed into a SEP or paid out as taxable cash compinsation. Small employers (25 or fewer employees) and had established before 1997 A nonqualified plan under which executives may defer compensation until termination of employment to reduce current income tax liability and save for retirement.

All of the following are exempt from the 10% tax penalty for early qualified plan withdrawals EXCEPT? A. Qualified college expenses B. First time home purchase C. Death of the participant D. Stock purchase

Stock Purchase

Which of the following would disqualify a company's retirement plan from receiving favorable tax treatment? A. Contains a vesting schedule B. Contributions are applied with no regard to income C. Formed for the sole benefit of employees and their beneficiaries D. It is temporary

Temporary

Who were Keogh plans designed to provide pension benefits for? A. Corporate officers B. Public school employees C. The self-employed D. Government employees

The self-employed

Rollover IRA

Transfere of funds from one IRA or qualified plan to the other This plan is subjected to 20% withholding tax if eligible rollover funds are received personally by a participant in a qualified plan, unless the funds are deposited into a new IRA or qualified plan within 60 days of distribution A surviving spouse who inherits IRA benefits form a deceased spouse's qualified plan is eligible to establish a rollover IRA in their own name Rollover contributions are unlimited by dollar amount

Vesting Schedule for qualified plans

Vesting schedule and nonforfeitable rights at any specified time. Vesting means the right that employees have their retirement funds. Benefits of "vested" belong to each employee even if the employee terminates employment prior to retirement. For all plans, an employee always has 100% vested interest in the benefits that accrue from the employees own contributions

Factors that cause Deduction of IRA Contributions

Whether or not the participant is covered by an employer-sponsered retirement plan or The amount of income the participant makes

Withdrawals and Taxation

Withdrawals by employee are treated as taxable income. Withdrawals made by employees prior to age 59 1/2 are assessed an additional 10% penalty tax. Distributions are mandatory by April 1st of the year following age 70 1/2, and failure to take required withdrawal results in 50% exercise tax on those funds

Stock Bonus Plan

a type of profit-sharing plan in which the employer rewards employees with company stock instead of cash similar to profit sharing plan, except that contributions by the employer do not depend on profits. Benefits are distributed in the form of company stock.

Participation Standards for qualified plans

all qualified employers must comply with ERISA minimum participation standards to determine employee eligibility. In general employees who have reached 21 years of age and completed one year of service will be allowed to rule in a qualified plan

IRC Section 457 Deferred Compensation Plans

allows participants in such plans to defer compensation without current taxation as long as certain conditions are met

Coverage Requirements for Qualified Plans

must benefit a broad cross-section of employees. Purpose of the coverage requirements is to prevent a plan from discriminating against rank and file employees in favor of the elite employees Form 5500 is a disclosure document that employee benefit plans use to satisfy annual reporting requirements under ERISA

Defined Benefit Plan

pays a specified benefit amount upon the employees retirement. When the term pension is used, it normally is referring to a defined benefit plan. The benefit is based on the employee's length of service and/or earnings. These plans are mostly funded by individual and group deferred annuities.

defined benefit plan (2)

pension plans under which benefits are determined by a specific benefit formula sets up a pre-determinded contribution and establishes a definite future benefit, pre determined by a specific formula. Benefits are tied to the employees years of service, amount of compensation, or both.

Money Purchase Plan

provide fixed contributions with future benefits to be determined. The most truly represent a defined contribution plan. A money purchase plan must meet the following three requirements: -Contributions and earning must be allocated to participants in accordance definite formula -Distribution can be made only in accordance with amounts credited to participants - Plan assets must be valued at least once a year, with participant accounts being adjusted accordingly

Funding Standards

these funds must be held by a third party and invested. The funding vehicle is the method of investing the funds as they accumulate. Federal minimum funding requirements are set to ensure that an employers annual contribution to a pension plan are sufficient to cover the cost of benefits payable during the years plus administrative expense

Under a Traditional IRA, interest earned is taxed? A. only if withdrawn prior to age 59 1/2 B. according to the capital gains rate C. upon distribution D. during the accumulation phase

upon distribution

Qualified plans are characterized by the following:

-Employer contributions are tax-deductible as a business expense -Employee contributions are made with pretax dollars- contributions are not taxed until withdrawn -Interest earned on contributions is tax-deffered until withdrawn upon retirement -The annual addition to an employees account in a qualified retirement plan cannot exceed the maximum limits set by the internal revenue service

A rollover from a Traditional IRA to another IRA MUST be done within ___ days to avoid tax consequences. A. 15 B. 30 C. 60 D. 90

60

Within how many days must a rollover be completed in order to avoid being taxed as current income? A. 30 B. 60 C. 90 D. 120

60

Which of the following employers is required to follow ERISA regulations? A. A local government with 150 employees B. A church with 30 employees C. A local electrical supply company with 12 employees D. A Canadian company with 300 employees working in the United States

A local electrical supply company with 12 employees

Traditional IRA

Allow for an individual to contribute a limited amount of money per year, and the interest ear ed is tax-deferred until withdrawals. allows individuals to save money for retirement and receive a current tax break, regardless of any other retirement plan. Basically the amount contributed to an IRA accumulates and grows tax deferred. The amount an individual contributed to a traditional IRA may be fully or partially deducted from current incomes, resulting in lower current income taxes

When a qualified plan starts making payments to its recipient, which portion of the distributions is taxable? A. Principal B. Contributions made by employee C. Contributions made by employer D. Gains

Gains

IRA Funding

Ideal vehicle for IRAs is fixed deferred annuity other acceptable funding vehicles: bank time deposit open accounts, bank certificates of deposit, insured credit union accounts, mutual fund shares, face amount certificates, real estate investment trust units, and certain US gold and silver coins

Funds may be withdrawn prior to the employee reaching age 59 1/2 without a 10% penalty tax if:

If the employer dies or becomes disabled; if loan is taken on plan proceeds ; if withdrawals result is due to divorce proceedings; if the withdrawal is made to a qualified rollover plan ; or if the employe elects to receive annual level payments for the remainder of his life.

Mike has inherited his father's traditional IRA. As beneficiary, he will pay ____ taxes on any money withdrawn. A. estate B. probate C. no D. income

Income

403(b) plan

Is known as tax-sheltered annuities Special class of retirement plans available to employees of certain charitable, educational, or religious organizations a retirement plan for specific employees of public schools, tax-exempt organizations and certain ministers, and 501 (c)

401(k) plan

Know: (type of contribution plan) allow employers to make tax-differed contributions to the participant, either by placing a cash bonus into the employees account on a pre-tax basis or the individual taking a reduced salary with the reduction placed pre-tax in the account. Account funds are takable upon withdrawal a retirement savings plan sponsored by an employer. It lets workers save and invest a piece of their paycheck before taxes are taken out. called cash or salary deferral option because employees can not be forced to participate Include matching employers to contributions

profit-sharing plan

Know: A type of retirement plan that set aside a portion of the firm's net income for distributions to employees who qualify under the plan. Plans must provide participants with the formula the employer uses for contributions. The contributions may vary year to year, and interest are tax-deferred until withdrawal. plans whereby a portion of a company's profit is set aside for distribution to employees who qualify under that plan The IRS also states that withdrawal of funds from a profit sharing plan may be subject to 10% tax penalty in addition to income taxes if they are made before the age of 59 1/2

Money Purchase Plan allows Employers to:

contribute a fixed annual amount, apportioned on each participant, with benefits based on funds in the account upon retirement. Target benefit plans have target benefit amount.

Employee Stock Ownership Plan (ESOP)

employee-ownership programs that provide a companys workforce with an ownership interest in the company. Shares are allocated to employees and may be held in a ESOP trust until employee retires or leaves the company

Alienation of benefits

involves the assignment of a pension or retirement plan participants benefit to another person. It is permitted only under exceptional circumstance per IRS rules, such as certain participant loans a certain domestic relation order EX: Tim is retired and has recently separated from his wife. He receives benefits from a qualified retirement plan through his former employer. The plan's trustee has decided to split these benefit payments between Tim and his estranged wife. This decision is likely in violation of which IRS rule?