Fin 3040 Ch 17
Typical qualified retirement plan: Deferred retirement age
The deferred retirement age is any age beyond the normal retirement age. Employees who continue working beyond the normal retirement age continue to accrue benefits under the plan.
Typical qualified retirement plan: Early retirement age
The early retirement age is the earliest age that workers can retire and receive a retirement benefit. In a defined benefit plan, the retirement benefit is actuarially reduced for early retirement.
Federal income tax advantages to employers in a qualified retirement plan?
The employer's contributions are tax deductible up to certain limits as an ordinary business expense. Investment income accumulates income-tax free. In addition, the employer's contributions are not currently taxed as income to the employee.
Typical qualified retirement plan: Normal retirement age
The normal retirement age is the age that the worker can retire and receive full, unreduced pension benefits. Age 65 is the normal retirement age in most plans.
Qualified retirement plan must meet certain minimum coverage requirements to receive favorable income tax treatment. Explain ratio percentage test
To reduce discrimination in favor of highly compensated employees, a qualified retirement plan must meet minimum coverage requirements. Under the ratio percentage test, the plan must benefit a percentage of non-highly compensated employees that is at least 70 percent of the highly compensated employees covered by the plan. For example, if the plan covers 100 percent of the highly compensated employees, the plan must cover at least 70 percent of non-highly compensated workers.
401(k) plan
allows participants the option of putting money into the plan or receiving the funds as cash. For 2020, participants under age 50 can elect to have their annual salaries reduced up to a maximum of $19,500. For 2020, participants age 50 and older can contribute an additional $6,000. The amount of salary deferred is then invested in the employer's Section 401(k) plan. Employees typically have a choice of investing the contributions into several investment accounts. Finally, to avoid discrimination in favor of highly compensated employees, the plan must satisfy an actual deferral percentage test.
Federal income tax advantages to employees in a qualified retirement plan?
employer contributions are not considered taxable income to the employee. Also, investment earnings on plan assets are not taxed as current income but accumulate on a tax-deferred basis. Finally, the pension benefits attributable to the employer's contributions are not taxed until the employee retires or receives the funds.
defined contribution plan
is a retirement plan in which the contribution rate is fixed but the actual retirement benefit varies. The benefits depend on the worker's age of entry into the plan, contribution rate, investment returns, and age of normal retirement.
403(b) plan
is a retirement plan for employees of public educational systems and tax-exempt groups, such as hospitals, nonprofit organizations, and churches. These plans are also called tax-sheltered annuities (TSAs). Eligible employees can voluntarily elect to reduce their salaries by a fixed amount, which is then invested in the plan. Employers may make a matching contribution, such as 50 percent for each dollar contributed by the employee by salary reduction. For 2020, the maximum salary reduction for workers under age 50 is $19,500. Employees age 50 and older can make an additional catch-up contribution of $6,000.
Roth 401(k) plan
is a retirement plan in which contributions are made with after-tax dollars, taxes are not levied on investment earnings in the account, and qualified distributions at retirement are received income-tax free.
