Investment Companies - Retirement / Education / Health Savings Plans
Traditional IRA v. Roth IRA
In a Traditional IRA, a tax deduction is permitted up-front (unless one's income is too high); so there is taxation at the back. Thus, a Roth IRA has "backloaded" tax benefits; while a Traditional IRA has "front loaded" tax benefits.
Investments not allowed for IRAs
Insurance policy "cash" values, term insurance, art and collectibles
To avoid Federal gift tax, this means that no more than X can be donated to an account
$14000 (or $28000 from a married couple)
What is the best choice for a person to make if they inherit an IRA account?"
(1) IRA Roll Over (2) Beneficiary Distribution Account ("Inherited IRA") (3) Cash Out The Account (4) Disclaim the IRA
ERISA requirements include
(1) Non-discrimination (2) Vesting (3) Fiduciary responsibility (4) Permitted investments - speculative strategies that do not meet the "prudent man" rule are not permitted, neither is whole life insurance
Plans that comply with ERISA requirements include:
(1) Profit-sharing plans (2) Defined contribution plans (3) Defined benefit plans (4) Tax-deferred annuity plans (403(b)) (5) Payroll deduction savings plans
They are a tax advantaged medical savings account that is owned by the individual. They are established by corporate employers as part of their health insurance plans, and only plans that have a high deductible can set up HSAs for employees
Health Savings Account
Which of the following statements are TRUE about Keogh Plans? I Contributions are 100% deductible II Contributions are not deductible III Distributions are 100% taxable IV Distributions are partially taxed, with only the amount above what was contributed being taxed
I and III; Keogh contributions are tax deductible (up to $53,000 in 2016), so the original investment was made with "before tax" dollars. In addition, earnings on Keogh investments are tax deferred. Once distributions commence from the Keogh, they are 100% taxable at that individual's tax bracket.
The spouse can roll over the account into his or her existing IRA; or if he or she does not have an existing IRA, can set up a new IRA with the proceeds. There is no tax due at this point
IRA Roll Over; option is not available for non-spousal beneficiaries
Only available to small businesses with 100 or fewer employees. The plan is established by the employer and is much more simple to establish and administer than a traditional pension plan
SIMPLE IRA; employees contributes up to $12,500 (in 2016) as a salary reduction. In addition, the employer must make a matching contribution of either 2% or 3% of the employee's salary (the 2% match option must be made regardless of whether the employee makes any contribution; the 3% match must be made only if the employee makes a contribution). Also note that there is no flexibility regarding the employer match - it must be made in good times and bad times by the company.
This is an employer-sponsored salary reduction plan only available to companies with a maximum of 100 employees
Savings Incentive Match Plan for Employees IRA
These are deferred compensation plans for high-salaried government employees of states, counties and cities and their agencies that are offered in addition to a 403(b) plan.
Section 457 Plans
The State establishes the minimum and maximum annual contributions that can be made to the plan, and the contributions are not tax deductible. Earnings in the account build tax deferred, and distributions to pay for higher education expenses are not taxable. Distributions are made directly by the plan to the educational institution, which can be in any State.
Section 529 Plan; there is no statutory maximum annual contribution; there is no income "phase-out" rule stopping higher earning persons from establishing such a plan; and there is no mandatory distribution age
These plans are generally used by small businesses that wish to limit the paperwork and fiduciary responsibilities associated with qualified retirement plans. The employer makes contributions to an Individual Retirement Account for each eligible employee and takes a deduction for the contribution.
Simplified Employee Pension IRA (SEP); the employer is permitted to change the contribution percentage each year; contribution made by the employer cannot exceed 25% of the employee's income, up to a maximum of $53,000 in 2016 A major advantage of SEP IRAs is that there is flexibility regarding the annual contribution to be made - the employer can change the contribution percentage each year. So this plan is a good option for a small business that has variable cash flow.
Used by a sole beneficiary of an account; this would give the largest RMD, since the expected payout time frame shortens (since only 1 lifetime is covered).
Single Life Expectancy Table
Deferred compensation plans are intended for
corporate executives to give them an "extra incentive" in addition to their regular retirement income
Roth IRAs are not subject to the requirement to begin distributions at age 70 ½; and contributions into a Roth IRA are permitted to continue after this age
distributions from a Roth IRA are not taxable, as long as the investment has been held for 5 years and as long as the person is at least age 59 ½
The maximum contribution that can be made by an employee as a salary reduction is
$12500
The annual contribution of a 401k is limited to a maximum dollar amount of
$18000
Since teachers, professors, nurses and doctors are not really good with managing their investments, these 403(b) plans do not allow...
...direct stock investments - there is no such thing as a "self-directed 403(b) plan." Direct investments in common stocks selected by the plan participant are prohibited
To ensure that tax due will be paid if the distribution is not rolled over into an IRA...
...the IRS requires that 20% of the distribution amount be withheld as a credit against the tax liability for having taken the premature distribution
The maximum contribution deductible to the employer in a profit sharing plan is
25% of income (statutory rate; 20% effective rate), capped at $53,000 in 2016
The maximum contribution for a defined contribution plan
25% of income, up to $53,000 (same as for Keogh Plans)
Employees of non-profit organizations, such as schools, hospitals, and foundations, are allowed to contribute to "tax-qualified" annuities - either fixed or variable contracts
403(b) Plan; the maximum annual contribution to such plans is 25% (statutory rate) of income, up to $18,000
A company has decided to terminate its retirement plan. In order to defer taxation on the distribution, the employee must roll over the funds into an Individual Retirement Account within how many days of the distribution?
60 days
Contributions can continue until age
70 1/2
For an Individual Retirement Account contribution to be deductible from that year's tax return, the contribution must be made by no later than:
April 15th of following year; IRA contributions must be made by April 15th of the following year - no extensions are permitted
Distributions must commence by
April 1st of the year following the year of reaching age 70 ½
Under Keogh rules, any distributions from a Keogh Plan must start no later than
April 1st of the year following the year the individual turns 70 1/2
Both the decedent's and beneficiary's names remain on the account; distributions must commence immediately; distributions must occur to deplete the account over 5 years (the 5 year rule); or distributions can be "stretched" over the beneficiary's life expectancy, if this is longer
Beneficiary Distribution Account ("Inherited IRA")
The beneficiary gets all the money in the account immediately; and also gets a tax bill for the entire amount of the distribution
Cash Out The Account
Established solely for the purpose of paying for qualified education expenses for the designated beneficiary - a child who must be under age 18.
Coverdell Education Savings Account (maximum permitted annual contribution is $2000 for all accounts); contributions are not tax deductible; additional contributions are not permitted into the account after the beneficiary reaches the age of 18; funds must be used by age 30
RMDs must be taken by
December 31st of each year; if there is a withdrawal shortfall, a penalty tax of 50% is applied to the amount not distributed
Contributions are made to fund a given benefit at retirement. An actuary is used to determine the total plan contribution made each year
Defined benefit
If the beneficiary is wealthy and doesn't need the money, he or she might "disclaim" the inherited IRA and give it to someone else - say that person's child.
Disclaim the IRA
Employer established retirement plans are regulated under...
ERISA (covers private retirement plans)
Used by an account holder whose sole beneficiary is his or her spouse, and the spouse is more than 10 years younger than the account holder
Joint and Last Survivor Table
HR 10 plans
Keogh plans; retirement vehicles designed for self-employed individuals; maximum contribution to a Keogh is effectively 20% of income (prior to taking the Keogh "deduction") or $53,000 in 2016
One major distinction between IRAs and Keoghs
Keoghs allow the cash value of life insurance to be considered as an investment; IRAs do not
Plans based on a percent of salary are sometimes called
Money Purchase Plans
Contributions are not deductible against the contributor's taxable income; the contribution amounts have been taxed
Non-tax qualified plan; earnings in the plan build up tax deferred; when distributions are taken from the plan, the portion of the distribution that represents that "build-up" is taxable
The same contribution amount as for a Traditional IRA can be contributed by an individual into such an account, but no tax deduction is permitted. If the monies are kept in the account for 5 years, then all withdrawals can be taken without any tax due at that point
Roth IRA
Contributions are deductible against the contributor's taxable income; the contribution amounts have not been taxed
Tax qualified plan; earnings in the plan build up tax deferred; when distributions are taken from the plan, the entire distribution amount is taxable. All ERISA plans are "tax qualified
High earning individuals can make contributions to
UGMA and UTMA accounts; Custodian accounts opened under either the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA) can be opened by any adult for any minor, with no limitation on the income of the donor in determining whether the account can be opened.
Used by an account holder whose spouse is not the sole beneficiary and whose spouse is less than 10 years younger
Uniform Lifetime Table
Payroll Deduction Savings Plan (401(k) Plan)
When payments are taken, 100% is taxable. This is a tax qualified plan, subject to ERISA.
If contributions are made in excess of the allowed amount
a 6% annual penalty tax is imposed on the excess amount for as long as it stays in the account
Taxpayers age 50 or older can contribute
an extra $1,000 to the $5500
A one-time contribution of 5 times the annual exclusion amount of $70,000 (or $140,000 for joint gifts) can be contributed in a single year
and be pro-rated over a 5 year period without incurring gift tax liability.
ERISA Rule 404(c)
applies to retirement plans that offer "self-directed" investment, such as 401(k) plans; requires that the plan sponsor offer at least 3 investment alternatives that are diversified; that have materially different risk and return characteristics; and that when combined with each other, tend to minimize risk through diversification
If the person making the contribution is not covered by another qualified pension plan, the contributions
are always tax deductible in full
All of the following statements are true regarding defined benefit plans EXCEPT: A. contributions made to the plan can vary from year to year B. employees with the highest salaries and the fewest years to retirement benefit the most C. benefits paid to employees consists of a tax free return of capital and a taxable return of earnings D. actuarial tables are used to determine contribution rates for each employee
benefits paid to employees consists of a tax free return of capital and a taxable return of earnings; Since a defined benefit plan is a "tax qualified" retirement plan, contributions are tax deductible and earnings "build up" tax deferred. When distributions commence, since none of the funds were ever taxed, the distribution amounts are 100% taxable
If the employer earns $265,000 or more, and contributes the maximum of $53,000 to the Keogh
only the first $265,000 of income (the "cap" amount) is used to compute the percentage to be contributed for the employees
Distributions prior to age 59 ½ without the penalty tax (but regular tax is still due) for
qualifying education expenses such as tuition, room, board and books; and the first $10,000 of first time home purchase expenses
Withdrawals from the account cannot be made without penalty until
the age of 59 ½
If a premature withdrawal is made
the amount taken out is subject to normal income tax plus a penalty tax of 10% of the amount withdrawn (if the person dies or is disabled before age 59 ½, distributions can be taken without penalty)
The annual contribution limits for an individual retirement account are
the lesser of 100% of income or $5500; if a married couple is filing a joint tax return, they can contribute 2 times the amount
If the maximum contribution is made to a Traditional IRA
then a contribution cannot be made to a Roth IRA (and vice-versa)
If funds are withdrawn and are not used for education expenses
they are taxable to the beneficiary at ordinary tax rates
If the employee is included in another pension plan, the tax deductible amount of his contribution
is phased out as his income level increases; the phase-out ranges for deductible IRAs are: $61,000 - $71,000 for a single return and $98,000 - $118,000 for a joint return
Monies that have accumulated in a Coverdell Education Savings Account that are not used by the beneficiary to pay for qualified educational expenses:
may be transferred to a Coverdell Education Savings Account for a sibling that so qualifies without any tax liability
A general rule of thumb for asset allocation is
to take "100 minus that person's age" to get the percentage of that individual's portfolio that should be invested in equities
