Retirement Plans (entire set)

QUALIFIED PLANS FOR THE SMALL EMPLOYER - Salary Reduction SEP Plans

A variation of the SEP plan is the salary reduction SEP (SARSEP). SARSEPS incorporate a deferral/salary reduction approach in that the employee can elect to have employer contributions directed into the SEP or paid out s taxable cash compensation. The limit on the elective deferral to a SARSEP is the same as a 401(k). SARSEPS are reserved for small employers (those with 25 or fewer employees) and had to be established before 1997. As a result of tax legislation, no new SARSEPS can be established. However, plans that were already in place at the end of 1996 may continue to operate and accept new employee participants.

CHARACTERISTICS OF QUALIFIES EMPLOYER PLANS —-Vesting Schedules

All qualified plans must meet standards that set forth the employee vesting schedule and nonforfeitable rights at any specified time. Vesting means the right that employees have to the retirement funds. Benefits that are "vested" belong to each employee even if the employee terminates employment prior to retirement. An employee always has a 1009% vested interest in benefits that accrue from the employee's own contributions to all plans. Benefits that accrue from employer contributions must vest according to vesting schedules established by law.

QUALIFIED PLANS FOR THE SMALL EMPLOYER —-Catch-Up Contributions

Both SARSEP and SIMPLE plans allow participants who are at least 50 years old by the end of the plan year to make additional "catch-up" contributions. In much the same way that it encourages businesses to establish retirement plans for their employees, the federal tax law provides incentives for individuals to save for their retirement by allowing certain kinds of plans to receive favorable tax treatment. Individual retirement accounts (IRAS) are the most notable of these plans. Available IRAS include the traditional tax- deductible IRA, the traditional non-tax-deductible IRA, as well as the Roth IRA. The Roth IRA was created by the Taxpayer Relief Act of 1997. Roth IRA's require nondeductible contributions but offers tax-free earnings and withdrawals.

Employee Stock Ownership Plans

Employee Stock Ownership Plans, or ESOP's, are employee-owner programs that provide a company's workforce with an ownership interest in the company. Shares are allocated to employees and may be held in an ESOP trust until they retire or leave the company.

- Qualified Versus Nonqualified Plans —-Alienation of Benefits

Alienation of benefits involves the assignment of a pension or retirement plan participant's benefits to another person. It is permitted only under exceptional circumstances per IRS rules, such as certain participant loans and certain domestic relations orders.

CHARACTERISTICS OF QUALIFIED EMPLOYER PLANS—- Funding Standards

For a plan to be qualified, it must be funded. In other words, there must be real contributions on the part of the employer, the employee, or both. These funds must be held by a third party and invested. The funding vehicle is the method for investing the funds as they accumulate. The exclusive benefit rule states that assets held in a company's qualified retirement plan must be maintained for the exclusive benefit of the employees and their beneficiaries. Under a qualified retirement plan, the survivor benefits can be waived only with a married worker's spouse's written consent. Federal minimum funding requirements are set to ensure that an employer's annual contributions to a pension plan are sufficient to cover the costs of benefits payable during the year, plus administrative expenses.

INDIVIDUAL RETIREMENT PLANS —-No Required Distributions

No Unlike traditional IRAS, Roth IRAS do not require mandatory distributions. There is no minimum distribution requirement for the account owner. The funds can remain in the account as long as the owner desires. In fact, the account can be left intact and passed on to heirs or beneficiaries.

QUALIFIED DEFINED CONTRIBUTION PLANS -

A defined contribution plan's provisions address the current amounts going into the plan and identify the participant's vested (nonforfeitable) account. These predetermined amounts contributed to the participant's account accumulate to a future point (i.e, retirement). The final amount available to a participant depends on the total contribution amount, plus interest and dividends. There are three primary types of defined contribution plans: profit-sharing plans, stock bonus plans, and money purchase plans.

Money Purchase Plans

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

SIMPLE Plans

The same legislation that did away with SARSEPS also created a new form of qualified employer retirement plan (or SIMPLE). These arrangements allow eligible employers to set up tax-favored retirement savings plans for their employees without having to address many of the usual (and burdensome) qualification requirements. SIMPLE plans are available to small businesses (including tax- exempt and government entities) that employ no more than 100 employees who received at least $5,000 in compensation from the employer during the previous year. To establish a SIMPLE plan, the employer must not have a qualified plan in place. SIMPLE plans may be structured as an IRA or as a 401(k) cash or deferral arrangement. In addition, the employer will not be eligible for participation in a Simple Plan if he or she already maintains another employer-sponsored plan to which contributions were made (or where benefits have already accrued). All contributions to a SIMPLE IRA or SIMPLE 401(k) plan are nonforfeitable, and the employee is immediately and fully vested. Taxation of contributions and their earnings is deferred until funds are withdrawn or distributed.

QUALIFIED PLANS VS NONQUALIFIED PLANS - Qualified Versus Nonqualified Plans

There are many kinds of retirement plans, each designed to fulfill specific needs. The products and contracts they offer provide ideal funding or financing vehicles for both individual plans and employer- sponsored plans. Broadly speaking, retirement plans can be divided into two categories: qualified plans and nonqualified plans. Qualified plans are those that meet federal requirements and receive favorable tax treatment. Employer contributions to a qualified retirement plan are considered a deductible business expense, which lowers the business's income taxes. Employer contributions to a qualified plan are not currently taxable to the employee in the years they are contributed, However, they are taxable when 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 earnings of a qualified plan are exempt from income taxation until taken out.

CHARACTERISTICS OF QUALIFIES EMPLOYER PLANS Participation Standards

All qualified employer plans must comply with ERISA minimum participation standards designed to determine employee eligibility. In general, employees who have reached age 21 and have completed one year of service must be allowed to enroll in a qualified plan. If the plan provides 100% vesting upon participation, they may be required to complete two years of service before enrolling. New employees must receive a copy of their plan sponsor's latest Summary Plan Description within 90 days after becoming covered by the plan. Church, governmental, and collectively bargained plans are specifically exempt from ERISA regulations.

CHARACTERISTICS OF QUALIFIES EMPLOYER PLANS Employee Retirement Income Security Act of 1974

Many of the basic concepts associated with qualifed employer plans can be traced to the Employee Retirement Income Security Act of 1974, commonly called ERISA. The purpose of ERISA is to protect the rights of workers covered under an employer-sponsored plan. ERISA imposes several requirements that retirement plans must follow to obtain IRS approval as a qualified plan, eligible for favorable tax treatment This law sets forth standards for participation, coverage, vesting funding, and contributions also ERISA ERISA, workers regulates had few group health guarantees to assure them area that they disclosure would and insurance in the of Before the benefit passage of receive reporting. the pension they thought they had eamed. plight the worker years to one employer only An to be unfortunate terminated but within common a few years was of retirement and who had not be devoted entitled to many a pension benefit.

QUALIFIED DEFINED CONTRIBUTION PLANS—- Profit-Sharing Plans

Profit-sharing plans are established and maintained by an employer and allow employees to participate in the company's profits. They set aside a portion of the firm's net income for distributions employees who qualify under the plan. Since contributions are tied to the company's profits, it is unnecessary that the employer contributes every year or that the amount of contribution is the same. However, the IRS states that to qualify for favorable tax treatment, the plan must be maintained with "recurring and substantial" contributions. The IRS also states that withdrawals of funds from a profit-sharing plan may be subject to a 10% tax penalty in addition to income taxes if they are made before the age of 59 1/2.

QUALIFIED SALARY REDUCTION PLANS —-Cash or Deferred Arrangements (401(k) Plans)

Another form of qualified employer retirement plan is known as the 401(k) plan. Employees can elect to reduce their current salaries by deferring amounts into a retirement plan. These plans are called cash or a salary deferral option because employees cannot be forced to participate. They may currently take their income as cash or defer a portion of it until retirement with favorable tax advantages. The amounts deferred are not included in the employees' gross income, and earnings credited to the deferrals grow tax-free until distribution. Typically, 401(k) plans include matching employer contributions. The maximum annual pretax contribution limit is $19,500.

- Qualified Plans for Small Employers—— Keogh Plans (HR-10)

A Keogh plan is a qualified retirement plan designed for unincorporated businesses (self-employed) that allow the business owner (or partner in a business) to participate as an employee only if the business employees are included. These plans may be set up as either defined contribution or defined benefit plans. In the first years following the Keogh bill's enactment, there was a great deal of disparity between Keogh plans' rules and those for corporate plans. However, various laws have eliminated most of the rules unique to Keogh plans, thereby establishing parity between qualified corporate employer retirement plans and noncorporate plans. • Keogh plans are subject to the same maximum contribution limits and benefit limits as qualified corporate plans. • Keogh plans must comply with the same participation and coverage requirements as qualified corporate plans. • Keogh plans are subject to the same nondiscrimination rules as qualified corporate plans; Keogh plans have a maximum contribution of $57,000.

INDIVIDUAL RETIREMENT PLANS —-Nonqualified Roth Withdrawal

A nonqualified withdrawal is one that does not meet the previously discussed criteria. The result is that distributed Roth earnings are subject to tax. This would occur when the withdrawal is taken without meeting the above requirements, and the amount of the withdrawal exceeds the total amount that was contributed. Since Roth contributions are made with after-tax dollars, they are not subject to taxation again upon withdrawal. The only portion of a Roth withdrawal that is subject to taxation is earnings, and only when those earnings are removed from the account without having met the above requirements. If the owner of the Roth IRA is younger than age 59 1/2 when the withdrawal is taken, it will be considered premature, and the earnings portion will also be assessed a 10% penalty.

QUALIFIED DEFINED CONTRIBUTION PLANS —-Stock Bonus Plans

A stock bonus plan is similar to a profit-sharing plan, except that the employer's contributions do not depend on profits. Benefits are distributed in the form of company stock.

CHARACTERISTICS OF QUALIFIES EMPLOYER PLANS

An emplover retirement plan is one that a business makes available to its emplovees. Typicallly, the employer makes all or a portion of the contributions on behalf of its employees and is able to deduct these contributions as ordinary and necessary business expenses The employees are not taxed on the contributions made on their behalE nor are they tased on the benefit fund accruing to them until it is actually paid out. By the same token, an individual employee's contributions to a qualifed employer retirement plan are not included in the individual's ordinary income and therefore are not taxable.

INDIVIDUAL RETIREMENT PLANS —-Traditional IRA

An individual retirement account, commonly called an IRA, is a means by which individuals can 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. IRA funds are not taxed until they are taken out at retirement. Depending on the individual's earnings and whether or not an employer- sponsored retirement plan covers the individual, the amount the individual contributes to a traditional IRA may be fully or partially deducted from current income, resulting in lower current income taxes.

Tax-Sheltered Annuities (403(b) Plans)

Another type of employer retirement plan is the tax-sheltered annuity, or 403(b). A tax-sheltered annuity is a unique tax-favored retirement plan available only to specific groups of employees. Tax-sheltered annuities may be established for the employees of specified nonprofit charitable, educational, religious, and other 501(c) (3) organizations, including teachers in public school systems. Such plans generally are not available to other kinds of employees. Funds are contributed by the employer or by the employees (usually through payroll deductions) to tax- sheltered annuities and are thus excluded from the employees' current taxable income.

QUALIFIED PLANS FOR THE SMALL EMPLOYER —-Simplified Employee Pensions (SEPS)

Another type of qualified plan suited for the small employer is the simplified employee pension (SEP) plan. Due to the many administrative burdens and the costs involved with establishing a qualified defined contribution or defined benefit plan, as well as maintaining compliance with ERISA, many small businesses have been reluctant to set up retirement plans for their employees. SEPS were introduced in 1978 specifically for small businesses to overcome these cost, compliance, and administrative hurdles. Basically, SEP's are arrangements where an employee (including a self-employed individual) establishes and maintains an individual retirement account (IRA) to which the employer contributes. Employer contributions are not included in the employee's gross income. A primary difference between a SEP and an IRA is the much more considerable amount that can be contributed each year to a SEP. In accordance with the rules that govern other qualified plans, SEPS must not discriminate in favor of highly compensated employees in regard to contributions or participation.

INDIVIDUAL RETIREMENT 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% of compensation each year, whichever is less. A non-wage-earning spouse may open an IRA and contribute up to the limit each year. Since 2002, people who are age 50 and older have been allowed to make "catch-up" contributions to their IRAS, above the scheduled annual limit, enabling them to save even more for retirement. These catch-up contributions can be either deductible or made to a Roth IIRA.

INDIVIDUAL RETIREMENT PLANS— Traditional IRA Withdrawals

Because the purpose of an IRA is to provide a way to accumulate retirement funds, there are several rules that discourage traditional IRA owners from withdrawing these funds prior to retirement. By the same token, traditional IRA owners are discouraged from perpetually sheltering their accounts from taxes by rules that mandate when the funds must be withdrawn. Traditional IRA owners must begin to receive payment from their accounts no later than April 1 following the year in which they reach age 72 (per the Secure Act of 2019) if they turned 70 % after December 31, 2019). The law specifies a minimum amount that must be withdrawn every year. Failure to withdraw the minimum amount can result in a 50% excise tax that will be assessed on the amount that should have been withdrawn With few exceptions, any distribution from a traditional IRA before age 59 1/2 will have adverse tax consequences. In addition to income tax, the taxable amount of the withdrawal will be subject to a 10% penalty (similar to that imposed on early withdrawals from deferred annuities). Early distributions taken for any of the following reasons or circumstances will not be assessed the 10% penalty: if the owner dies becomes disabled, if the owner is faced with a certain amount of qualifying medical expenses, to pay for higher education expenses, to cover first time home purchase expenses (up to $10,000 and must not have made a principal home purchase in the last two years), to pay for health insurance premiums while unemployed, or to correct reduce an excess contribution. At retirement or any time after age 59 1/2, the IRA owner can elect to receive either a lump-sum payment or periodic installment payments from his or her fund. Traditional IRA distributions are taxed in much the same way as annuity benefit payments are taxed. That is, the portion of an IRA distribution that is attributed to nondeductible contributions is received tax-free. The portion that is attributed to interest earnings or deductible contributions is taxed. The result is a tax-free return of the IRA owner's cost basis and a taxing of the balance (interest). If an IRA owner dies before receiving full payment, the remaining funds in the deceased's IRA will be paid to the named beneficiary. Suppose the IRA owner is a military reservist called to active duty (between September 11, 2001, and December 31, 2007) for more than 179 days or an indefinite period. In that case, the 10-percent early- withdrawal penalty does not apply. However, regular income taxes will apply. Suppose the IRA owner is a firefighter, policeman, or an emergency medical technician (EMT) with a pension or retirement plan who retires after age 50. In that case, he or she is also exempt from the penalty tax.

IRC Section 457 Deferred Compensation Plans

Deferred compensation plans for employees of state and local governments and nonprofit organizations became popular in the 1970s. Congress enacted Internal Revenue Code Section 457 to allow participants in such plans to defer compensation without current taxation as long as certain conditions are met. If a plan is eligible under Section 457, the amounts deferred will not be included in gross income until they are actually received or made available. Life insurance and annuities are authorized investments for these plans. The annual amounts an employee may defer under a Section 457 plan are similar to those available for 401(k) plans. Before 1962, many small business owners found that their employees could participate in and benefit from a qualified retirement plan, but the owners themselves could not. Self-employed individuals were in the same predicament. The reason was that qualified plans had to benefit employees. Because business owners were considered employers, they were excluded from participating in a qualified plan. The Self-Employed Individuals Retirement Act, signed into law in 1962, rectified this situation by treating small business owners and self-employed individuals as employees. This law enabled them to participate in a qualified plan if they chose to do so, just like their employees. The result was the Keogh (or HR-10) retirement plan.

EDUCATION SAVINGS PLANS Education IRAS

Education IRAS (also referred to as Coverdell Education Savings Accounts) are also available where an investor can make nondeductible contributions of up to $2,000 per child under age eighteen. The funds saved can be used for primary and secondary school expenses (i.e., tuition, books) in addition to higher education fees (i.e., college). Any funds leftover (i.e., if a child does not attend college) may be rolled over into another Education IRA before age 30.

NONQUALIFIED RETIREMENT PLANS

If a plan does not meet the specific requirements set forth by the federal government, it is termed a nonqualified plan and, thus, is not eligible for favorable tax treatment. For example, Bill, age 42, decides he wants to start a retirement fund. He opens a new savings account at his local bank, deposits $150 a month in that account, and vows not to touch that money until he reaches age 65. Although his intentions are good, they will not serve to "qualify" his plan. The income he deposits and the interest he earns are still taxable every year. Employers generally provide nonqualified retirement plans to highly paid or key employees, or directors and officers of a firm. The contributions to such plans are not tax-deductible since the employer is legally discriminating in favor of higher-paid employees. In other words, the employer makes no effort to satisfy the qualification requirements under the Internal Revenue Code (i.e., IRC) or ERISA for tax-favored treatment of qualified plan costs or benefits. Providing this type of additional compensation to an employee allows the firm to attract and retain key employees' services. Common types of nonqualified plans include nonqualified deferred compensation plans, supplemental executive retirement plans, and incentive compensation plans. For instance, in a nonqualified deferred compensation plan, compensation for an employee's services is postponed until retirement. Generally, the employee will not pay taxes on the deferred amounts until they are received. The employer cannot deduct the deferred payments until they are actually received by the employee, usually at retirement. Nonqualified plans may be funded or unfunded. A funded plan is one where the employer maintains assets in some sort of trust or escrow account as security for the promise of future benefit payments. An unfunded plan exists when no actual funds or assets have been designated to fund the plan. Therefore, the employee is relying on the unsecured promise of the employer.

- Qualified Defined Benefit Plans

In contrast to a defined contribution plan that sets up predetermined contributions, a defined benefit plan establishes a definite future benefit, predetermined by a specific formula. When the term pension is used, the reference typically refers to a defined benefit plan. Usually, the benefits are tied to the employee's years of service, amount of compensation, or both. For example, a defined benefit plan may provide for a retirement benefit equal to 2% of the employee's highest consecutive five-year earnings, multiplied by the number of years of service. Or the benefit may be defined as simply as $100 a month for life. To qualify for federal tax purposes, a defined benefit plan must meet the following basic requirements: • The plan must provide for definite determinable benefits, either by a formula specified in the plan or by actuarial computation. • The plan must provide for systematic payment of benefits to employees over a period of years (usually for life) after retirement. Thus, the plan must detail the conditions under which benefits are payable and the options under which benefits are paid. • The plan must provide retirement benefits primarily. The IRS will allow provisions 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 or defined benefit) requires an understanding of each plan's operation and characteristics as they relate to the employer's objectives.

INDIVIDUAL RETIREMENT PLANS Deduction of IRA Contributions

In many cases, the amount an individual contributes to a traditional IRA can be deducted from that individual's income in the year it is contributed. The ability of an IRA participant to take a deduction for their contribution rests on two factors: • Whether or not an employer-sponsored retirement plan covers the participant • The amount of income the participant makes. Individuals who are not covered by an employer-sponsored plan may contribute, up to the annual limit, to a traditional IRA and deduct from their current income the full amount of the contribution, no matter what their level of income is. Married couples who both work and have no employer-sponsored plan can each contribute and deduct up to the maximum each year. Individuals who are covered by an employer- sponsored plan are subject to different rules regarding the deductibility of traditional IRA contributions. For them, the amount of income they make is the determining factor: the more they make, the less IRA deduction they can take. Do not confuse the deductibility of contributions with the ability to make contributions. Anyone (if you turned 70 % after December 31, 2019, per the new Secure Act) who has earned income (as well as a non-wage-earning spouse) can contribute to a traditional IRA. However, the level of income and participation in an employer plan may affect the traditional IRA owner's ability to deduct the contributions.

EDUCATION SAVINGS PLANS ——Section 529 Plans

The Economic Growth and Tax Relief Act of 2001 created the qualified 529 savings plan. Section 529 plans are state-operated investment plans that give families a federal tax-free method to save money for college and other qualified, post-secondary higher education expenses (i.e., vocational school, graduate school, or trade school). There are two types of 529 plans. A college savings plan allows parents to use their plan funds for college expenses at any college. A prepaid tuition plan allows parents to "lock-in" future tuition at in-state public colleges at current prices. The following are some 529 plan facts: Like a Roth IRA, earnings from a 529 plan are exempt from federal taxes as are any withdrawals as long as they go toward paying college costs. Some States waive State taxes for residents while others allow deductions on contributions. Qualified expenses include but are not limited to tuition, room and board, books, and supplies. uThere is no direct limitation on the amount of money that can be contributed to a 529 plan. However, a 529 plan contribution is considered a gift and is therefore subject to gift taxes and the rules regarding estate taxes and the estate tax exclusion. Each person may contribute up to $14,000 without triggering gift taxes ($70,000 allowed for five years). If funds are withdrawn for purposes other than education (i.e., unqualified distributions), the earnings are subject to a 10% penalty and federal income tax. States may assess their own penalties. Grandparents can use this plan to make gifts to grandchildren. The amounts contributed by grandparents are excluded from their estate. The owner of a plan may switch investment options within the same plan once per year. A rollover is permitted from one 529 plan into another once per year as well. Savings are treated as a parental asset when aid is determined. Still, only 5.6% or less of the account's value is factored into calculating the expected family contribution (EFC) for each academic year. The account holder controls the money for the account's life, even after the beneficiary reaches age 18. Beneficiaries may also be changed at any time.

PENSION PROTECTION ACT - Pension Protection Act

The Pension Protection Act of 2006 embodied America's pension laws' most sweeping reform in over 30 years. It improves the pension system and increases opportunities to fund retirement plans. The Act encourages workers to increase their contributions to employer-sponsored retirement plans and helps them manage their investments. For example, automatic enrollment is a means of increasing participation in 401 (k) plans, especially among young workers entering the workforce. The Act also provides for automatic deferrals into investment funds and automatic annual increases in employees salary deferral rates beginning in 2008. Since 2007, plan sponsors can offer fund-specific investment advice to participants through their retirement plan providers or other fiduciary advisers. Counseling in person is also allowed under strict guidelines.

CHARACTERISTICS OF QUALIFIES EMPLOYER PLANS —-Coverage Requirements

Under the IRS "minimum coverage" rules, a qualified retirement plan must benefit a broad cross-section of employees. The purpose of coverage requirements is to prevent a plan from discriminating against rank-and-file employees in favor of the "elite" employees (officers and highly compensated employees). Their positions often enable them to make basic policy decisions regarding the plan. The IRS will subject qualified employer plans to coverage tests to determine if they are discriminatory. As mentioned earlier, all qualified employer plans must comply with ERISA minimum participation standards designed to determine employee eligibility. In general, employees who have reached age 21 and have completed one year of service must be allowed to enroll in a qualified plan. A qualified plan cannot discriminate in favor of highly-paid employees in its coverage provisions or in its contributions and benefits provisions. Form 5500 is a disclosure document that employee benefit plans use to satisfy annual reporting requirements under ERISA

INDIVIDUAL RETIREMENT PLANS Qualified Roth Withdrawals

Withdrawals from Roth IRAS are either qualified or nonqualified. A qualified withdrawal is one that provides for the full-tax advantage that Roths offer (tax-free distribution of earnings). To be a qualified withdrawal, the following two requirements must be met: • The funds must have been held in the account for a minimum of five years. • The withdrawal must occur because the owner has reached age 59 %, the owner dies, the owner becomes disabled, or the distribution is used to purchase their first home.

INDIVIDUAL RETIREMENT PLANS -IRA Funding

An ideal funding vehicle for IRAS is a flexible premium fixed deferred annuity. Other acceptable IRA funding vehicles include 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 particular US gold and silver coins.

Contributions

Qualification standards regarding the amount and type of contributions that can be made to a plan vary, depending on whether the plan is a defined contribution plan or a defined benefit plan. Generally, all plans must restrict the amount of contributions that can be made for, or accrue to, any one plan participant. The annual addition to an employee's account in a qualified retirement plan cannot exceed the IRS's maximum incidental limits. A plan is considered "top-heavy" if more than 60% of the plan assets are attributable to key employees as of the last day of the prior plan year. With these basics in mind, let's turn to the two major categories of qualified employer retirement plans used primarily by corporate employers. The first is called a defined contribution plan, which allows the plan sponsor and the employee to make periodic contributions per a defined formula. The other category is called a defined benefit plan, which defines the amount of retirement income each participant will receive.

INDIVIDUAL RETIREMENT PLANS —Roth IRA

The 1997 Taxpayer Relief Act introduced a new kind of IRA: The Roth IRA. Roth IRAS are unique in that they provide for back-end benefits. No income tax deductions can be taken for contributions made to a Roth, but the earnings on those contributions are entirely tax-free when they are withdrawn. An amount up to the annual contribution limit can be contributed to a Roth IRA for any eligible individual. Active participant status is irrelevant. No income tax deductions can be taken for contributions made to a Roth, but the earnings on those contributions are entirely tax-free when they are withdrawn. An individual can open and contribute to a Roth regardless of whether the individual is covered by an employer's plan or maintains and contributes to other IRA accounts. No more than the maximum amount can be contributed to it in any year, for any account or combination of accounts. Unlike traditional IRAS, who are limited to those under age 70 1/2, Roth IRAS, impose no age limits. At any age, an individual with earned income can establish a Roth IRA and make contributions. However, Roth IRAS subject participants to earnings limitations that traditional IRAS do not. High-income earners may not be able to contribute to a Roth IRA since the maximum annual contribution that can be made begins to phase out for individuals whose modified adjusted gross incomes reach certain levels. Above these limits, no Roth contributions are allowed.