unit 11 Retirement Plans

403(b)

-School employees -Employees of nonprofit organizations

tax-sheltered annuities (TSAs)

B) TSAs are available to employees of certain nonprofit organizations. Participants do not pay current taxes on their contributions, but they will be taxed on benefits when they are received.

Defined Contribution

■ Retirement benefit NOT specified ■ Contribution is specified

401(k)

-Employee may make contributions—salary (elective) deferral -Employers may match contributions up to a specified percentage RMDs from IRA and 401(k) plans and other defined contribution plans must begin no later than when the owner turns 70 1⁄2. The first distribution can be delayed until April 1 of the year following the attainment of age 701⁄2.

Keogh (HR-10)

-Individual sole proprietors -Partnerships A Keogh plan (or an HR-10) is a qualified retirement plan for self-employed individuals and their eligible employees, if any. To be eligible to participate in a Keogh plan, an employee must be at least 21 years of age, have completed 1 or more years of continuous employment with that employer, and have worked at least 1,000 hours in the year.

IRA Required Minimum Distribution

-Must start making with minimum withdrawals at age 70 1⁄2 -First minimum withdrawal can be delayed until April 1 of the year following the year the owner turns 70 1⁄2 -50% tax penalty owed if minimum distributions not taken -Annual minimum withdrawals are based upon the owners life expectancy

Distributions from an IRA upon Death

-Transfer to a spouse is not taxable -Individual beneficiaries may choose not to take distributions for up to five years following the owner's death, but under this option, the entire IRA fund must be distributed by that time -The entire value of the IRA is includable in the deceased owner's estate for estate tax purposes

The penalty for premature withdrawal of funds from a traditional IRA is

A premature withdrawal is generally taken before the owner reaches age 59 1⁄2 and carries adverse tax consequences. The penalty for premature withdrawal of funds from a traditional IRA is 10% of the taxable amount withdrawn.

To enroll in an employer's qualified retirement plan, employees must

C) be at least 21 years old and complete 1 year of service In general, employees who are at least 21 years old and have completed 1 year of service must be allowed to enroll in a qualified plan. If the plan provides for 100% vesting upon participation, they may be required to complete 2 years of service before enrolling A) favorable tax rules C) allowing the employer to attract and keep talented employees D) increased employee productivity.

ERISA (Employee Retirement Income Security Act)

Many of the basic protections associated with qualified employer plans can be traced to The Employee Retirement Income Security Act of 1974, commonly known as ERISA, protects the rights of workers covered under an employer-sponsored plan. ERISA imposes a number of requirements that retirement plans must follow to obtain IRS approval as qualified plans. federal acts that governs the funding, vesting, administration, and termination of private pension plans designed to protect the interests of participants in in employee benefit plans as well as the interests of the participants' beneficiaries. -Protects employee and beneficiaries -Plan applies to qualified pensions and also group insurance -ERISA requires that certain information be made available to plan participants, beneficiaries, and the Department of Labor

The exclusion ratio calculation

The exclusion ratio calculation that is used to calculate the tax-free portion of nonqualified annuity payments is irrelevant with qualified contributions. Since this IRA was fully funded with tax-deducted contributions, the annuity income payment ($5,400 per year) is taxable as ordinary income.

Vesting

Vesting is the right of an employee to his retirement fund. Benefits that have vested belong to the employee even if he terminates employment before retirement. Although an employee is always vested in the benefits he contributed, an employer's contributions will vest according to a vesting schedule set by law. ->■ Determines when an employee owns the money in a retirement plan -->■ Employees are always 100% vested in their own contributions -->■ Employer contributions—employees must become vested in at least six years

contributions to a traditional IRA

With a few exceptions, any distribution from a traditional IRA before age 591⁄2 will be subject to income tax and a 10% penalty. However, up to $10,000 may be withdrawn before age 591⁄2 to pay for the purchase of a first home without being assessed the 10% penalty. A) There is a maximum deductible contribution limit involved with a traditional IR C) Both can make contributions to their own individual traditional IRAs. D) Based on their modified AGI, they may have their deduction for contributions to a traditional IRA reduced (phased out). There is a maximum deductible contribution limit involved with qualified retirement plans, including traditional IRAs. The actual amount involved is typically indexed, meaning it could change with the new year. Persons covered by a retirement plan at work may have their deduction for contributions to a traditional IRA reduced (phased out) based on their modified AGI. To be eligible for the catch-up provision, individuals must be 50 or older.

Non-Qualified Plans

are not required to meet the IRS conditions. ■ Not regulated by ERISA ■ Can discriminate in favor of higher paid employees ■ Contributions usually not tax deductible

Transfer

—money sent directly from one plan to another - No limit on the number of transfers - No money withheld and sent to the IRS

Profit Sharing

■ Contributions made by employer ■ Based on company profits ■ Contributions not made every year ■ Maximum contribution is 25% of total employee payroll

Roth IRA

■ Contributions not tax deductible ■ Contribution limits same as traditional IRA ■ Qualified distributions are tax free - Account has been open for at least five years - Age 59 1⁄2, death, disability, or first-time homebuyer In order for distributions to be tax-free, a Roth IRA must be maintained for at least 5 years and distribution must be after age 59 1⁄2.

Simplified Employee Pension (SEP) Plans

■ Employer makes contribution on employee's behalf ■ Higher contribution limits than traditional IRA ■ Employees must be 100% vested A SEP is an arrangement whereby an employee establishes and maintains an individual retirement account 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 larger amount that can be contributed each year to a SEP. The allowable limit for a SEP is much higher than that of an IR

Savings Incentive Match Plans for Employees (SIMPLE)

■ Employers with 100 employees or less ■ Employees can contribute ■ 100 % immediate vesting for employer contributions ■ All employees earning $5,000 or more per year must be allowed to participate ■ 25% early withdrawal penalty for first two years of employment

IRA Funding

■ Investment can't be put in - Life insurance - Artwork, antiques, stamps or coin collections - Gold or silver bullion

Individual retirement Accounts

■ Owner must be under age 70 1⁄2 to make contributions ■ Must have earned income ■ Non-working spouse can make contributions based upon earned income of spouse (spousalIRA)

IRA Deductibility of Contributions

■ Phase out of deduction based upon adjusted gross income (AGI) ■ No deduction if income above maximum AGI

Employer Sponsored Retirement Plans

■ Regulated by ERISA (Employee Retirement Income Security Act of 1974) ■ Employer contributions tax deductible ■ Employee contributions tax deductible ■ Interest earnings grow tax deferred ■ General requirements - Participation—plans must benefit all regular employees, not just a few selected ones - Non-discrimination—plans may not provide benefits to executives and other highly paid individuals that are out of proportion to other employees - Vesting - Reporting and disclosure—each participant must receive, in writing, a summary plan description, notification of any significant changes, and an annual report - Fiduciary Duty—anyone with control over the plan or its assets are fiduciaries. They must manage the plan solely in the best interest of its participants

IRA Contributions

■ Up to 100% of earned income ■ Subject to annual maximums ■ Extra contributions—age 50 and over

Rollover

■ —money is withdrawn and sent to the owner - Owner has 60 days after receipt to put money in IRA - If money is coming from an employer sponsored plan ■ 20% withheld and sent to the IRS - Limited to one rollover every 12 months Distributions from employer-sponsored plans are eligible for a tax-free rollover if they are reinvested in an IRA within 60 days after receipt of the distribution and if the plan participant does not actually take physical receipt of the distribution. The entire amount need not be rolled over; a partial distribution may be rolled over from one IRA or eligible plan to another IR However, if a partial rollover is executed, the part retained will be taxed as ordinary income and subject to a 10% penalty.