Unit 24

Qualified Plan

An employer-sponsored plan, such as a pension, 401(k), 403(b), where the contributions are made with pretax dollars and earnings in the account grow without any tax (tax deferred) until the funds are withdrawn.

Employee Retirement Income Security Act of 1974 (ERISA): Communication

Communication. The retirement plan must be in writing, and employees must be kept informed of plan benefits, availability, account status, and vesting procedure no less frequently than annually.

SEP IRA Taxation

Employer contributions are tax deductible to the employer. Contributions are not taxable to an employee until withdrawn, and earnings in the account accumulate tax deferred.

Section 404 of ERISA

Under Section 404 of ERISA, every person who acts as a fiduciary for an employee benefit plan must perform his responsibilities in accordance with the plan document specifications. Under ERISA, trustees cannot delegate fiduciary duties, but they can delegate investment management responsibilities to a qualified investment manager.

Employee Retirement Income Security Act of 1974 (ERISA): Vesting

Vesting. Employees must be entitled to their entire retirement benefit amounts within a certain time, even if they no longer work for the employer

A nonqualified plan designed to provide additional retirement benefits limited to a select group of management or highly-compensated employees is called...

a SERP **A payroll deduction plan is usually nonqualified, but that is most often used by lower income employees; it is definitely not an executive's plan.**

Taxable withdrawals before age 591⁄2 are also subject to a 10% early withdrawal penalty unless they are due to:

- Death - Disability - First-time purchase of a primary residence ($10,000 lifetime maximum) - Qualified higher education expenses for immediate family members (including grandchildren, but not nieces or nephews) - Medical expenses (over certain limits) - Health insurance for unemployed - Equal Payments for life expectancy - Rule 72t

Hardship Withdrawals

1. 401(k) plans are permitted to make hardship withdrawals available to participants facing serious and immediate financial difficulty. 2. There are maximum limits; the amount withdrawn is not eligible for a rollover and, therefore, is taxable as ordinary income and possibly the 10% penalty. 3. It differs from a 401(k) loan which is not taxable as long as the repayment requirements of the IRS are met.

401(k) Plans

1. 401(k) plans permit an employer to make matching contributions up to a set percentage of the employee-directed contributions, making this a type of defined contribution plan. 2. Contributions made with pre-tax dollars. 3. **However, even though income taxes are based on this lower amount, FICA (Social Security) and FUTA (federal unemployment) taxes are levied against gross salary, not this reduced amount.** 4. For exam purposes, unless that case is specified, it is up to the employer to determine if it will incorporate matching contributions into the plan. 5. One of the benefits of investing through a 401(k) plan is that it takes advantage of dollar-cost averaging 6. When one includes the catch-up amount, the maximum combined employer and employee contribution in a defined contribution plan increases from $56,000 to $62,000 per year.

403(b) Plans

1. 403(b) plans are qualified tax-deferred retirement plans for employees of public school systems, (403(b) employees), and tax-exempt, nonprofit organizations such as churches and charitable institutions, (501(c)(3) employees). 2. Qualified employees may exclude contributions from their taxable incomes provided they do not exceed limits 3. Qualified annuity plans offered under Section 403(b) of the IRC, sometimes referred to as tax-sheltered annuities (TSAs), are intended to encourage retirement savings. To ensure this objective, 403(b)s (like IRAs and other retirement plans) are subject to tax penalties if savings are withdrawn before a participant reaches age 591⁄2. 4. Employer may make contributions

Section 457 Plans

1. A Section 457(b) plan is a deferred compensation plan set up under Section 457 of the tax code 2. State, city, and county employees 3. Certain non-profits (not churches) 4. Can't rollover, but no 10% penalty 5. In a 457 plan, employees can defer compensation, and the amount deferred is not reportable for tax purposes. 6. Must hold its assets in trust or custodial accounts for the benefit of individual participants

Direct Rollovers From Retirement Plans to IRAs

1. A direct rollover is a distribution from an employer-sponsored retirement plan to an IRA, either traditional or Roth. 2. When you terminate employment (or retire), you have the option of moving your employer-sponsored plan assets to an IRA. 3. In some cases, if you go to a new job, your new employer's plan may permit a direct rollover into the plan. 4. The key to a direct rollover is that the money is never seen by the employee and moves directly from the current plan administrator directly to another administrator.

Nonqualified Deferred Compensation (NQDC) Plan

1. A nonqualified deferred compensation (NQDC) plan is a contractual agreement between a firm and an employee in which the employee agrees to defer receipt of current compensation in favor of a payout at retirement. 2. Because the employer can discriminate, one of the most common uses of deferred compensation plans is to provide benefits to retain key employees. 3. Business Failure - Generally, an employee enjoys no benefits from a deferred compensation plan until retirement. If the business fails, the employee is a general creditor of the business with no guarantee that he will receive the deferred payment.

Nonqualified Plan

1. A nonqualified plan does not allow the employer a current tax deduction for contributions. Instead, the employer receives the tax deduction when the money is paid out to the employee. 2. Accumulation may be taxed deferred. 3. Can discriminate (executives) - key employees and exclude others 4. Nonqualified plans are not subject to the same reporting and disclosure requirements as qualified plans. However, nonqualified plans still must be in writing and communicated to the plan participants. 5. Trust not required 6. IRS approval not required 7. Sponsors of nonqualified plans are fiduciaries.

Payroll Deduction Plans

1. A payroll deduction plan involves a deduction from an employee's check on a weekly, monthly, or quarterly basis as authorized by the employee. 2. The money is deducted after taxes are paid and may be invested in investment vehicles, such as the employer's stock or U.S. Savings bonds at the employee's option.

Profit-Sharing Plans

1. A profit-sharing plan established by an employer allows employees to participate in the business's profits. 2. The benefits may be paid directly to the employee or deferred into an account for future payment, such as retirement, or a combination of both. 3. Profit-sharing plans need not have a predetermined contribution formula. 4. Profit-sharing plans are popular because they offer employers the greatest amount of contribution flexibility. 5. The ability to skip contributions during years of low profits appeals to corporations with unpredictable cash flows.

Supplemental Executive Retirement Plan (SERP)

1. A supplemental executive retirement plan (SERP) provides benefits to executives over and above the benefits available from a qualified plan and is funded entirely with employer funds. 2. The plan can be either completely unfunded (like an excess benefit plan) or informally funded. 3. The plan rewards an executive's continued employment or encourages the early retirement of the executive. 4. A SERP also may be established to protect the executive from involuntary termination if the company changes ownership by awarding her increased benefits from the plan. 5. The "R" sometimes refers to retention because these plans do encourage key employees to remain until they qualify for the benefit. 6. These are frequently funded with cash value life insurance policies.

Traditional IRA

1. A traditional IRA allows a maximum tax-deductible annual contribution of the lesser of $6,000 per individual or $12,000 per couple, or 100% of taxable compensation for the taxable year 2019. 2. The income and capital gains earned in the account are tax-deferred until the funds are withdrawn. 3. Contributions may or may not be deductible 4. Distributions are taxed at ordinary income - proportionate if some contributions were after tax.

Adjusted Gross Income (AGI)

1. Adjusted gross income, generally referred to as AGI, is computed on the bottom of the first page of your Form 1040. 2. When you do your taxes, you begin by listing all of your earned income (salary, wages, and bonuses) plus other income such as interest and dividends, capital gains, alimony received, and profits from a business you may own. From that total, you deduct certain items to arrive at the AGI. 3. Among the more testable items that are deductible are: - traditional IRA contribution; - alimony paid (if divorce decree was signed prior to January 1, 2019); - self-employment tax; and - penalties paid on early withdrawal from a savings account. **Please note that although tax-exempt income from municipal securities is shown on the Form 1040, it is not included in AGI.**

When it comes to traditional IRAs and SEP IRAs, distributions without penalty may begin...

1. After age 59 1⁄2 2. Must begin by April 1 of the year following the year an individual turns 70 1⁄2. 3. Distributions before age 591⁄2 may be subject to a tax penalty and withdrawals less than the required minimum distributions (RMDs), after age 701⁄2 may also incur tax penalties.

Comparison of IRAs and Keogh Plans

1. Although both IRAs and Keoghs are tax-advantaged, an IRA does not involve employer contributions and, thus, is not a plan qualified by ERISA. Similarities below: 2. Tax deferral of contributions to plans. Taxes are deferred on contributions until the individual receives distributions. 3. Tax-sheltered. Investment income and capital gains are not taxed until withdrawn at which time they are subject to taxation at ordinary income rates. 4. Contributions. Only cash may be contributed to a plan. In the event of a rollover or transfer, cash and securities from the transferring account can be deposited. 5. Distributions. Distributions without penalty can begin as early as age 591⁄2. 6. Penalties for early withdrawal. The individual pays income tax on the total amount withdrawn, plus a 10% penalty. Early withdrawals without penalty are permitted in the event of death or disability. 7. Payout options. Distributions may be in a lump sum or periodic payments. 8. Beneficiary. Upon the planholder's death, payments are made to a designated beneficiary (or beneficiaries) and, as with corporate plans, bypass probate.

Nonqualified

1. An employer-sponsored plan, such as a deferred compensation plan, where there are no tax advantages other than that the pay is not received until sometime later when the individual should be in a lower tax bracket. 2. Another advantage is that the employer can discriminate between employees. 3. The term can also apply to an annuity purchased on an individual basis outside of a retirement plan

Multiple qualified plan vs multiple IRAs distributions

1. An individual with multiple IRAs computes the RMD from each, but can elect to distribute the amounts from each IRA or select the IRA(s) from which to make the distribution. 2. In the case of multiple qualified plans, (the individual worked for more than one employer and did not rollover the earlier employer's plan), the required RMD must be taken from each plan; there is no combining as there is with IRAs.

Guaranteed Investment Contracts (GICs)

1. Another option for 403(b) plans (as well as 401(k) plans), is the Guaranteed Investment Contract, almost always referred to by its initials, GIC. 2. These are contracts issued by insurance companies that offer a guaranteed return of principal at a certain date in the future and come with a fixed rate of return that is generally a bit higher than that offered by comparable bank CDs. 3. However, unlike CDs, GICs are not federally insured; therefore, despite the inclusion of the word guaranteed in the title, GICs carry slightly more investment risk than CDs and that is why their return is higher.

Roth Conversions

1. Anyone with a traditional IRA is permitted to convert it to a Roth IRA. However, there are income tax consequences. Basically, the entire amount converted is added to the investor's ordinary income. 2. However, as long as the funds are transferred trustee to trustee, or, if distributed to the owner, are rolled over within 60 days, there will be no 10% early distribution tax penalty for those under age 591⁄2. 3. Conversions may also be done from any qualified employer plan such as 401(k) and 403(b) plans as well as Simple and SEP IRAs.

Qualified Plan RMD

1. As with IRAs, other than a Roth IRA, failure to distribute the required amount from qualified plans generates a 50% penalty tax on the shortfall in addition to ordinary income taxation. 2. There are no RMDs from a qualified plan while still employed by the sponsor of that plan, regardless of your age.

Qualified Plan Early Withdrawals

1. Before 59 1/2 = 10% penalty tax 2. Similar exceptions to IRA, but not $10,000 for home, education, medical 3. Only in the case of a qualified plan is the penalty avoided by using a qualified domestic relations order (QDRO). - divorce 4. No early penalty for death, disability, or substantially equal periodic payments under IRS Rule72(t) 5. After a person begins taking distributions from an IRA under Rule 72(t), contributions, asset transfers, or rollovers are not permitted while receiving payments.

Not Compensation for IRA Purposes

1. Capital gains 2. Interest and dividend income 3. Pension or annuity income 4. Child support 5. Passive income from DPPs 6. Alimony from post-December 31, 2018, divorces

The agreement underlying a deferred compensation plan usually includes the following:

1. Conditions and circumstances under which some or all of the benefits may be forfeited, such as if the employee moves to a competing firm 2. A statement to the effect that the employee is not entitled to any claim against the employer's assets until retirement, death, or disability 3. A disclaimer that the agreement may be void if the firm suffers a business failure or bankruptcy

Keogh Plan Contributions

1. Contribution limits for a Keogh plan are significantly higher than those for an IRA. 2. For those filing tax returns in 2019, as much as $56,000 may be contributed on behalf of a plan participant. 3. Those who are eligible for a Keogh plan may also maintain an IRA, but, as described previously, if the earning limits are exceeded, the IRA contribution will not be deductible. 4. If the business has employees, they must be covered at the same contribution percentage as the owner in order for the plan to be nondiscriminatory. 5. Only earnings from self-employment count toward determining the maximumt hat may be contributed. For example, if a corporate employee had a part-time consulting job, only that income, not the corporate salary, could be included in the computation.

403(b) Tax Advantages

1. Contributions (which generally come from salary reduction) are excluded from a participant's gross income. 2. Participant's earnings accumulate tax-free until distribution. - dollars are withdrawn at retirement, usually when that person is in a lower tax bracket. 3. Income Exclusion - If an eligible employee elects to make annual contributions to a 403(b), those contributions are excluded from the employee's gross income for that year. The amount of the contribution is not reported as income, resulting in lower current income taxes.

Nonqualified Plan Taxation

1. Contributions not tax-deductible 2. Accumulation may be tax-deferred if the nonqualified plan is properly designed 3. Contributions to nonqualified plans that have already been taxed make up the investor's cost base. When the investor withdraws money from the nonqualified plan, the cost base is not taxed. However, earnings are taxed when withdrawn.

What are the three types of Nonqualified Plans?

1. Deduction plans 2. Deferred compensation plans 3. Supplemental executive retirement (or retention) plan - Supplemental executive retirement plan (SERP)

Defined Contribution Plans

1. Defined contribution plans include money-purchase pension plans as well as profit-sharing plans and 401(k) plans. 2. As with other business plans (as compared to an IRA), the maximum employer contribution is currently $56,000. 3. Defined contribution plan participants' funds accumulate until a future event, generally retirement, when the funds may be withdrawn. 4. The ultimate account value depends on the total amount contributed, along with interest and capital gains from the plan investments. 5. In this type of plan, the plan participant assumes the investment risk. 6. The deduction for contributions to a defined contribution plan, such as a profit-sharing plan, (including 401(k)), or money-purchase pension plan, cannot be more than 25% of the total payroll for the year to the eligible employees participating in the plan.

Employer contributions to profit-sharing plans and 401(k) plans

1. Employer contributions to defined benefit or defined contribution (money purchase), pension plans are mandatory. 2. Although profit-sharing plans and 401(k) plans are technically defined contribution plans, they are not pension plans, and employer contributions are not mandatory. 3. In all cases, allowable employer contributions are 100% deductible to the corporation. There is no tax obligation to the employee until withdrawal.

IRA Penalties

1. Excess contributions = 6% 2. Premature Distributions; before 59 1/2 = 10% of taxable amount 3. Insufficient distribution = 50% - Distribution must begin April 1st of the year following turning age 70 1/2

Tax on Qualified Plan Distributions

1. Excess over cost basis taxed as ordinary income 2. Distributions from a 403(b) must follow the same rules as distributions from all qualified plans. Because the employee's 403(b) contributions are made with pretax dollars and all earnings were tax deferred, any distribution is subject to ordinary income tax rates in the year it is received 3. A normal distribution can start at age 59 1⁄2. Premature distribution is subject to a 10% penalty tax. And, the RMD rules apply as well.

403(b) Investments

1. Historically, these plans were (and still are) referred to as tax-sheltered annuity plans (TSAs) because annuities were the only investment option. 2. In 1974, a provision was made to permit the purchase of mutual funds as well, although it is estimated that more than 85% of all 403(b) money is invested in either fixed or variable annuities.

Net Unrealized Appreciation (NUA)

1. If a lump-sum distribution includes employer securities, the NUA in the value of the securities is not taxed to the employee at the time of distribution 2. If taken as a lump-sum distribution, the participant has the option of deferring tax on all of the NUA. 3. A lump-sum distribution is defined as the disbursement of the entire vested account balance within one taxable year as a result of a triggering event. Triggering events are limited to: - separation from service, - attainment of age 591⁄2, or - death. 4. When using the NUA approach, only the original cost basis (as supplied by the employer) is subject to tax. Any unrealized appreciation will be taxed as long-term capital gain, whenever sold. And, to make things even sweeter, as long as held more than 12 months, any further appreciation is taxed as long-term capital gain.

IRA Nonspouse Beneficiary: Cash out the IRA in five years

1. If the deceased was younger than 701⁄2, (not obligated to take RMDs), the nonspouse IRA beneficiary is allowed to withdraw all of the funds from the IRA by December 31 of the fifth year following the IRA account owner's death. 2. If this option is selected, then each withdrawal will be included in taxable income (once again, assuming all contributions were pretax) during the year the funds are withdrawn. 3. Interestingly, the IRS does not require the payments to be made with any designated frequency. That is, you can take a portion the first year because you can use some cash, nothing for the next three years, and the balance no later than December 31 of the fifth year.

IRA Nonspouse Beneficiary: Take RMDs based on the life expectancy of the oldest beneficiary

1. If there are multiple beneficiaries and the decision is to stretch out the withdrawals, the IRS requires that the life expectancy of the oldest beneficiary be used. 2. Obviously, this will result in a higher payout (and more tax revenue) than if the life expectancy of the youngest was an option.

Disclaiming an IRA

1. If you accept an item left to you by someone who has died, you are claiming that asset; if you refuse it, you are disclaiming it. 2. In order for the disclaimer to be effective, it must be done within nine months of death, it must be in writing, and, of course, you cannot have taken any of the money. 3. If the named beneficiary of an IRA disclaims all or part of the inherited IRA, the disclaimer has the effect of changing the beneficiary of the retirement plan. In general, the assets pass to the contingent beneficiary(s). What if no contingent beneficiary has been named? Unless the IRA adoption document provides for it, the person disclaiming cannot decide where the money goes—it will follow the provisions of the deceased's will.

60-day Rollovers

1. If you just see "IRA rollover," it will be the 60-day rollover. 2. An IRA account owner may take temporary possession of the account funds to move the retirement account to another custodian. 3. The account owner may do so only once per 12-month period, and the rollover must be completed within 60 calendar days of the funds' withdrawal from the original plan. 4. However, 100% of the withdrawn amount must be rolled into the new account, or the unrolled balance will be subject to income tax and, if applicable, early withdrawal penalty. 5. When the participant takes possession of the funds from a qualified plan to make a rollover, the payor of the distribution must, by law, withhold 20% of the distribution as a withholding tax. The participant must, nonetheless, roll over 100% of the plan distribution, including the funds withheld, or be subject to income tax and, if applicable, early withdrawal penalty.

Contributory vs. Noncontributory Plans

1. In a contributory plan, both the employer and employee make contributions to the account. 2. In a noncontributory plan, only the employer makes the contributions. 3. Probably the most common example of a contributory plan is the 401(k) plan where the employee determines how much to contribute and the employer may match up to a certain percentage

IRA Investments

1. In most cases, IRAs at securities firms are set up as self-directed plans. That means the investment choices are determined by the account holder. 2. Funds in an IRA account may be used to buy stocks, bonds, mutual funds, UITs, limited partnerships, REITS, U.S. government securities, gold or silver coins minted by the U.S. Treasury Department (American Eagles) as well as certain platinum coins and certain gold, silver, palladium, and platinum bullion, annuities, and many other investments. 3. IRA investments should be relatively conservative and should reflect the investor's age and risk tolerance profile. Because an IRA serves as a source of retirement funds, it is important that the account be managed for adequate long-term growth.

Roth 401(k) Plans

1. Just as with a Roth IRA, these plans require after-tax contributions but allow tax-free withdrawals, provided the retiring person is at least 591⁄2 years old at the time of the withdrawal. 2. Once again, paralleling the Roth IRA, the account must be at least five years old to take tax-free withdrawals. 3. Like a regular 401(k) plan, it has employer-matching contributions; however, the employer's match must be deposited into a regular 401(k) plan and be fully taxable upon withdrawal. 4. Thus, the employee must have two accounts: a regular 401(k) and a Roth 401(k). Employees may contribute to either account but may not transfer money between accounts once the money has been contributed. 5. Unlike Roth IRAs, Roth 401(k) plans have no income limit restriction on who may participate. 6. Unlike Roth IRAs, Roth 401(k) plans require withdrawals to begin no later than age 701⁄2, following the same rules that apply to all RMDs.

Keogh Plan

1. Keogh plans are Employee Retirement Income Security Act (ERISA)-qualified plans intended for self-employed individuals and owner-employees of unincorporated business concerns or professional practices. - The term owner-employee refers to sole proprietors. 2. Included in the self-employed category are independent contractors, consultants, freelancers, and anyone else who files and pays self-employment Social Security taxes. 3. A corporation cannot use a Keogh plan. 4. Whenever the term qualified plan is used, it refers specifically to an employer-sponsored plan, not an IRA.

Prohibited Transactions by the Plan Fiduciary

1. No self-dealing 2. No acting with parties with adverse interests 3. No compensation on personal transactions 4. Act with skill and caution

401(k) Plan Loans

1. Non-taxable distribution 2. The IRS maximum loan amount is 50% of the participant's vested share or $50,000, whichever is the smaller. 3. Paid back in 60 month via payroll deduction - home mortgages are an exception to this 4. All loans must carry what the IRS considers to be a "reasonable rate of interest."

IRA Nonspouse Beneficiary: Take out required minimum distributions over the beneficiary's own life expectancy

1. Nonspouse IRA beneficiaries, may be able to take RMDs over their life expectancy, leaving the bulk of the account to continue to grow in the tax deferred account. 2. Each distribution taken will be included in taxable income during the year the funds are withdrawn 3. To choose this option, a separate inherited IRA account in the deceased account owner's name for the benefit (FBO) of the beneficiary must be established and the first required minimum distribution must be taken by December 31 of the year following the year of the account owner's death. 4. For example, the inherited IRA account would be titled "Sammy Jones, IRA (deceased 5/5/17), FBO Monique Gaillaird, beneficiary."

Corporate Sponsored Retirement Plans

1. Qualified Plans These include: - pension plans, - profit-sharing plans, - and the highly popular 401(k) plans. 2. The Employee Retirement Income Security Act of 1974 (ERISA) is federal legislation that regulates the establishment and management of corporate pension or retirement plans, also known as private sector plans. 3. All qualified corporate plans must be established under a trust agreement. A trustee is appointed for each plan and has a fiduciary responsibility for the plan and the beneficial owners (the plan holders).

Investment Policy Statement - Section 404(A)

1. Recommended, not required, plan document detailing acceptable investments and investment strategies. 2. A typical IPS will include: - investment objective and policies - investment selection criteria (but not actual investments) - monitoring procedures and performance - determination for meeting future cash flow needs 3. Not the same as the DOL's Summary Plan Description (SPD) 4. Although it is not specifically mandated under ERISA, it is strongly suggested that each employee benefit plan has an investment policy statement (IPS), preferably in writing, which serves as a guideline for the plan's fiduciary regarding funding and investment management decisions. 5. The IPS will NOT include specific security selection.

Substantially Equal Periodic Payment (SEPP) exception

1. Rule 72t 2. The substantially equal periodic payment exception under IRS rule 72(t) states that if you receive IRA payments at least annually based on your life expectancy (or the joint life expectancies of you and your beneficiary), the withdrawals are not subject to the 10% penalty. 3. The IRS has tables for determining the appropriate amount of each payment at any given age.

Roth IRAs

1. Same contribution limit as a traditional IRA. - may have both, but the limit does not double 2. Contributions not allowed for those exceeding earnings limits 3. Contributions never tax-deductible - Always after-tax dollars 4. Cost basis may be withdrawn at any time 5. Earnings may be withdrawn tax-free if a qualified distribution account: a. Has been established for 5 years and; b. one of the following applies; - Age 59 1/2 - Death or disability - First-time home purchase ($10,000) 6. No required minimum distributions at age 70 1/2 7. Contributions may be made after age 70 1/2 as long as the taxpayer has earned income 8. Minor may be named as beneficiary.

SIMPLE Plans

1. Savings Incentive Match Plans for Employees (SIMPLEs) are retirement plans for a business with 100 or fewer employees who earned $5,000 or more during the preceding calendar year. 2. For small businesses looking for a way to have an inexpensive retirement plan for their employees, the SIMPLE is the way to go. 2. The employee's contribution, up to $13,000 with a $3,000 catch-up provision (2019), is pretax and may be matched by the employer using either of the following two options: - A 2% nonelective employer contribution, where employees eligible to participate receive an employer contribution equal to 2% of their compensation (limited to $280,000 per year for 2019 and subject to cost-of-living adjustments for later years), regardless of whether they make their own contributions. - A dollar-for-dollar match up to 3% of compensation, where only the participating employees who have elected to make contributions will receive an employer contribution (i.e., the matching contribution).

Prohibited Investments Under ERISA

1. Similar to IRAs, qualified plans cannot invest in art, antiques, gems, coins, collectibles, or alcoholic beverages. 2. They can invest in precious metals, such as gold and silver coins minted by the U.S. Treasury, only if they meet various federal requirements. 3. ERISA also limits how much some plans can invest in the employer's stock. 4. Although not specifically prohibited under ERISA, the exam will never find writing uncovered calls in a retirement plan to be a prudent decision.

Trustee-to-Trustee Transfers

1. Sometimes simply referred to as an IRA transfer, this is when account assets are sent directly from one IRA custodian to another, and the account owner never takes possession of the funds. 2. Unlike the 1 per 12 months with an IRA rollover, the number of IRA transfers an account owner may make per year is unlimited. 3. Direct rollovers and transfers generally make better sense than 60-day rollovers because the 20% federal tax withholding does not apply to direct transfers of portfolios and, because there is no specified time limit, you don't have to rush to meet the 60-day requirement.

Ineligible and Inappropriate IRA Investments

1. Tangibles - Collectibles, including antiques, gems, rare coins, works of art, and stamps, are not acceptable IRA investments. 2. Insurance 3. Municipal bonds (tax-exempt) **gold and silver coins are allowed** **Investment real estate is allowed for business purposes (Contributor and linear family may not derive immediate benefit)**

Catch-Up Contributions for Older IRA Owners

1. The Economic Growth and Tax Relief Reconciliation Act of 2001, (EGTRRA), was the source of the legislation permitting certain individuals to make additional contributions to their IRAs. 2. Individuals aged 50 and older are allowed to make catch-up contributions to their IRAs above the scheduled maximum annual contribution limit, which will enable them to save more for retirement. 3. These catch-up payments can go either to a traditional IRA or to a Roth IRA. 4. $1,000 extra

IRA Nonspouse Beneficiary

1. The beneficiary will not be allowed to rollover the inherited IRA into their own IRA, this is simply not an option. 2. In general, there are four primary options available, the fourth of which probably won't be tested. - Take the cash now - Cash out the IRA in five years - Take out required minimum distributions over the beneficiary's own life expectancy - Take RMDs based on the life expectancy of the oldest beneficiary 3. If the beneficiary does nothing by December 31 of the year following the year of death, the default option used by the IRA is the five-year withdrawal option.

Simplified Employee Pension Plans (SEPs) (SEP IRAs)

1. The third type of IRA is somewhat different in that is funded by an employer rather than the individual. 2. Simplified employee pension plans (SEPs) offer self-employed persons and small businesses easy-to-administer pension plans. 3. A SEP is a qualified plan that allows an employer to contribute money directly to an individual retirement account (IRA) set up for each employee, hence the name SEP IRA. 4. Used primarily by small businesses and self-employed persons.

Uniform Prudent Investor Act (UPIA)

1. The trustee can pursue a modern theory of investment, where trustee creates a custom-tailored investment strategy for a particular trust 2. The standard of prudence is applied to any investment as part of the total portfolio, rather than to individual investments. 3. Can balance risk against conservativeness 4. Prudence NOT measured by hindsight 5. A plan participant or beneficiary who controls his specific plan account is not a fiduciary. 6. Transaction cost is not a determining factor in security selection. That is, when the fiduciary is deciding what security will fit the needs of the portfolio, the amount of commission involved in the purchase is not considered when determining if that security is an appropriate addition.

457 Plan facts

1. These plans are exempt from ERISA—nongovernmental plans must be unfunded to qualify for tax benefits while government plans must be funded. - Must hold its assets in trust or custodial accounts for the benefit of individual participants 2. These plans are generally not required to follow the nondiscrimination rules of other retirement plans. 3. Plans for tax-exempt organizations are limited to covering only highly compensated employees, while any employee (or even independent contractor) of a governmental entity may participate. 4. Distributions from 457(b) plans of nongovernmental tax-exempt employees may be made at any age and there is no 10% penalty for early withdrawal. 5. It is possible to maintain both a 457 and 403(b), or a 457 and 401(k) and make maximum contributions to both ($38,000 in 2019). As a result, those 50 or older, using the catch-up provision in each plan, could contribute as much as $49,000. You could also have an IRA along with the 457. 6. Unlike 401(k) plans, loans from a 457(b) plan are available in governmental plans only, and only if the entity decides to include that feature in the plan. Furthermore, the requirements for unforeseen emergency withdrawals are much stricter than for hardship withdrawals under a 401(k) plan.

SEP IRA Eligibility

1. To be eligible, an employee must be at least 21 years of age. 2. Have performed services for the employer during at least three of the last five years 3. Have received at least $600 (for 2018) in compensation from the employer in the current year (the annual compensation figure is indexed for inflation). 4. SEP rules require the employer to allow all eligible employees to participate.

Public Educational 403(b)

1. To qualify as a public educational institution, an organization must be state supported, a political subdivision, or an agency of a state. 2. Private school systems have a separate set of qualifying rules. 3. - elementary schools; - secondary schools; - colleges and universities; and - medical schools. 4. - teachers and other faculty members; - administrators, managers, principals, supervisors, and other members of the administrative staff; - counselors; - clerical staff and maintenance workers; and - individuals who perform services for the institution, such as doctors or nurses.

401(k) cont.

1. Top heavy testing rules for key employees (not highly compensated employees) - key employees, 401(k) - top heavy plan = employees will have to take money back 2. Safe harbor plan avoids testing if contributing with immediate vesting, whether non-elective or matching. 3. Distribution may be rolled over into a traditional IRA or into a Roth IRA 4. Self-employed may use solo 401(k) to maximize contributions 5. Participants may borrow - Payback with interest through payroll deduction.

Defined Benefit Plans

1. Traditional Pension Plan 2. Sponsor (employer) bears the investment risk 3. Provides defined benefit at retirement based on the following: - age - years of service - earnings (last five years of salary) 4. The Plan's annual return must be signed by an actuary 5. Because of the actuarial assumptions and computations, the maximum has to be figured by an actuary.

Adjusted Growth Income (AGI) requirements for Roth IRA

1. Unlike the traditional IRA, there are limits placed on Roth eligibility based on income. 2. The following numbers, (which are never tested), are effective for those filing a tax return for 2019: - A single person with an AGI of less than $122,000 may contribute the full amount to a Roth IRA. The ability to contribute to a Roth IRA is gradually phased out if the taxpayer's AGI is between $122,000 and $137,000. - For married taxpayers who file joint tax returns, the AGI limit is $193,000, with the contribution phased out for couples whose income is between $193,000 and $203,000.

Compensation for IRA Purposes

1. Wages, salaries, and tips 2. Commissions and bonuses 3. Self-employment income 4. Alimony from pre-2019 divorce decrees 5. Nontaxable combat pay

IRA Spousal Beneficiary

1. When the beneficiary is the spouse, there are two choices that can be made: - Do a spousal rollover, meaning the amount of the inheritance is rolled over into the spouse's own IRA - Continue to own the IRA as the beneficiary 2. Continue as beneficiary - there is no 10% penalty for withdrawals before age 59 1⁄2 - RMDs will be computed based on the beneficiary's age, not that of the deceased - if it is a Roth IRA and the account hasn't been open for at least five years, any withdrawal of earnings will be subject to income tax but not the 10% penalty.

Employee Retirement Income Security Act of 1974 (ERISA)

2. ERISA guidelines for the regulation of retirement plans include the following. - Eligibility - Funding - Vesting - Communication - Nondiscrimination 1. ERISA regulations apply to private sector (corporate) plans only. Plans for federal or state government workers (public sector plans) are not subject to ERISA.

60-day Rollover Example

A 50-year-old individual with $100,000 in his company retirement plan changes employers. His pension plan may be distributed to him in a lump-sum payment, minus the mandatory 20% withholding of $20,000. He must then deposit $100,000 in an IRA rollover account within 60 days. Any portion not rolled over, including the $20,000 withheld, is considered a distribution subject to ordinary income tax and early distribution penalty. If he deposits the entire $100,000 into the IRA, he will apply on his next income tax return for a refund of the $20,000 withheld.

SEP IRA Contributions

A SEP allows the employer to contribute up to 25% of an employee's salary to the employee's SEP IRA each year, up to a maximum of $56,000 per employee per year in 2019. The employer determines the level of contributions each year and must contribute the same percentage for each employee, as well as the employer.

How would one best describe a prudent investor?

A trustee who invests with reasonable care, skill, and caution

What are the two categories of qualified retirement plans?

All qualified retirement plans fall into one of two categories. 1. Those that offer no specific end result, but, instead focus on current, tax-deductible contributions, are defined contribution plans. 2. Those that promise a specific retirement benefit but do not specify the level of current contributions are defined benefit plans.

For exam purposes, you can postpone beginning distributions until the later of:

April 1 of the calendar year after you turn age 701⁄2, or April 1 of the calendar year following your retirement (but only for qualified plans, not an IRA).

Tax-Exempt 501(c)3

As stated earlier, 501(c)3 organizations are tax-exempt entities specifically cited in the IRC as eligible to establish 403(b)s for their employees. Typical 501(c)3 organizations include: - private colleges and universities; - trade schools; - parochial schools; - zoos and museums; - research and scientific foundations; - religious and charitable institutions; and - private hospitals and medical schools.

Employee Retirement Income Security Act of 1974 (ERISA): Eligibility

Eligibility. If a company offers a retirement plan, all employees must be covered if they are 21 years old or older, have one year of service, and work 1,000 hours per year.

Keogh Plan Eligibility

Employee participation in a Keogh plan is subject to these eligibility rules. - Full-time employees are employees who receive compensation for at least 1,000 hours of work per year. - Tenured employees are employees who have completed one or more years of continuous employment. - Adult employees are employees 21 years of age and older and, just as with traditional IRAs, not in excess of 70 1⁄2.

403(b) Employer Contributions

Employer contributions to a 403(b) are generally subject to the same maximums that apply to all defined contribution plans: the lesser of 100% of the participant's compensation or $56,000 per year.

Employee Retirement Income Security Act of 1974 (ERISA): Funding

Funding. Funds contributed to the plan must be segregated from other corporate assets. The plan's trustees have a fiduciary responsibility to invest prudently and manage funds in a way that represents the best interests of all participants.

IRA contribution deadline

IRA contributions for a specific taxable year may be made anytime from January 1 of that year through the required filing date of that year's return, (generally April 15 of the next year, unless the 15th falls on a holiday or weekend). If the individual obtains a filing extension, the deadline is still April 15.

Moving IRAs

Individuals may move their funds and investments from one IRA to another IRA through a one of three methods: - 60-day rollover; - direct rollover; or - trustee-to-trustee transfer.

Real Estate in an IRA (or Qualified Plan)

Legally, you may invest in real estate in your IRA or as a participant in a 401(k) or other qualified plan. However, the moment the participant derives any personal benefit from the property—such as staying in a condo purchased in resort area that is rented out most of the year, or allowing prohibited persons to use the property—look out.

Employee Retirement Income Security Act of 1974 (ERISA): Nondiscrimination

Nondiscrimination. A uniformly applied formula determines employee benefits and contributions. Such a method ensures equitable and impartial treatment.

SEP IRA Vesting

Participants in a SEP IRA are fully vested immediately, meaning that once the money is deposited in an employee's SEP IRA, it belongs to the employee.

Tax Deferred

Simply, income tax is put off (deferred) to a later time. In most retirement plans, tax on the amount of the contribution is usually deferred until withdrawal. Tax on the earnings is always deferred until withdrawal.

IRA Contribution Limit

That new limit is $6,000 ($7,000 for those age 50 and older)

Deductible Contribution

The contribution made by the individual, whether an employee contribution to a qualified plan such as a 401(k) plan, or by any individual to an IRA. This means the amount contributed is pretax or otherwise deductible on the tax return

IRA Nonspouse Beneficiary: Take the Cash Now

The nonspouse IRA beneficiary can withdraw 100% of the IRA account immediately. If this option is chosen, then 100% of the amount withdrawn (assuming the IRA was funded completely with pretax contributions) will be included in taxable income during the year of withdrawal.

403(b) Plan Requirements

The plan must be in writing and must be made through a plan instrument, a trust agreement, or both. The employer must remit plan contributions to an annuity contract, a mutual fund, or another approved investment

Qualified

This term by itself means that contributions are made with pretax dollars and earnings in the account are tax deferred until the funds are withdrawn. This can apply to either a qualified plan or an IRA.

What are the three different IRAs?

Traditional IRAs Roth IRAs Simplified employee pension plan (SEP) IRAs **IRAs are not to be confused with qualified plans or nonqualified plans used by businesses.**

Contributions to a 529 Plan

1. A donor (typically a parent or grandparent) may contribute a maximum of $75,000 ($150,000 if married) in a single year for each Section 529 Plan beneficiary without gift tax consequences. This represents a five-year advance on the (2019) $15,000 per recipient annual gift tax exclusion. - can do this once every 5 years 2. The donor of the 529 plan assets retains control of most 529 accounts and may take the money back at any time (although a 10% penalty tax may apply). 3. The dollar amount of allowable contribution varies from state to state and may be as high as $300,000. 4. Assets in the account remain under the donor's control even after the student is of legal age. 5. There are no income limitations on donors making contributions to a 529 plan.

Coverdell ESAs

1. After-tax contribution (nondeductible), but grows tax-deferred. 2. Contributions may be made by anyone, including the beneficiary, but the total annual maximum contribution per child is $2,000 3. Contributions may be made until the child's 18th birthday - unless the beneficiary is a special needs beneficiary 4. Contributions must fall under certain earnings limits 5. Earnings withdrawn for qualified education expenses before the beneficiary is age 30 are tax-free; otherwise tax + 10% tax penalty 6. Coverdell ESA contributions, for any year, to be made up to April 15 of the following year (just like contributions to your IRA).

UGMA/UTMA Rules

1. All gifts are irrevocable. Gifts may be in the form of cash or fully paid securities. 2. An account may have only one custodian and one minor or beneficial owner. 3. A donor of securities can act as custodian or appoint someone to do so. 4. Unless they are acting as custodians, parents have no legal control over an UGMA/ UTMA account or the securities in it. 5. A minor can be the beneficiary of more than one account, and a person may serve as custodian for more than one UGMA/UTMA, provided each account benefits only one minor. 6. The minor has the right to sue the custodian for improper actions.

Contributions to an HSA

1. Anybody may contribute (individual, employer, family members or any other person may also make contributions on behalf of an eligible individual) 2. Contributions to an HSA must be made in cash, but the law permits investments to be made into stocks, bonds, and mutual funds. 3. Contributions of stock or property are not allowed. 4. There is a limit on the amount that may be contributed 5. The only facts that could be important are that the contribution for those with family coverage is higher (logically) than that for self-only coverage, and that the amount the individual may contribute is reduced by any amounts contributed by the employer.

Safe Harbor Provisions of Section 404(c): Investment Selection

1. At least three investment alternatives 2. A 404(c) plan participant must be able to materially affect portfolio return potential and risk level 3. A 404(c) plan participant must be able to diversify his investment to minimize the risk of large losses 4. It isn't the number of funds that counts; it is the different asset classes available. - If the plan offered 10 investment options, instead of three, but they were all of the same asset class, such as 10 equity funds, or 10 bond funds, that would not comply with 404(c).

Top-Heavy Plan

1. Because all qualified plans must be nondiscriminatory, the IRS has defined a top-heavy 401(k) plan as one in which a disproportionate amount of the benefit goes to key employees. 2. The plan must be tested on an annual basis to ensure that it complies with the regulations. 3. On the exam, you may be asked to define a top-heavy plan and will have to choose between key employees and highly compensated employees. The easiest way to remember is to match the (k) in 401(k) with the word key.

College Savings Plans

1. College savings plans generally permit the contributor, known as the account holder, to establish an account for a student (the beneficiary) for the purpose of paying the beneficiary's qualified college expenses. 2. The typical plan offers a number of investment options including stock mutual funds, bond mutual funds, and money market funds. 3. A very popular option is the age-based portfolio that automatically shifts toward more conservative investments as the beneficiary gets closer to college age. 4. Withdrawals from college savings plans can generally be used at any college or university regardless of the state carrying the plan or the state of residence

Opening an UGMA/UTMA Account

1. Custodian's name 2. Minor's name and social 3. State where the account is held

Tax Treatment of 529 Plans

1. Earnings in 529 plans are not subject to federal tax and, in most cases, state tax, so long as withdrawals are for eligible college expenses, such as tuition, and room and board, and even a computer. 2. Money representing earnings that is withdrawn from a 529 plan for ineligible expenses will be subject to income tax and an additional 10% federal tax penalty. 3. Unlike the IRS, many states offer deductions or credits against state income tax for investing in a 529 plan. But eligibility for these benefits is generally limited to participants in a 529 plan sponsored by your state of residence. 4. If any tax is due on withdrawal, it is the responsibility of the student, not the donor.

Safe Harbor Provisions of Section 404(c): Investment Control

1. Employees choose their own investments 2. Must tell employees that they can change their investment allocations at least quarterly 3. Even though the employees maintain investment control, the plan fiduciary is not relieved of the responsibility to monitor the performance of the investment alternatives being offered and replace them when necessary.

Custodial Account

1. In a custodial account, the custodian for the beneficial owner enters all trades. UGMA and UTMA accounts require an adult or a trustee to act as custodian for a minor (the beneficial owner). 2. One child - beneficial owner 3. One custodian - Adult - Not necessarily the donor - Fiduciary Capacity 4. Irrevocable - no limit to gift size 5. UGMA and UTMA accounts

Investment Options for 529 Plans

1. In general, these plans offer several different portfolio options ranging from aggressive (for those with a longer time horizon) to guaranteed (for those in college using the funds). 2. In most cases, these portfolios are registered mutual funds, in others, they are separately managed accounts containing stocks and/or bonds. Some portfolios include insured bank CDs and some of the states offer managed fixed-income pools. 3. U.S. Savings Bonds are not available as investment options in Section 529 plans.

College Savings Plan Impact on Financial Eligibility

1. Investing in a 529 plan (or Coverdell ESA) will generally impact a student's eligibility to participate in need-based financial aid. 2. Both types of plans are treated as parental assets in the calculation of the expected family contribution toward college costs regardless of whether the owner is the parent or the student. 3. Having money in a 529 plan is a better deal than if they were non-529 assets of the student

Section 529 Plans

1. Legally known as qualified tuition programs (QTPs) 2. With the passage of Tax Cuts and Jobs Act of 2017, these plans extended the qualification to K-12 schooling as well. 3. There are two basic types of 529 plans: prepaid tuition plans and college savings plans.

Safe Harbor Provisions of Section 404(c): Communicating required information

1. Making certain information available upon request, such as prospectuses and financial statements or reports relating to the investment options 2. A description of the risk and return characteristics of each of the investment alternatives available under the plan 3. Allowing real-time access to employee accounts either by telephone or the internet

Prepaid Tuition Plans

1. Prepaid tuition plans generally allow college savers to prepay for tuition at participating colleges and universities, and in some cases, room and board can be prepaid as well. 2. Most prepaid tuition plans are sponsored by state governments and have residency requirements. 3. The basic concept is that if you pay for the tuition at today's rates, the child will be able to attend in the future, regardless of how much higher the tuition is.

Custodian

1. Securities in a UGMA/UTMA account are managed by a custodian until the minor reaches the age of majority, or in the case of UTMA, the age determined by the specific state. The custodian has full control over the minor's account and can: - buy or sell securities; - exercise rights or warrants; and - liquidate, trade, or hold securities. 2. The custodian also may use the property in the account in any way the custodian deems proper for the minor's support, education, maintenance, general use, or benefit. 3. However, the account is not normally used to pay expenses associated with raising a child, such as the three basic needs of food, clothing, medical expenses, and shelter 4. A custodian may be reimbursed for any reasonable expenses incurred in managing the account. Compensation may be paid to the custodian unless the custodian is also the donor. - if the donor is the custodian - no management fee 5. Custodian is not required to be the child's legal guardian

Safe Harbor 401(k) Plan

1. Several years after the top-heavy rules were written, relief was offered in the form of the safe harbor 401(k). A plan does not have to undergo annual top-heavy testing if set up properly. 2. There are two basic choices for setting up a safe harbor plan. The employer will either match employee contributions or use a nonelective formula (the employees don't have to contribute) of eligible employee compensation to satisfy IRS requirements. 3. In either case, all employer contributions are immediately vested.

Ineligible IRA Investment Practices

1. Short sales of stock 2. Speculative option strategies 3. Margin account trading **Covered Call writing is allowed**

Ineligible and Inappropriate IRA Investments

1. Tangibles - Collectibles, including antiques, gems, rare coins, works of art, and stamps, are not acceptable IRA investments. 2. Insurance 3. Municipal bonds (tax-exempt)

Summary Plan Description (SPD)

1. The SPD is an important document that tells participants what the plan provides and how it operates. It provides information on when an employee can begin to participate in the plan, how service and benefits are calculated, when benefits become vested, when and in what form benefits are paid, and how to file a claim for benefits. 2. Under regulations of the U.S. Department of Labor (DOL), the plan administrator is legally obligated to provide to participants, free of charge, the SPD. 3. Unlike the investment policy statement, it does not deal with the investment characteristics of the plan.

UGMA/UTMA Taxation

1. The minor's Social Security number appears on an UGMA/UTMA account, and the minor must file an annual income tax return and pay taxes on any earned income produced by the UGMA/UTMA account as would any other taxpayer. 2. However, in the case of unearned income, such as from dividends and interest, until the minor reaches age 19, or the individual is a full-time student under 24, that unearned income in excess of $2,100 is taxed using the trust tables where rates get as high as 37% when income exceeds $12,750. This is commonly referred to as the kiddie tax. 3. Although the minor is the account's beneficiary and is responsible for any and all taxes on the account, in most states it is the custodian's responsibility to see that the taxes are paid from the account.

Effect of TCJA 2017

1. The new rule permits K-12 withdrawals as qualified expenses for attendance at a public, private or religious elementary or secondary school. 2. Virtually everything that applies to the pre-TCJA Section 529 Plan is the same with one major exception: qualified expenses are limited to $10,000 of tuition per student annually.

Prohibited ERISA Transactions

1. Transactions involving "parties in interest" - borrowing money from the plan 2. Fiduciary self-dealing - acting on both sides of a transaction involving the plan

UGMA/UTMA Investments

1. UGMAs/UTMAs may be opened and managed as cash accounts only. 2. A custodian may never purchase securities on margin or pledge them as collateral for a loan. 3. A custodian must reinvest all cash proceeds, dividends, and interest within a reasonable period. Cash proceeds may be held in an interest-bearing custodial account for a reasonable period. 4. Investment decisions must consider a minor's age and the custodial relationship; examples of inappropriate investments are commodity futures, naked options, and high-risk securities. 5. Covered call writing is normally allowed. 6. Stock subscription rights or warrants must be either exercised or sold.

Safe Harbor Provisions of Section 404(c)

1. Under ERISA Section 404(c), a fiduciary is not liable for losses to the plan resulting from the participant's selection of investment in his own account, provided the participant exercised control over the investment and the plan met the detailed requirements of a Department of Labor regulation—that is, the 404(c) regulation. 2. There are three basic conditions of this regulation: - Investment selection - Investment control - Communicating required information

Benefits of HSA

1. You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you do not itemize your deductions on Form 1040. 2. Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income. 3. The contributions remain in your account until you use them. 4. The interest or other earnings on the assets in the account are tax free. 5. Distributions may be tax free if you pay qualified medical expenses. 6. An HSA is portable. It stays with you if you change employers or leave the work force.

529 Plan Withdrawal Restrictions

1. You can rollover any unused funds to a member of the beneficiary's family without incurring any tax liability as long as the rollover is completed within 60 days of the distribution. 2. You can only withdraw money that you invest in a 529 plan for eligible college expenses without incurring taxes and penalties. 3. Can roll to most family members 4. The earnings portion of a nonqualified distribution is taxable to the individual who receives the payment, either the account owner or the designated beneficiary. 5. Federal tax law allows a tax-free rollover of any or all of a 529 account from the current 529 plan to a different 529 plan, but only once in any 12-month period unless there is a change in beneficiary.

Eligibility for an HSA

1. You must be covered under a high deductible health plan (HDHP), on the first day of the month. That means you are considered to be an eligible individual for the entire year if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers). 2. You have no other health coverage except what is permitted under the rules. 3. You are not enrolled in Medicare. 4. You cannot be claimed as a dependent on someone else's tax return. 5. Each spouse who is an eligible individual who wants an HSA must open a separate HSA. You cannot have a joint HSA.

Nondeductible Contribution

A contribution to a qualified plan or an IRA which is made with after-tax dollars. The funds do grow tax deferred, but there is no tax benefit derived from the contribution.

Health Savings Account (HSA)

A health savings account (HSA) is a tax-exempt trust or custodial account individuals can set up with a qualified HSA trustee to pay or reimburse certain medical expenses they incur. 1. Tax-deductible contributions 2. No "use it or lose it" like FSA 3. Must have high deductible health plan (HDHP) and no other insurance.

safe harbor 401(k) using a non-elective formula

A safe harbor 401(k) with a non-elective formula is one in which the employer must contribute a minimum of 3% of each employee's earnings, whether or not the employee participates in the plan. Furthermore, those contributions are immediately vested. As a result, these plans offer a safe harbor from being tested for being top heavy, but this is a benefit for the employer, not the employee.

High Deductible Health Plan (HDHP)

An HDHP has: 1. A higher annual deductible than typical health plans, and 2. a maximum limit on the sum of the annual deductible and out-of-pocket medical expenses that you must pay for covered expenses. Out-of-pocket expenses include copayments and other amounts, but do not include premiums.

Registration of UGMA/UTMA Securities

Any securities in an UGMA/UTMA account are generally registered in the custodian's name for the benefit of the minor and cannot be solely in the minor's name. So that transfers may be accomplished more expeditiously, securities may be held by custodians in street name.

Two major types of education funding programs.

Coverdell ESA Section 529 Plan

HSA vs FSA

Do not confuse an HSA with a FSA (flexible spending account). The FSA account holds money deducted from the employee's pay and remains with the company—it is not investible, and, if you don't use it, you lose it.

UPIA - Party in Interest

ERISA has a rather broad definition of the term party in interest, but it basically includes anyone who can have an impact on an employee benefit plan, including those who render advice to the plan. 1. Any fiduciary of the plan 2. The employer 3. An employee organization whose members are covered by the plan (unions) 4. Service providers (e.g., legal, accounting, trustee/custodial, record-keeping) 5. A "control person" of any of the above 6. Lineal descendent of above (besides #3)

What term is used to describe which employees will be covered by a pension plan?

Eligibility Pension plans must have a uniform nondiscriminatory eligibility program. All employees must be covered when they become eligible, which means reaching 1 year of service working full-time and age 21.

Which of the following is (are) TRUE regarding qualified pension plans? I. They must not discriminate. II. They must have a vesting schedule. III. They must be in writing. IV. Every month the employer must update the current status of all accounts.

I, II, and III An employer must update the status of all employees at least annually, not monthly.

If investment choice is the criteria, which retirement choice would be best?

IRAs Participants in a 401(k) do have a choice of investments, but that choice is limited to the package included in the employer's plan. Participants in a 403(b) plan have even fewer choices; annuities are the primary investment asset in those plans. If investment choice is the criteria, then the greatest control is with an IRA

Death of the Minor or Custodian

If the beneficiary of an UGMA/UTMA dies, the securities in the account pass to the minor's estate, not to the parents or the custodian. If the custodian dies or resigns, either a court of law or the donor must appoint a new custodian.

FAFSA and Custodial Accounts

In our discussion of educational funding programs, it was mentioned that money in Coverdell ESAs and Section 529 plans is only counted at a 5.64% rate when determining the family's financial contribution toward college. Assets held in a custodial account (UTMA or UGMA) are counted at a 20% rate—a true disadvantage when compared to the other plans.

Definition of an 403(b) Employee

Only employees of qualified employers are eligible to participate in a 403(b) plan. Independent contractors are not eligible. It is the employer's responsibility to determine an individual's status or definition.

Prepaid Tuition Plan vs College Savings Plan

Prepaid Tuition - lock in tuition - cover tuition and mandatory fees only (some allow room and board) - many guaranteed or backed by the state - age limit - residency requirements - limited enrollment period College Savings Plan - No lock on college costs - Covers all qualified higher education expenses (room, books, tuition, fees) - No state guarantee. Most investment options are subject to market risk. - No age limits. Open to adults and children. - No residency requirement. However, nonresidents may only be able to purchase some plans through financial advisers or brokers. - Enrollment open all year

RMD

Required Minimum Distribution

Section 529 Plans over Coverdell ESA

Sections 529 a. contribution limits are higher b. there are no earnings limits 1. Contributions to a Coverdell ESA are limited to $2,000 per beneficiary per year while those to a Section 529 plan can be as high as $300,000 in some states 2. A married couple cannot make a Coverdell contribution if their income exceeds $220,000, while there is no earnings limit to contribute to a 529. 3. In neither case is the contribution tax deductible on the federal level (although the Section 529 plans may have tax advantages in some states). 4. a beneficiary of a 529 plan may also be the beneficiary of a Coverdell Education Savings Account

403(b) Eligibility

Similar to other qualified plans, if the employer either matches or makes nonelective contributions, a 403(b) plan must be made available to each full-time employee who has both reached age 21 and completed one year of service. Unique to the 403(b) plans is that if the plan only offers employee deferrals, then any employee, even one who started today, is eligible to participate.

Maximum IRA Contribution

The maximum contribution to an IRA is 100% of earned income or the maximum allowable limit, whichever is less.

529 Plan age restrictions

There are no age restrictions. That is, if at any age, an individual desires to go back to school, a 529 Plan may be used

SEP IRA Catch-up Provisions

There is no catch-up provision for a SEP

529 Offering Circular

They are municipal fund securities and require delivery of an official statement or offering circular Not a prospectus This leads to somewhat of a lack of flexibility because the investment choices are limited to the offerings provided in that offering circular.

UGMA vs UTMA

UGMA - Age of majority - Limited investment options UTMA - Up to age 25 - Broader investment options a. real estate (real property), certain partnership interests, and other types of intangible property,

When is a proper recommendation?

When you see contribution levels at $2,000 per year or less, that is a signal that Coverdell is the proper recommendation. Higher levels would be the 529 plan