Chapter 10: Retirement Plans

Non qualified Roth Withdrawal

A non qualified withdrawal is one that does not meet the previously discussed criteria. The result is that distributed Roth earnings are subject to tax.

Roth IRA

A personal savings plan; contributions are not tax-deductible; earnings are tax-free

Keogh Plans (HR-10)

- Allows unincorporated business owners to participate in the retirement plan - as an employee - Can be either defined contribution or defined benefit plans

Funding Standards

- An employer must deposit enough money to cover the pension plans and administrative costs

Employee Stock Ownership Plan (ESOP)

a compensation system that awards employees shares of company stock in addition to their regular compensation

Conduit IRA

A conduct IRA is a holding tank for funds that originally came from a qualified plan and are on their way to another qualified plan. No withholding tax is necessary unless any of the funds are distributed directly to the individual.

Money Purchase Plan

- Money purchase plans have required contributions. That is, you, as the employer, are required to make a contribution, on behalf of the plan participants, to the plan each year. - With a money purchase plan, the plan states the contribution percentage that is required. For example, let's say that your money purchase plan has a contribution of 5% of each eligible employee's pay. You, as the employer, need to make a contribution of 5% of each eligible employee's pay to their separate account. - Fixed contributions, undefined benefits

Pension Protection Act

A federal law passed in 2006 intended to shore up the financial integrity of private traditional (defined benefit) plans and, at the same time, to encourage employees to make greater use of salary reduction (defined contribution) plans. The act encourages workers to increase their contributions to employer sponsored retirement plans and helps them manage their investments.

Tax-Sheltered Annuities

A special tax-favored retirement plan available only to certain groups of employees. May be established for the employees of specified non profit, charitable, educational, religious and other 501 (c) 3 organizations.

Stock Bonus Plan

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

Simplified Employee Pension (SEP)

A tax-deferred retirement plan available to small businesses.

Vesting Schedule

A time-table for determining at what point the employers contributions become the property of the employee in a pension plan.

Section 529 Plans

A vehicle for providing for higher education expenses and is named after the tax code that governs it. Prepaid tuition plans: Allows contributions to prepay college tuition and other fees for a designated beneficiary College Savings Plan: Allows contributions to invest after tax dollars in professionally managed accounts Does not need to report income when withdrawing for qualified college costs

Catch-up Contributions

Additional amounts that 401(k) participants age 50 and older can choose to defer into their 401(k)

Alienation of benefits

Alienation of benefits involves the assignment of a pension or retirement plan participants benefits to another person. It's permitted only under exceptional circumstances per IRS rules.

Contribution

All plans must restrict the amount of contributions that can be made for, or accrue to, any one plan Participant.

Participation Standards

All qualified employer plans must comply with ERISA minimum participation standards designed to determine employee eligibility. Church, Governmental, and collectively bargained plans are specifically exempt from ERISA regulation.

IRC Section 457 Deferred Compensation Plans

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.

Cash or Deferred Arrangement (CODA)

An arrangement under a retirement plan that allows employees to either receive cash or have the employer contribute an equivalent amount to the plan.

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

salary reduction plan

Another name for any retirement plan that takes its contribution before withholding taxes are calculated.

Withholding

Any rollover must be made directly from one IRA to another IRA or it will be subject to a 20% withholding.

IRA Participation

Anyone under the age 70 who as earned income may open a traditional IRA and contribute up to the contribution limit or 100% of compensation each year, whichever is less.

Form 5500

Disclosure statement that employee benefit plans use to satisfy annual reporting requirements under ERISA

ERISA (Employee Retirement Income Security Act)

Federal law that increased the responsibility of pension plan trustees to protect retirees, established certain rights related to vesting and portability, and created the Pension Benefit Guarantee Corporation

Traditional IRA

Individual Retirement Account - A personal qualified retirement account through which eligible individuals accumulate tax-deferred income up to a certain amount each year, depending on the person's tax bracket. The amount the individual contributes to a traditional IRA may be fully or partially deducted from current income, resulting in lower current income taxes.

Qualified vs. Nonqualified Plans

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 income taxes.

Profit Sharing Plans

Plans that distribute a portion of an organization's profits to its employees.

Defined Contribution Plans

Profit sharing plans, Stock bonus plans and money purchase plans.

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

Deduction of IRA Contributions

The amount an individual contributes to a traditional IRA can be deducted from that individuals income in the year it is contributed. 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.

Traditional IRA Withdrawals

Traditional IRA owners must begin to receive payment from their accounts no later than April 1 following the year in which they reach age 70. The law specifies a minimum amount that must be withdrawn every year. Failure to with draw the minimum amount can result in a 60% excise tax. With few exceptions any distribution from a traditional IRA before age 59 will have adverse tax consequences and a 10% penalty

Coverage Requirements

Under the IRS "minimum coverage" rules, a qualified retirement plan must benefit a broad cross- section of employees. (To prevent a plan from discriminating against rank and file employees)

No requires distributions

Unlike traditional IRA's, Roth IRA's 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, the account can be passed down to heirs or beneficiaries.

Qualified Roth Withdrawals

Withdrawals from Roth IRAs are either qualified or non qualified. To be qualified: The funds must have been held in the account for a minimum of 5 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 a first home.

Rollover IRA

an individual retirement account into which you can transfer your assets from your company retirement plan tax-free while avoiding penalties. Rollover contributions to an IRA are unlimited by dollar amount. A surviving spouse who inherits IRA benefits or benefits from the deceased spouses qualified plan is eligible to establish a rollover IRA in the surviving spouses own name. Assess passing to a surviving spouse generally are not subject to estate taxes at the time of death due to the Unlimited Martial Deduction

Spousal IRA

an individual retirement account set up to benefit a spouse who has no income

Defined Benefit Plans

plans that provide for the payment of determinable retirement income benefits

Simple Plans (IRA)

retirement plan often offered to employees of smaller businesses; the business matches funds placed in the retirement fund by the employee up to a certain % of the salary; tax-sheltered, tax deferred, or pre-tax. Eligible for companies that employs no more than 100 employees who receive at least $5000 in compensation