Chapter 6: Retirement Plans
Health Savings Accounts (HSAs)
A health savings account (HSA) is a savings account used specifically to pay for qualified medical expenses. HSAs were designed to encourage people to save for future health costs. HSAs can be used to pay for medical expenses for an individual or for a family. HSAs are beneficial because they offer tax advantages, which go to the holder of the account.
To meet the section 404(c) requirements, an employer must do what 5 things?
1) Be prudent in selecting and monitoring the investment options in the plan they offer. 2) Provide an appropriate number of (not too few, not too many) investment choices. 3) Select a default investment (one that is chosen for the employee, if they do not choose) that is an appropriate mix of investments focused on capital preservation and longer term growth. 4) Provide employees with ongoing education to understand the investment choices available to them. 5) Verify and document that employees have received all the needed information.
Defined Contribution Plan
A defined contribution plan is a qualified retirement plan in which the contribution is defined but the ultimate benefit to be paid out is not. More and more, companies are moving to defined contribution plans to avoid the high costs of pensions. In a defined contribution plan, investment risk and investment rewards are assumed by the participant rather than by the employer. In this kind of plan, participants contribute a portion of their pre-tax earnings to the plan. Participants have their own individual accounts and choose from several different investment options. Often employers will match at least part of the employee's contributions. Employer contributions are often on a vesting schedule that defines ownership of the funds by time interval. A participant's benefits will depend on the amount of his contributions, the amount of his employer's contributions, the performance (positive or negative) of the investments over the participant's career, and any expenses incurred in managing the account. The contributions and earnings grow tax-free until they are withdrawn, at which time they will be taxed as ordinary income.
UGMA/UTMA Account
An UGMA/UTMA account is a custodian account that is opened by an adult who manages it for a minor. An alternative to this type of account for a minor is a trust, but an UGMA/UTMA account is simpler and less expensive to set up. There can be only one custodian and one minor for each account. The minor and custodian do not need to be related, but the custodian must be an adult and must be a person, not a corporation. The minor is the legal owner of the account and its assets (the beneficial owner), and the custodian (the nominal owner) is responsible for managing the account. The minor must have a social security number and will be taxed on the earnings of the account.
Traditional IRA
Another type of non-qualified plan is the deferred compensation plan. In a deferred compensation plan, employees sign a contract with the employer that they will defer some of their compensation until retirement. This kind of plan is usually offered as an additional benefit to upper management or to entice a key employee to stay at the company. These plans are desirable to highly paid individuals, because they can defer taxes on the income until they are in a lower tax bracket. Sometimes the contract will include conditions in which the employee will not receive his deferred compensation, for example, if he moves to a competitor. Deferred compensation plans do not fall under ERISA, so the funds set aside for these employees do not need to be segregated from the other funds of the company. The risk is that if the company goes bankrupt, these funds can be used to pay creditors. In fact, companies may not give plan participants a guarantee that they will be paid ahead of creditors if the company is forced to liquidate.
When can individuals avoid tax penalty on an IRA?
Individuals can avoid the 10% tax penalty if the withdrawal is for one of the following reasons: • Qualified education expenses (for example, tuition, books, and supplies) • Payment of medical expenses (if they are more than 10% of the individual's gross income) • Permanent disability • First-time home purchase ($10,000 lifetime maximum) • Payment of health insurance premiums by unemployed or self-employed person who has received state or federal aid for three months straight • The withdrawals occur in substantially equal periodic payments (IRS Rule 72(t)) continuously for five years
Section 404(c)
ERISA outlines a set of voluntary guidelines for employers that, if followed, shift the liability for the decisions employees make about investing off the employer and to the employee. In other words, if an employer meets their Section 404(c) requirements and an employee loses all her money by making poor investment decisions, the employer will not be found at fault.
How many times in a year can a rollover happen?
Rollovers are allowed no more than once in a 12 month period; meaning, from the day you withdraw the money for your rollover, you cannot make another rollover within 12 months.
Earned Income vs. Unearned Income
The government puts limits on IRA deduction amounts. All contributions must be made only from earned income, as opposed to passive income. Earned income typically means wages, or as the IRS puts it, taxable compensation. Unearned income includes dividends, capital gains, and interest on securities; social security benefits; unemployment benefits; child support; rental income; and inherited funds.
What are the main tax benefits of HSAs?
There are three main tax benefits: (1) contributions to HSAs are tax-deductible, (2) taxes on interest and dividends are deferred and may even be exempt at withdrawal, and (3) contributions and earnings can be withdrawn tax-free at any time if they are used for qualified medical expenses.
457 Plans
457 plans—similar to a 401(k) plan for state and local government employees. As noted above, governments are exempt from ERISA requirements.
What must a fiduciary do in regards to investment selection?
To comply with ERISA and limit a fiduciary's liability, a plan must offer at least three different investment choices. Further, those choices need to be broad and different enough to accommodate employees' differing risk tolerances and investing goals, as well as allow for adequate diversification. In practice, most plans offer more than three options, with many plans offering ten or more.
Fiduciaries
Under ERISA, employers offering their employees a retirement plan are required to act as fiduciaries, or a trusted party who acts in the best interests of another party. This definition also extends to include most of the outside providers and advisers who work with the plan. Ultimately, this means that employers and professionals working with the plan have both a legal and an ethical obligation to ensure that the retirement plan they offer is in place to serve the employees (not the employer) and that the decisions made regarding that plan are clearly in the best interest of the employees.
How do 529 plans work?
Pre-paid tuition plans generally allow participants to purchase units or credits at participating colleges and universities to lock in current rates (prices) for future tuition and, in some cases, room and board. Performance of these investments depends on tuition inflation. When tuition prices rise quickly, this is a good deal for participants. Most prepaid tuition plans are sponsored by and, in some cases, guaranteed by state governments and have residency requirements. Some are sponsored by colleges and universities.
Profit Sharing Plan
Profit-sharing plans—a plan for corporate employees in which benefits are linked to corporate profits through a pre-determined formula. Distributions are not guaranteed, but when there is a distribution, it is made to all employees as a percentage of their salaries.
Required Minimum Distributions (RMDs)
Required minimum distributions refer to the amount of money that must be taken out of a qualified retirement account starting the year the account holder turns 70 1/2 years old. The minimum amount is determined by the account holder's life expectancy, as found on tables the IRS develops, and the amount in the account. Account holders who do not take their required minimum distribution by the deadline will be subject to a tax equal to 50% of the undistributed RMD.
What are the IRA contribution limits vs. 401k contribution limits?
Some people choose to contribute to a defined contribution plan rather than a traditional individual retirement account (IRA), because the contribution limits for the former are higher. For 2016, for example, employee contributions to 401(k), 403(b), and 457 plans are limited to $18,000 per year, whereas IRA contributions are limited to $5,500.
What are the contribution limits for HSAs?
The IRS defines which plans qualify and sets limits on annual contributions. For 2016 annual contributions were limited to $3,350 for individuals and $6,750 for families. Further, to qualify for an HSA, an individual or family must not be eligible for Medicaid or Medicare. HSAs are also limited to paying for qualified medical expenses, which are defined by the IRS. Over the counter drugs cannot be paid for with funds from a HSA.
529 College Savings Plans
There are two types of 529 plans: college savings plans and prepaid tuition plans. A college savings plan is a tax-free savings plan that offers families professionally managed portfolios to help meet anticipated college costs. College savings plans are subject to risk, because their returns are based on the market performance of the underlying securities within the plan. College savings plans are administered by states, often with recordkeeping and administrative services contracted out to a mutual fund company or other financial services company. College savings plans are considered municipal securities, and are therefore subject to MSRB rules, but they are exempt from many registration requirements.
What does the investment policy statement typically include?
• Investment goals and objectives • The way the plan will meet these objectives • Selection process for the investments within the plan • The way that the goals and investments will be measured, monitored, and reviewed • An asset allocation and a description of when the assets will be rebalanced • Any limitations on what can be invested in
What are the differences between CESAs, 529s, UGMA/UTMAs, and Education Savings Bonds?
(See Education Savings Bond Program section in ch. 6)
401k
401(k) plans—a plan for corporate employees in which employees contribute a portion of their wages to individual accounts and where contributions may be matched by their employer.
403b
403(b) plans—(formerly called tax-sheltered annuities) similar to a 401(k) plan for employees of nonprofit entities. As noted above, churches are exempt from ERISA requirements.
Rollover
A rollover is when the individual wants to take the retirement plan account funds to a new investment entity. This usually occurs when an employee leaves one job and takes his pension or accumulated account in one lump sum when he leaves. In other words, the employee takes a check for the entire amount with the intention of depositing it into a new plan. This is also called an indirect transfer.
What is prohibited transactions in qualified plans and what are disqualified persons?
Prohibited transactions include: • A transfer of plan income or assets to a disqualified person • Lending money to a disqualified person • When a fiduciary uses plan assets or income for their own benefit • When a fiduciary is paid with plan assets or income for a service • Furnishing goods and services from the plan to a disqualified person • Taking goods or services from a disqualified person for the plan
What are the two types of employer sponsored retirement plans?
Qualified employer-sponsored retirement plans come in two types: defined benefit plans and defined contribution plans. Defined benefit plans promise a specific benefit upon retirement for eligible employees, no matter how much was paid in. For example, a defined benefit plan might pay an employee $1,000 per month beginning at retirement for the rest of the employee's life. Defined contribution plans do not promise a specific benefit, but rather pay out an amount dependent on how much was paid in. They are at least partially funded by the employer, but are managed by the participant.
Tax-Qualified Plans vs. Non-Qualified Plans
Tax-qualified plans are called such because they meet the requirements of the IRS to receive tax advantages. Tax-qualified plans allow participants to make contributions to a plan with pre-tax dollars. This means that participants can deduct contributions to tax qualified plans from their income when calculating their taxes. Such plans often include matching employer contributions, where employers can deduct such contributions from their corporate taxes. Non-qualified plans include contributions that participants make with after-tax dollars. With non-qualified plans, participants may not deduct their contributions to the plan when calculating their income taxes.
What are the contribution limits of IRAs?
Traditional IRA contributions have been limited to $5,500 per individual for both 2015 and 2016, but an additional $5,500 can be contributed to the non-working spouse's IRA, provided the couple files a joint return and the working spouse has enough earned income to cover both IRA contributions. The government allows persons over the age of 50 to contribute an extra $1,000 annually as a catch-up contribution.
What are the ERISA requirements for a retirement plan?
• The plan must be available to all employees who are at least 21 years of age and who work at least 1,000 hours a year (no employees that fit these requirements can be excluded from the plan). • Employees must be covered by a retirement plan within a reasonable time of their employment. • Pension sponsors must fully fund the participants' benefits, and the contributed funds must be held separate from other corporate assets. • Participants must be furnished a summary plan, in writing, that contains the plan's terms and the benefits offered. • Participants must receive a statement of the plan's benefits and the status of their account at least annually. • Participants may choose a beneficiary. • Employees must be fully vested—that is, their accrued benefits must be guaranteed them—within a reasonable period of time, usually five to seven years. • Employees must receive their entire retirement benefit within a reasonable amount of time of their employment, even if they no longer work for the employer. • A party-in-interest (for example managers, counsel, or employees of the plan; service providers to the plan; the employer whose employees are covered by the plan; or employee organizations whose members are covered by the plan) is prohibited from selling assets to the plan. (Registered representatives of member firms are exempted from this rule, so they may provide advice and receive commissions on transactions.) • Plan assets must be put into a trust for the sole benefit of the employees. If the company is forced to liquidate, creditors will not be able to access these assets.
Defined Benefit Plans
A defined benefit plan is a qualified plan where the employer promises to pay each eligible employee a specific periodic (usually monthly) benefit for life, starting at retirement. The most common example of the defined benefit plan is the pension plan. These plans are typically funded and managed by the company or organization that employs the participant. Therefore, all the investment decisions are made by the employer, and it is the employer's responsibility to make sure that enough money is set aside for its employees' retirement.
What is a disqualified person?
A disqualified person includes the investment adviser serving the plan, the management of the company offering the plan, and any company owning more than 50% of the company sponsoring the plan. Disqualified persons also include family members of the plan.
What is the key difference between Roth 401k and Roth IRA?
A Roth 401(k) is different from a Roth IRA in that the Roth 401(k) has no restrictions on income level, and participants must start taking distributions from the Roth 401(k) beginning the year the owner turns 70 1/2. A Roth 401(k) may be rolled over into another Roth 401(k) or a Roth IRA, but not a traditional 401(k).
Direct Transfer
A direct transfer occurs when a qualified plan participant requests that funds be transferred directly from one management company to another. The participant never holds the funds in his possession. There are no limits on how many times a participant can make a direct transfer.
Keogh Plans (HR-10 Plans)
Keogh plans are retirement plans for sole proprietorships and unincorporated businesses. Keogh plans cannot be used by S corporations, limited liability companies, and C corporations. A Keogh plan may be designed as either a defined benefit plan or defined contribution plan. The defined contribution plan provides an individual account for each participant in the plan. It may be of two kinds: profit-sharing plans and money purchase plans. With the profit-sharing plan, employers can contribute up to the lesser of 100% of the participant's earned income into the plan or $53,000. Deductions cannot exceed 25% of the compensation paid during the year to eligible employees. Employer contributions are discretionary, in the sense that their amount may vary from year to year. When the company is unprofitable, the employer is not required to make payments into the plan. With the money purchase plan, the employer decides on a percentage of earned income or the employee's compensation to pay each year and then is obligated to stay the course no matter what kind of year the business endures. The defined benefit plan is a pension plan that differs from most defined benefit plans, because it is self-funded. Self-funding means that benefits are not insured but are paid solely out of the plan's net assets. The employer's contributions are based on the benefits needed for all of the plan's participants. Annual contributions may not exceed 100% of the average compensation for a participant's three highest compensation years, or $215,000 (in 2016), whichever is less. Allowable deductions for a defined benefit plan are based on actuarial assumptions and computations.
What are the special rules in regards to Roth IRAs?
The following rules hold for Roth IRAs: • One cannot deduct contributions to a Roth IRA from income for tax purposes. • Contributions are limited to earned income. • Contributions are limited to $5,500 with a $1,000 catch-up for individuals over age 50 (additional $5,500 to a spousal Roth IRA for a non-working spouse). • Contributions can be withdrawn tax-free without penalty at any time. • Participants with income exceeding certain levels may not be eligible to contribute to a Roth IRA. In 2016 married couples filing a joint tax return were ineligible if they made more than $194,000 (up from $193,000 in 2015). (Traditional IRAs and most other qualified retirement plans do not have restrictions on income levels.) • There are no minimum age requirements to set up a Roth IRA. • There are no maximum age requirements to set up a Roth IRA.
Investment Policy Statement (IPS)
To help further limit an employer's liability as a fiduciary, employers can incorporate an investment policy statement (IPS) into their retirement plan. An IPS is a document that outlines a retirement plan's investment goals and strategies, and serves as a guide for what to invest in, as well as a means of assessing how well the fiduciary has met the policy's investment goals.
Deferred Compensation Plan
Another type of non-qualified plan is the deferred compensation plan. In a deferred compensation plan, employees sign a contract with the employer that they will defer some of their compensation until retirement. This kind of plan is usually offered as an additional benefit to upper management or to entice a key employee to stay at the company. These plans are desirable to highly paid individuals, because they can defer taxes on the income until they are in a lower tax bracket. Sometimes the contract will include conditions in which the employee will not receive his deferred compensation, for example, if he moves to a competitor. Deferred compensation plans do not fall under ERISA, so the funds set aside for these employees do not need to be segregated from the other funds of the company. The risk is that if the company goes bankrupt, these funds can be used to pay creditors. In fact, companies may not give plan participants a guarantee that they will be paid ahead of creditors if the company is forced to liquidate.
Under ERISA rules, which of the following would not be prohibited within the retirement plan? A. A loan to a participant of the plan who is not a disqualified person B. A transfer of plan income to the investment adviser managing the plan C. Lending money to the CEO at the company that is offering the plan D. Investing in gold coins
Answer: A Explanation: Under ERISA rules, the following are prohibited transactions: investments in collectibles (antiques, art, etc.), alcoholic beverages, such as vintage wine, and precious metals that do not meet certain requirements. Certain transactions between the plan and a disqualified person are also prohibited. A disqualified person includes the investment adviser serving the plan, the management of the company offering the plan, and any company owning more than 50% of the company sponsoring the plan. Prohibited transactions include a transfer of plan income or assets to a disqualified person, lending money to a disqualified person, a fiduciary using plan assets or income for its own benefit, when a fiduciary is paid with plan assets or income for a service, furnishing goods and services from the plan to a disqualified person, and taking goods or services from a disqualified person.
Which of the following wouldn't be a reason to have an investment policy statement for a retirement plan? A. It limits an employer's liability as a fiduciary. B. It serves as a guide for what to invest in, as well as a means of assessing how well the fiduciary has met the policy's investment goals. C. It is a requirement to be a qualified retirement plan. D. It serves as a guiding document outlining how many of the ERISA Section 404(c) requirements are met.
Answer: C Explanation: IPSs limit an employer's liability as a fiduciary. Companies that have operated within the parameters set by their IPSs are generally spared punitive action by regulators if losses due to investment performance occur within the plan. An IPS is a guiding document outlining how many of the ERISA Section 404(c) requirements are met. An IPS also serves as a guide for what to invest in, as well as a means of assessing how well the fiduciary has met the policy's investment goals. The IRS does not require that qualified plans have an investment policy statement. ERISA does not require it either, but they do recommend it.
What should an employer acting as a fiduciary strive to do with a plan?
As a fiduciary, a company and the employees overseeing the plan must strive to: • Provide reasonable investment options • Manage the plan's costs • Avoid unnecessary risk associated with the plan • Handle the administrative requests of plan participants in a timely fashion • Educate employees regarding their investment options and the investing process
What are the tax advantages of 529 plans?
At the federal level, the tax advantages of 529 plans include exemption from federal taxes on earnings if the funds are used for qualified educational expenses. State tax advantages can vary depending on the state in which the client is opening the account and whether the client is a resident of that state. The individual who opens the 529 plan, rather than the beneficiary, owns and controls the account. In fact, with very few exceptions, the beneficiary has no rights to the funds, even after reaching legal age. Contributions to a 529 plan are considered to be gifts under federal tax law. Therefore, any contributions over $14,000 if filing single ($70,000 over five years) or $28,000 if married filing jointly ($140,000 over five years) count against the one-time gift/estate tax exemption. Once the donor reaches the five-year limit, he is not able to make another contribution (gift) to that student for five years without using part of his lifetime gifting exclusion. Contributions are not deductible from the donor's federal income tax liability, but the principal grows tax-deferred, and distributions for the beneficiary's college costs are exempt from tax. In addition, many states provide state income tax deductions for all or part of the contributions of the donor. There are no income limits for making contributions to a 529 plan.
What are the restrictions around high-deductible health plans?
If money is withdrawn from the account for non-qualified expenses before the age of 65, there may be penalties on withdrawals. If money is withdrawn for non-qualified expenses after the account holder turns 65, however, there will be no penalty, but ordinary income tax rates will apply. There are some restrictions on who is eligible for an HSA. Only individuals or families covered by a high deductible health plan (HDHP) can take advantage of an HSA. For 2016, the IRS defines a high deductible as $1,300 for individuals and $2,600 for a family. Contributions can be made by an employer, the policyholder of the HDHP, or another individual. But all contributions become the property of the policyholder. Funds can be rolled over from year to year.
Why is an investment policy statement important?
Investment policy statements are one of the first things that the U.S. Department of Labor looks at when it performs an audit of any ERISA-covered plan. During the audit, the Department of Labor reviews how an employer's retirement plan was managed and administered to see if it deviated from its written investment policies. Companies that have operated within the parameters set by their investment policy statements are generally spared punitive action by regulators in the event of losses due to investment performance.
Non-Qualified Retirement Plans
Non-qualified retirement plans do not meet the qualifications necessary to receive favorable tax treatment. For corporations, this may mean they did not meet the ERISA requirements. Non-qualified plans are often used to give special retirement benefits to key employees. The contributions to non-qualified plans are usually made with after-tax dollars, and because taxes have already been paid on these contributions, any withdrawals of contributions are not taxed. When earnings are withdrawn, however, they are taxed at the participant's ordinary income level. Non-qualified plans do not allow employers to deduct contributions from their income for tax purposes. Employers often choose to establish non-qualified plans, because they do not have to make them available to every employee, so they offer more flexibility than qualified plans. Other advantages to non-qualified plans are that they are easy to set up, they require almost no filing, and the amount of the contributions is not limited.
Payroll Deduction Plan
One type of non-qualified plan is a payroll deduction plan. In this kind of plan, an employer deducts a certain amount of an employee's paycheck and puts it into life insurance, an annuity, a mutual fund, or an IRA. Because it is a non-qualified plan, the amount of the funds cannot be deducted from the employer's or employee's taxable income. In other words, payroll deductions are invested into the retirement vehicle with after-tax dollars. In almost all cases, the employee can choose whether to participate or not.
Roth 401k
Roth 401(k)s are retirement plans that have similarities to both Roth IRAs and 401(k) plans. As with a Roth IRA, participants make after-tax dollar contributions to the account. As long as they are over 59 1/2 years old and have had the account for five years or more, they can make all withdrawals tax-free. Income earned in the account will not be taxed, even at withdrawal. Roth 401(k)s resemble traditional 401(k)s in that the employer can make matching contributions, but the employer's contributions must be made to a regular 401(k) with pre-tax dollars. The result is that the employee will end up with two 401(k) accounts, a traditional and a Roth. The employee can contribute to either but cannot transfer money between them once the money is deposited.
Simplified Employee Pension Plans (SEP IRAs)
SEP plans are IRA-based retirement plans for any sized business but are usually favored by small businesses. Under this type of plan, the business owner can make pre-tax contributions into IRA accounts set up for eligible employees and also for herself if the owner is self-employed. The plan allows employers to skip contributions in years when business is bad, but if the owner makes a contribution for herself she must also make contributions for her employees. When contributions are made, they must be made for all participants who actually performed work during the year for which the contributions are made, including those over 70 1/2 years of age (the latter feature is unique to the SEP plan). Contributions for all participants generally must be uniform; for example, the same percentage of hourly wage. The business owner can make contributions of up to 25% of an employee's salary. Only the employer, and not the employee, makes contributions to the SEP IRA, but an employee is always 100% vested in her SEP IRA. Generally, the employer can take an income tax deduction for contributions made to each employee's SEP. SEP contributions are not included on the employee's W-2 statement for tax purposes. Rules for withdrawal of funds are generally the same as for any other IRA (see the IRA section).
What are the contribution and withdrawel requirements of SEP, SIMPLE, and Keogh IRAs
SEP plans, SIMPLE plans, and Keoghs all have characteristics in common with traditional IRAs. For example, contributions are generally made with pre-tax dollars, must be earned income, and must only be in cash. Taxes on contributions and earnings are deferred until withdrawal as long as withdrawals occur after the age of 59 1/2. Required minimum distributions must begin the year the participant turns age 70 1/2, although the participant may choose to delay the first payment until April 1 of the following year. After that, RMDs must be taken by December 31 each year. Funds can be distributed as a lump sum or in periodic payments. If the account owner fails to withdraw an RMD or the full amount of the RMD before the deadline, the amount not withdrawn is taxed at 50%.
How are Coverdall ESAs similar/dissimilar to 529 plans?
Similarities: The Coverdell ESA is similar to a 529 college savings plan in that contributions are made with cash in after-tax dollars and all withdrawals can be made tax-free as long as they are used for qualified educational expenses. Dissimilarities: First, annual contributions are limited to $2,000 for all Coverdell accounts for a particular beneficiary per year and $2,000 to each Coverdell account per contributor per year. Second, withdrawals can be used to finance any level of education, from the primary and secondary levels through college. Third, contributions can be made only until the beneficiary turns 18, unless it is a special needs beneficiary. Fourth, the account exists only until the beneficiary (unless it is a special needs beneficiary) turns 30 or if he dies before turning 30. At that time, any remaining money in the account must be distributed. Such funds are subject to income tax and an additional 10% tax penalty if not rolled into a CESA for another qualified family member.
Savings Incentive Match Plan for Employees (SIMPLE) IRA Plans
The SIMPLE IRA plan is a retirement plan for businesses having no more than 100 employees. With a SIMPLE IRA, the employee may make pre-tax contributions to the plan. The employer is required to either match these contributions up to 3% of the employee's compensation or to contribute 2%, whether the employee makes a contribution or not. All employees who earned more than $5,000 in the preceding year are eligible under this plan. Unlike the SEP plan, however, premature SIMPLE IRA distributions (withdrawals of account funds) will incur a 25% penalty in the first two years the account exists if made before age 59 1/2. While the SEP plan is discretionary, in that the employer can decide when to fund the plan, funding the SIMPLE IRA plan is mandatory no matter what kind of year the business had. Like the SEP plan, SIMPLE IRAs are 100% vested at all times because they are IRAs.
In what situations can the early withdrawel penalty be avoided?
The early withdrawal penalty can be avoided if the withdrawal is for any of the following reasons: • The payment of medical expenses (if they are more than 10% of the individual's gross income) • Death or permanent disability • The withdrawals occur in five substantially equal periodic payments (SEPPs) as stipulated by IRS Rule 72(t). • The distribution is made to an employee after separation from service, as long as the separation occurred during or after the calendar year in which the employee reached age 55.
