chapter11- retirement plans

Which of the individuals described below would NOT be permitted to open an IRA? A) A self-employed attorney who already has a Keogh plan established B) A corporate officer who is covered by a company sponsored 401(k) plan C) A divorced person whose sole income is alimony and child support from a former spouse D) An individual with current income consisting of dividends and capital gains only

D- an IRA must only be funds with earned income

deferred compensation plan would be most suitable for

These plans are more suitable for highly compensated employees that are just a few years from retirement allowing them to defer earnings and taxation until then.(such as executives , but not people affiliated with the company SOLELY as board members )

self-employed 401k

a person who has no employees besides themselves or their spouse. high contribution limits and more flexibility

529 plan characteristics

after tax contributions, non deductible no earnings limitations, not subject to income limitations (unlike coverdell plan) high contribution limits non-qualified withdrawals are subject to tax plus a 10% penalty (penalized if you take it out for a reason other than qualified education expense) amount you can put in sometimes vary from state to sate

profit sharing plans (a type of contribution plan)

annual contribution is not mandatory tax deferred growth taxable at payout

section 529 plans

college savings plans , this is used specifically for college

vesting

employees are entitled to their entire retirement benefit within a certain number of years of service even if they leave the company

on a roth IRA how do earnings accrue?

on a tax deferred basis

ERISA provisions include the following..

participation, funding, vesting ,communication, nondiscrimination, beneficiaries

401k plans are qualified meaning...

plan is approved by the IRS plan cannot discriminate tax accumulation differed all withdrawals taxed plan is a trust

KEOGH PLANS (HR-10)

qualified plans for self-employed persons and owner employees of unincorpated business or professional practices makes tax deductible cash contributions each year up to a max amount, taxed as ordinary income

One of your customers, age 52, wishes to open an IRA. His annual income is over $200,000 and consists entirely of income from rental real estate and income from a trust fund. What amount may your customer contribute this year to his IRA?

0- you need EARNED income, this income is not earned

A self-employed individual has 2 full-time employees and makes the maximum allowable contribution to his own Keogh (HR-10 plan). What percentage of each employee's earned income must he contribute to their plans as eligible employees?

25%

A distribution from a corporate pension plan to be rolled over into an IRA must be completed within how many days to maintain its tax-deferred status?

60

The amount paid into a defined contribution plan is set by the: A) ERISA-defined contribution requirements. B) employee's age. C) trust agreement. D) employer's profits.

C- trust agreement

If a 40-year-old customer earns $65,000 a year and his 38-year-old spouse earns $40,000 a year, how much may they contribute to IRAs?

No matter how much income individuals or couples receive, they may contribute to their IRAs if they have earned income. Each is entitled to contribute 100% of earned income up to the maximum allowed. However, if either or both of them are covered under a qualified plan, limits may exist on the deductibility of the contributions.

what is allowed within an IRA?

annuities, stocks, bonds, UTIs, mutual funds, gov securities, gold and silver coins

HSA accounts

are qualified employer plans that allow before-tax contributions to be added to a savings account for medical expenses

TSA plans (tax-sheltered annuities)

available to employees of public-educational institutions, tax-exempt organizations, religious organizations , zoos and museums

roth 401k plan

compared to 401k, this plan has after tax contributions no income limitations (compared to roth ira ) you pay taxes on the money you put in, but they grow tax-deffered employer can match but they will still put money inside a regular 401k 70 1/2 rule (start taking distributions at 70 1/2)

tax for ROTH IRA

contributions are always tax free if account held for five years and the owner is at least 59 1/2 years old. prior to age 59 1/2.... 1. contributions are always withdrawn tax free 2.

the benefit of all qualified plans?

distributions are tax deductible to the CORPORATION, a company must follow all rules to make sure they don't violate anything to keep the plan qualified.

payroll deduction plan

employees can authorize their employer to deduct a specified amount for retirement savings from paychecks . - similar to 401k

Withdrawing funds from IRA

entire amount coming out is taxed as ordinary income, if it was tax-deductible

ERISA

established to prevent abuse and misuse of pension funds.

after-tax contribution

is the contribution made to any designated retirement or investment account after taxes have been deducted from an individual's or company's taxable income.

what is not permitted within an IRA act?

life insurance contracts , municipal bonds (because they are tax exempt ), short sales of stock, margin account trading, or any other speculative option trading

SIMPLEs (savings incentive match plans for employees)

retirement plans for businesses with fewer than 100 employees that have no other retirement plan in place pretax contributiuons

defined benefit plan

the benefits are what are determined by the plan retirement benefits are targeted for a certain amount a more expensive account to maintain because actuaries come in to calculate the annual contribution the risk is born by the employer Older employees benefit most

Transfers of IRA

the funds go directly from one trustee to another, owner does not take possession of funds . you can do this as often as you want

when contributions are after tax it means

they are not tax deductible

employees are eligible for KEOGH plans if..

they have worked 1000 hours in the year are at least 21 have completed one or more years of continuous employment

a transfer can be done on an unlimited basis

true

No 70 1/2 rule for ROTH IRA

you can invest after 70 1/2,

who benefits from a defined contribution plan vs. defined benefit plan?

younger employees for contribution, older employees for define benefit

penalties for IRA

-6% penalty per year for excess contribution until it is withdrawn. -pre-59 1/2 payments. premature distributions are -given at 10% penalty. -taxable but exempt from 10% penalty if.... 1. death/ disability 2. education/ first time home purchase 3. medical expenses 4. health insurance premium for unemployed 5. rule 72-t most severe penalty= insufficient distributions once you have reached age 70 1/2. (subject to ordinary tax plus 50%)

educational funding programs

1. educational IRA / coverdell ESA, these are not specific to college, they can be used for high school

Which of the following statements are TRUE regarding tax-deferred, noncontributory, defined benefit plans? Contribution amounts are fixed. Contribution amounts vary. Benefit payments are fixed. Benefit payments vary.

A - In an employer-sponsored defined benefit plan, the contribution amounts vary according to the assumptions used. The benefit amount, however, will be fixed per person based on a formula combining age, years of service, salary, etc.

Under ERISA, all of the following retirement plans must set standards for vesting, eligibility, and funding EXCEPT: A) deferred compensation plans. B) corporate pension plans. C) Keogh plans. D) profit-sharing plans.

A- deferred compensation plans are not qualified and can be discriminatory

defined benefit plans are best for?

firms who favor older key employees

characteristics of educational IRA

funded with after tax contributions , these are intended for when a child is still a minor contributions can be made by ANYONE, but cannot exceed more than 2,000$ per child per year contributions can be made up until a childs 18th birthday contributors must fall under a certain income or they cant contribute distributions are tax free as long as it is for educational expenses

Which of the following individuals are eligible to participate in a tax-sheltered annuity? Maintenance engineer at a state university. Student in a public school system. Minister. Office clerk at a small corporation.

I AND III Employees of 501(c)(3) and 403(b) organizations (which include charities, religious groups, sports organizations, and school systems) qualify for tax-sheltered annuities (TSAs).

traditional IRA's

must be at least under 70 1/2 years old. (after this age no more contributions) must used EARNED income ( no social security, not to exceed INDEXED MAXIMUM. catch up contributions for people who are under 50, they are allowed to make an additional contribution can set up an IRA for a spouse who has little, or no income at all. funded with pre-tax dollars. money isn't taxed until you take it out at retirement

college savings plan

states can set maximum contribution limits but no federal limits subject to gift tax rules donor retains control of the money.

if you do an IRA rollover, you can't do another one for another 12 months.

true

IRA rollovers

move IRA funds from one account to another (one trustee to another) owner takes possession of funds you must roll over the entire amount for it to be tax deductible MUST be completed within 60 days of distribution, can only do one roll-over in one 12 month period

SEPs (simple employer pensions)

qualified retirement plans that offer self-employed persons and small businesses pension plans. self-employed individuals may contribute up to a maximum amount each year to a SEP for themselves or employees.

All of the following statements regarding a qualified pension plan are true EXCEPT A) it must comply with nondiscrimination rules B) growth in the account is tax-free C) it must cover all of its eligible employees D) it requires advance approval from the IRS

C- Growth in qualified pension plans, as well as other qualified plans, is tax deferred, not tax-free. All growth is taxable at the time of distribution. Reference: 11.6 in the License Exam Manual

Which of the following permits the highest annual contributions? A) A Coverdell Education Savings Account. B) A traditional nondeductible IRA. C) A SEP IRA. D) A traditional spousal IRA for which the contribution has been deducted.

C- SEP IRA tend to have higher annual contributions

Roth IRA

funded with after-tax dollars 100% of earned income not to exceed indexed maximum, offset by traditional IRA contribution contributions to ROTH IRA are non-deductible and there are income limitations if you reach a certain amount of income you are not able to make ROTH IRA contributions after you make after tax non deductible contributions earnings accrue on a tax deferred basis earnings are not taxed as they accrue or are distributed from an account as long as the money has been in an account for five taxable years and the owner bas reached age 59 1/2 no required min. distributions 10% penalty for distributions before age 59 1/2 is waived if its for first time house owners.

who takes on the risk in a defined contribution plan vs. a defined benefit plan?

in a contribution plan the employee takes on the risk, in a benefit plan the employer takes on the risk.

When must IRA rollovers be completed?

within 60 calendar days. if you change employers the amount in your pension plan may be distributed to you in a lump sum payment and you must deposit the distribution in an IRA rollover act

A 52-year-old dentist has a balance of $150,000 in his Keogh plan, composed of $100,000 of contributions and $50,000 of earnings. If the dentist withdrew $100,000 from the Keogh plan, which of the following statements are TRUE? The entire withdrawal is taxable. The entire withdrawal is not taxable. The entire withdrawal is subject to a 10% penalty tax. Only the portion of the withdrawal representing earnings ($50,000) is subject to a 10% penalty.

The entire withdrawal is taxable (pre-tax contributions) the entire withdrawal is subject to 10% penalty tax Contributions to qualified plans are made with pretax dollars and earnings grow on a tax-deferred basis, so the cost basis is zero. Therefore, any distributions will be taxed as ordinary income. In addition, there is a 10% penalty on withdrawals made prior to reaching age 59-½.

Which of the following would be the least appropriate investment in a traditional IRA for a 67-year-old client? A) Common stock. B) Treasury notes. C) Corporate bonds. D) Variable annuities.

Variable annunites- they tend to make the IRA more expensive In addition to sales and surrender charges, variable annuities may impose other charges such as mortality and expense risk charges, administrative fees, etc. In less than 4 years, your client will have to begin making withdrawals regardless of any surrender charges the annuity may impose.

contributions of IRA

contributions may or may not be tax-deductible. if you are eligible to make a contribution to an IRA, but it is deductible if you... (only deductible under a certain limit) 1) the IRA was covered by a retirement plan at work 2) or the income must meet a certain amount

Most severe IRA penalty

insufficient distributions once you reach age 70 1/2. you are subject to income tax and a 50% penalty

401k (qualified plan, or salary deduction plans)

most popular retirement plan employee chooses how much of their compensation they want withheld and put into their 401k plan. these are not included in income tax purposes earnings are tax deferred THESE ARE VERY TAX ADVANTAGED!! employers may match the contribution (vanguard) but if employer puts in more than that amount the employer doesn't do any matching when the distributions come out they are 100% taxable

Defined contribution plan (corporate sponsored retirement plan)

the retirement benefits are uncertain, what is defined by the plan is how much $ the employer contributes each year employee has control over the account in that he can chose which funds he utilizes investment risk for employee, no guarantee of any retirement benefits and no right to plan benefits if the business fails younger employees benefit most!!!!!!!!!!! not older employees board members are not eligible for these plans risk is on the employee \ taxable as ordinary income