Unit 11: Retirement Plans
Quiz: Can Life Insurance be used to fund an IRA?
No.
Quiz: Mitch is unemployed but does receive rental income of $2,000 a month. Does he meet eligibility requirements for setting up an IRA?
No.
403 plans are:
Retirement plans for non-profits, such as public school systems, churches and hospitals. EE & ER contribution limits are usually the same as those for 401K plans *Also known as a tax-sheltered account)
Roth IRAs follow rules similar to traditional IRAs except:
- Contributions are never deductible; and - Qualified distributions are tax-free if they meet these two requirements: 1. The Roth IRA has been set up for at least 5 years 2. Distribution is after age 591/2 or due to death, disability or being a first-time homebuyer; first time homebuyer is subject to a $10,000 limit.
(Premature Withdrawals) - The IRA 10% penalty is waived for the following reasons:
- Death or total & permanent disability of the IRA owner - Periodic payments made over the owners life expectancy - Certain medical expenses - Payment of health insurance premiums while unemployed - Certain higher education expenses - Down payment for a first time home purchase ($10,000 max) - Distributions made under a divorce decree to an ex-spouse or dependent child - Birth and Adoption expenses ($5,000 max) - Correcting an excess contribution
What are some common examples of withdrawals that may avoid a tax penalty?
- Down payment of first home - College education - Health insurance if unemployed
All employer-sponsored qualified plans have the following tax advantages:
- Employer contributions are tax-deductible to the business - Employee contributions are tax-deductible to the employee - Neither employer nor employee contributions are taxable as current income to employees - All (except for the Roth 401K feature) earnings grow tax-deferred.
IRA Funding products that may be used are:
- Flexible premium annuities - bank accounts - brokerage accounts - mutual funds
Taxation of IRA Withdrawals
- Fully taxed if all money in the IRA has not already been taxed - Non Deductible contributions are distributed tax free
Individual Retirement Accounts (IRAs)
- Must have earned income - Non-Working spouse can make contributions based upon earned income of spouse (spousal IRA)
Quiz: What requirements of all employer-sponsored qualified retirement plans states that the plans must benefit all regular EE's not just a select few?
- Participation requirement
IRA Deductibility
- Phase out of deductions base upon adjusted gross income - No deduction if income above max AGI IRA contributions can be deducted (partially or full) on a federal income tax return and the income limit ranges are adjusted annually. - The entire contribution is deductible for income below the range. - A portion of the contribution is deductible for incomes between the ranges - No portion of a contribution is deductible for incomes above range. - A fill annual limit contribution is allowed whether it will or will not be deducted from federal income taxes.
Roth IRAs
- Were introduced in 1997 - Contributions not tax deductible - Contributions limit same as traditional IRA - Withdrawals tax free: Account open for 5 years Not before age 59 1/2 - No minimum distribution requirements *Individuals can have a Roth IRA and a Traditional IRA, but the total annual contribution to both may not exceed the maximum limit for one IRA. Contributions to Roth IRAs are phased out for higher-income taxpayers.
IRA Premature Withdrawals
- Withdrawals taken before 59 1/2 may have a 10% penalty tax and income tax applied - There are ways penalty can be waived. *Earnings on an IRA contributions are tax deferred; income tax is not due until the earnings are withdrawn.
Individuals may deduct IRA contributions from taxable income if:
- the individual or spouse is not covered by an employer-sponsored retirement plan; or -the adjusted gross income (AGI) is under certain limit.
(Reporting and Disclosures of ERISA & Fiduciary Responsibility) Examples of the types of information that must be distributed include:
-A Summary plan description to each plan participate and the Department of Labor -A Summary of material modifications and details changes in any plan description to each plan participant and the DOL -An annual return or report (Form 5500 or one of its variations) submitted to the IRS -A summary annual report to each plan participant -Any terminal report to the IRS
IRA Required Minimum Distribution (RMDs)
-Applicable age: Age 73 starting in 2023 Age 75 starting in 2033 -First minimum withdrawal can be delayed until April 1st of the year following the year the owner turns the applicable age. - 25% penalty on taxes owed if minimum distributions not taken Retirees must start receiving a required minimum distribution from qualified retirement plans by April 1st of the year following the year they reach the applicable age. If a person fails to take the required minimum distribution, they may be subject to a 25% excise tax penalty.
Savings Incentive Match Plan for Employees (SIMPLE)
-ER with 100 employees or less -EE's can contribute -100% immediate vesting for employer contributions -All EE's earning $5,000 or more per year must be allowed to participate -25% early withdrawal penalty for first 2 years of participation
What are the 3 rules for rollovers?
1. Money must be deposited within 60 days or it becomes taxable 2. If the rollover is coming from an employer-sponsored plan it is subjected to withholding tax rate of 20% 3. An IRA may be rolled over only once in a 12 month period. The rules do not apply to transfers from one plan to another
Taxation of Distributions
All (except for the Roth 401K feature) distributions from employer-sponsored qualified plans are taxable, because they come from deductible contributions and tax-deferred earnings. Tax rules for distributions from employer-sponsored qualified plans are similar to tradition IRAs: -Withdrawals taken before age 59 1/2 are considered premature, unless there is an exception, a 10% penalty tax applies in addition to any ordinary income tax. - Required minimum distributions must begin the year the individual turns the applicable age for required minimum distributions, the first payment may be delayed until April 1st of the following year.
401K Plans
Allow taxpayers a break on taxes on their deferred income. Will not be taxed on that money until its withdrawn. Employers can make matching contributions up to a certain dollar amount or percentage of the employees contributions. It has an annual contribution limit that is higher than the limit on an annual IRA contributions Key Points: -Employee can make contributions (salary elective deferral) -Employers can match contributions up to a certain percentage.
IRA Limits
Annual IRA Contributions are capped at lesser of: - 100% of earned income; or - a flat dollar amount: tax law places limits on IRAs contributions, the amount is adjusted annually for cost-of-living adjustments. - Subject to annual maximums - There is a cap on how much you can invest The flat dollar limit also applies to spousal IRAs Individuals age 50 or over have a catch-up provision available to increase the flat dollar amount.
Keogh Plans (HR-10)
Are qualified retirement plans set up by self-employed persons and non-incorporated businesses such as sole proprietorships (individuals) & partnerships. Koegh plans may be defined benefit or defined contribution. Key Points: -They are designed for: Self employed individuals Sole proprietorships
Fiduciary Responsibility (ERISA)
Duty of management to safeguard a company's assets and handle its funds in a trustworthy manner. Key Points: -Protects EE and beneficiaries -Applies to qualified pensions and also group insurance -ERISA requires that certain info be made available to plan participates, beneficiaries and the Department of labor.
Non-Qualified Plans
ER's who want to provide a benefit for select EE's can use a non-qualified plan, a bonus plan or a deferred compensation plan. These plans do not get the favorable tax treatment given to qualified plans. They do not need to meet participation, non-discriminations, and other general requirements of qualified plans. ER's can design these plans in any way they wish. KEY POINTS: - Non Regulated by ERISA -Can discriminate in favor of higher paid EE's -Contributions usually not tax deductible
ERISA (Employee Retirement Income Security Act)
ERISA was made to protect the interests of participants in EE benefit plans as well as the interests of the participants beneficiaries. Much of the law deals with qualified pension plans, but some sections also apply to groups insurance plans.
Simplified Employee Pension (SEP)
Employees must be immediately 100% vested in ER contributions made under SEP. Key Points: -ER makes contribution on EE behalf's -Higher contribution limits than traditional IRA -Employees must be 100% vested. -Annual ER contributions may not exceed 25% of the EE;s compensation up to a specified max contribution amount.
Profit Sharing Plans
Employers are NOT required to make a contribution every year. Depends on the profit of the company. The amount & timing of contributions is at the employer's discretion. Contributions are dependent on the company making a profit. Key Points: -Contributions made by employer -Based on company profits -Contributions not made every year -Maximum contribution is 25% of total employee payroll
Distributions from an IRA upon Death
If the owner of an IRA dies, the requirements for distributions vary depending on the beneficiary. -Spouses may choose to treat the IRA as their own or they may choose a lump-sum distribution. - Non-spouse beneficiaries may take a lump-sum distribution or take distributions over the 10 years following the owners death. *The entire value of the IRA is includable in the deceased owners estate. - Transfer to a spouse is not taxable - The entire value of the IRA is includable in the deceased owners estate for estate tax purposes. - Distributions vary depending on beneficiary
IRA Funding (Funding Vehicles)
Investments cant be put in: - Life insurance - Artwork, antiques, stamps, or coin collections - Gold or silver bullion (US minted Coins are okay)
IRA Rollovers and Transfers
Rollover - Money is withdrawn and sent to the owner. - Owner has 60 days after receipt to put money in an IRA - If money is coming from an employer sponsored plan: 20% withheld and sent to IRS -Limited to one rollover every 12 months Transfer - Money sent directly from one plan to another. - No limit on the number of transfers - No money withheld and sent to the IRS
What are the two ways to move IRA accounts from one company to another?
Rollovers & Transfers
Employer Sponsored Retirement Plans - General Requirments
Tax advantages to employer and/or employer depending on how the plan is funded. - Regulated by ERISA (Employee Retirement Income Security Act of 1974) - Employer contributions tax deductible - Employee contributions tax deductible - Interest earnings grow tax deferred - General requirements - Participation: plans must benefit all regular employees, not just a few selected ones. - Non-discrimination: plans may not provide benefits to executives and other highly paid individuals that are out of proportion to other employees - Vesting: - Determines when an employee owns the money in a retirement plan - Employees are always 100% vested in their own contributions - Employer contributions - Employees must become vested in at least 6 years -Reporting and disclosure: each participate must receive in writing, a summary plan description, notification of any significant changes, and an annual report. -Fiduciary duty: anyone with control over the plan or its assets are fiduciaries. They must manage the plan solely in the best interest of its participants.
Quiz: Profit-Sharing plans does not require:
The ER to make a funding contribution every year.
What are some restrictions on the type of products in which IRA funds may be invested?
The following are not allowed: - Life insurance - Collectibles: such as artwork, antiques, stamps, coin collectors - Hard assets: precious gems and precious metals in bullion form, but US minted gold and silver coins are allowed.
Quiz: Premature withdrawal at age 55 in order to pay off a credit card would be subject to a?
a 10% penalty
Pension Plans
are funded by employer every year of employment. -Define benefits: Retirement benefit specific in plan - Defined Contributions: Retirement benefit NOT specified Contribution is specified