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30 Cards in this Set
- Front
- Back
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What is the Employee Retirement Income Security Act (ERISA)?
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A body of federal law that governs certain work-sponsored financial plans
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What is the investment policy statement for retirement plans?
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A document that governs how the retirement plan operates. It specifies the investment strategy, whether it is governed by ERISA, risk tolerance
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Penalties for violating ERISA law
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Fiduciaries may be required to repay plan for any profits received and may receive a 15% tax penalty
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What are the three requirements to be a qualified ERISA plan?
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Eligibility: Plan must cover all employees 21+ who have worked for employer for >1 year Vesting: All participants must be vested after 5 years or 20% vested after 3 with full vesting after 7 Investment of Contribution and Determination of Benefits: Investment of assets governed by strict fiduciary guidelines |
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Benefits of Qualified Plans |
Pre-tax contributions: employer contributions do not have income tax until they are withdrawn Tax-deferred growth: Investment earnings are tax deferred; no income tax paid on earnings until funds withdrawn |
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Tax Rules for Pre-Tax versus Post-Tax
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Pre-tax contributions reduces reportable income, cost basis is only included for post-tax, distributions are taxable for pre-tax and tax-free for post-tax
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Differences between Defined Benefit and Defined Contribution Plans
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Defined Benefit plan is a % of employee's salary, determined by EE's age and years of service. Employer is obligated to provide benefits even if plan doesn't perform well. Defined Contribution plan the benefits depend on how much has been contributed to plan. No guaranteed benefit, unlike benefit plan
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Profit-Sharing Plans
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Funded by employer from company profits; if company isn't doing well contribution can be skipped. Generally participants receive a certain percentage of salary. Max contribution is $53,000 or 25% of EE's salary - whichever is less
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401(k) Plans
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Contribution limits are 18,000/yr although employees over 50 may contribute an additional $6,000/yr
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403(b) Plans |
Accommodate salary deferrals and contributions from employers. Offered for public educational orgs and other tax-exempt companies. Same limit as 401(k) of 18,000 or 24,000/yr, but funds can only be invested in annuity contracts, custodial accounts that hold mutual fund shares, retirement income accounts
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HR-10 (Keogh) Plans
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For self-employed individuals, or for those who work for a corp and also for themselves. If individual sets up plan they must contribute to EE what they contribute to themselves. Max contribution for himself is 53,000 or 100% of eligible comp, whichever less. For employer contributions, max is 20% of gross income |
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Simplified Employee Pension (SEP)
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For self-employed persons or small companies with less than 25 EE's. Contributions are discretionary, max is 25% of EE salary or $53,000
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Savings Incentive Match Plan for Employees (SIMPLE)
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Allows employers/employees to contribute to traditional IRAs established for EE's. Great to start retirement plan for smaller companies. When using SIMPLE IRA no other plan can be used, employer matches EE contribution up to 3% or non-elective contribution of 2%, all contributions are 100% vested. EE's can contribute $12,500/yr with an add'l $2500 if age 50 or older
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Required Minimum Distributions (RMDs)
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Minimum amounts a retirement plan account owner must withdraw annually beginning with the year they reach 70.5 years of age, or if later, year in which they retire. But if retirement account is IRA or account owner is % owner of business, RMDs must begin at 70.5
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Why can non-qualified plans be helpful for employers?
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They re designed to meet specialized retirement needs of executives and other top-end employees. Employer cannot deduct contributions but income will accumulate tax-deferred
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457 Plans
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A tax-advantaged defined contribution plan that can be established for government, school businesses. Contributions are 18,000/24,000. No withdrawal penalty if money taken out prior to 59.5.
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Non-Governmental 457 Plans
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Must be limited to higher compensation employees. Money may not be rolled over into another type of plan Non-vested money remains property of employer, not employee |
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Payroll Deduction Plans
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Allow employee to purchase life insurance, mutual funds, variable annuities by having after-tax deductions taken from paychecks
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Deferred Compensation Plans
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Employer agress to pay certain amount of comp at a later date. Advantage is if EE thinks they will be in a lower tax bracket when they receive money
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Individual Retirement Accounts (IRA) |
Max contribution is 5500/yr or 100% of earned income. 6% penalty if plan overfunded. Individuals >50 can contribute 6500/yr. Married couples can contibute max of 11000/yr into two separate IRAs
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When can an individual deduct IRA income?
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When a single person is not covered by an employee sponsored retirement plan, 5000 can be taken from taxable income
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Transferring Money in IRAs
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An investor can transfer funds from one IRA to another or into 401(k) - only done once every rolling 12 months. A withholding tax of 20% may apply when person transfer funds after having received a check made payable to their name. Transfer needs to be trustee-to-trustee
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Early Withdrawals from IRAs
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An investor who withdraws before 59.5 will pay a 10% tax peanlty on the amount withdrawn unless account owner is disabled, dies, money is for medical expenses, a first-time home purchase, education. Money must be withdrawn by age 70.5 or a tax penalty will be incurred
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Roth IRAs verus Normal IRA
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Similar, but Roth IRA's are not tax-deductible meaning they can withdraw funds at any time. Withdraws are tax-free provided account has been in existence for 5 years
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Why should someone convert a traditional IRA into a Roth IRA?
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If the investor thinks they'll be in a higher tax bracket by then Will investor be able to pay taxes without dipping into IRA? |
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Inheriting an IRA
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The IRA can be cashed in which avoids 10% penalty but income must be paid on entire account. If spouse is receiving IRA, they can just roll it over into theirs with no issue. If spouse does not treat it as own, withdrawals must be delayed until decent would've been 70.5 If beneficiary receives, withdrawals must begin immediately based on own'ers life expectancy or beneficiaries life expectancy, whatever is longer If withdrawals had already been done, they must continue based on longer life expectancy between decendent and beneficiary |
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Coverdell Education Savings Account (ESA) |
Anyone can make an after-tax contribution of $2000/yr to an ESA for someone under 18. Investment is self-directed and can be used for any level of schooling. If money isn't used by beneficiary's 30th birthday, must be distributed and receives 10% penalty
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529 College Savings Plan
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Tax-free gift of up to 14,000/yr, but plans may be front-loaded with gift up to 70k first year. Individuals can contribute to this amount for as many beneficiaries as they want. Donor cannot choose securities like in an ESA, but takes option stiuplated in the plan. Rollovers of a plan to another state's plan can happen once every 12 months |
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Health Savings Account (HSA) |
Tax-advantaged account used to pay for qualfied medical expenses. Eligible persons are involved in only high deductible health plans. Any funds withdrawn and not used for medical expenses are taxable and subject to 20% IRS tax penalty. If person is 65, they can withdraw funds with no penalty
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Things not to do with Retirement Accounts
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Do not invest in risky things, or things that can depreciate quickly (antiques). Do not place annuities in retirement plans and do not place muni bonds in retirement plans (tax advantages are lost)
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