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7 Cards in this Set
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Individual Retirement Accounts or Annuities (IRAs) |
Are established by an individual who has earned income to save for retirement. |
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Traditional IRAs |
Allow for an individual to contribute a limited amount of money per year, and the interest earned is tax-deferred until withdrawal. Contribution limits are indexed annually, currently at $5,500 per year, with $6,500 for individuals ages 50 or older. Some individuals may deduct contributions from their taxes based on their adjusted gross income (AGI), but all withdrawals are taxable income. If an individual or spouse does not have an employer retirement plan, the entire contribution is tax-deductible, regardless of AGI. Withdrawals made prior to age 59.5 are assessed an additional 10% penalty tax. Withdrawals are mandatory at age 70.5, and failure to take the required withdrawal results in a 50% tax on those funds. Funds may be withdrawn prior to the employee reaching age 59.5 without the 10% penalty tax due to death or disability; and before age 59.5 for the following ( for each of the following, the 10% penalty does not apply, but the interest is taxable): first-time homebuyers up to $10,000; education (no dollar maximum); or catastrophic medical expenses. |
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Roth IRAs |
Are designed so that withdrawals are tax-free. Contributions to Roth IRAs are subject to the same limits as traditional IRAs, but are not tax-deductible. Interest on contributions is not taxable as long as the withdrawal is a qualified distribution. Qualified distributions must occur after five years in the event of death or disability of the individual, up to $10,000 for first-time home buyers, or at the age of 59.5. Contributions are limited to individuals with incomes less than $114,00, or $181,000- $188,000 for joint filers. Individuals with higher incomes may not contribute to a Roth IRA. |
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Non-qualified Retirement Plans |
Are retirement plans without the tax benefits of qualified plans. They do not need IRS approval, and employers can establish plans that favor key employees.
Common plans are spit-dollar, deferred compensation, and executive bonus plans. Section 457 plans are non-qualified deferred compensation plans for government and non-profit employees.
The maximum amount of compensation that may be deferred is the lesser of 25% of gross earning or $17,500. Interest earned on non-qualified plans is tax-deferred until withdrawal. |
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Taxation of Benefits |
Contributions made with taxed dollars are not taxed upon withdrawal. However, tax-deferred interest is taxable income upon withdrawal. |
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Rollovers |
Are a transfer of funds from one IRA or qualified plan to another. Rollovers are taxable at 20%, unless the funds are deposited into a new IRA or qualified plan within 60 days of distribution. |
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Section 529 Plan (College Savings Program) |
The section 529 plan is a tax-advantaged savings plan to fund higher education costs. Contributions are not federally tax-deductible, but some states may allow the contributor to deduct all or part of the state income tax. Distributions used for college costs are tax-free. |
