Chapter 9: Retirement Plans

a retirement or employee compensation plan established and maintained by an employer that meets specific guidelines spelled out by the IRS and consequently receives favorable tax treatment.

a federal law that sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans.

tax-qualified retirement plan in which annual contributions are determined by a formula set forth in the plan. Benefits paid to a participant vary with the amount of contributions made on the participants behalf and the length of service under the plan.
There are three types of defined contribution plans: profit sharing plans, stock bonus plans, and money purchase plans

are any plans whereby a portion of a company’s profits is set aside for distributions to employees who qualify under the plan

pension plans under which benefits are determined by a specific benefit formula

a retirement savings plan sponsored by an employer. It lets workers save and invest a piece of their paycheck before taxes are taken out. Taxes aren’t paid until the money is withdrawn from the account.

a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers.

are designed to fund retirement of self-employed individuals; named derived from the author for the Keogh Act (HR-10), under which contributions to such plans are given favorable tax treatment.

a type of qualified retirement plan under which the employer contributes to an individual retirement account set up and maintained by the employee.

a qualified employer retirement plan that allows small employers to set up tax-favored retirement savings plans for their employees.

a personal qualified retirement account through which eligible individuals accumulate tax-deferred income up to a certain amount each year, depending on the person’s tax bracket.

provide generous tax breaks But it’s a matter of timing when you get to claim them. Traditional IRA contributions are tax deductible on both state and federal tax returns for the year you make the contributions, while withdrawals in retirement are taxed at ordinary income tax rates. Anyone under the age of 70 & 1/2, and the law specifies a minimum amount that must be withdrawn every year. No cash withdrawals prior to the age of 59 & 1/2 are permitted without having to pay a 10% excise tax, with the following exceptions:

• If the owner dies or becomes disabled

• If distribution is in equal payments over the owner’s lifetime

• if higher education expenses for a dependent are necessary

• to purchase a first home with up to $10,000 down payment

• If out-of-pocket medical expenses are in excess of 7.5% of adjusted gross

• to pay health insurance premiums while unemployed

• to correct or reduce an excess contribution

an individual retirement account allowing a person to set aside after-tax income up to a specified amount each year. Both earnings on the account and withdrawals after age 59 & 1/2 are tax-free. The funds are taxed as income before the contribution is made. In other words, Roth contributions are made with after-tax dollars. Therefore, at the time of payout, the funds are tax-free. Unlike the traditional IRA, the Roth imposes no age limits. Roth withdrawals are either qualified or nonqualified. Also, unlike traditional IRAs, Roth IRA distributions are not mandatory and can therefore be inherited and passed down through generations

provide the tax-free distribution of earnings. To be qualified withdrawal, the funds must have been held in the account for a minimum of five years; and if the withdrawal occurs for one of the following reasons, no portion of the withdrawal is subject to tax.

• The owner has reached age 59 & 1/2

• The owner dies or becomes disabled

• The distribution is used to purchase a first home

if a withdrawal is taken without meeting the above criteria and the amount of the withdrawal exceeds the total amount contributed, it is a nonqualified withdrawal. The earnings from the contributions are taxable.

are an individual requirement account established with funds transferred from another IRA or qualified retirement plan that the owner had terminated.

All qualified employer plans must comply with minimum participation standards designed to determine employee eligibility. In general, employees who have reached age 21 and have completed one year of service must be allowed to enroll in a qualified plan. Or if the plan provides for 100% vesting upon participation, they may be required to complete two years of service before enrolling.
Church, governmental, and collectively bargained plans are specifically exempt from ERISA regulations

alienation of benefits involves the assignment of a pension or retirement plan participant’s benefits to another person. It is permitted only under exceptional circumstances per IRS rules, such as certain participant loans and certain domestic relations orders

• The funds must have been held in the account for a minimum of 5 years

• The withdrawal must occur because the owner has reached age 59 & 1/2, the owner dies, the owner becomes disabled, or the distribution is used to purchase a first home.

unlike traditional IRAs, Roth IRAs do not required mandatory distributions. There is no minimum distribution requirement for the account owner. The funds can remain in the account as long as the owner desires. In fact, the account can be left intact and passed on to heirs or beneficiaries

persons eligible to set up IRAs for themselves may create a separate spousal IRA for nonworking spouse and contribute up to the annual maximum to the spousal account, even if the working spouse has an employer-sponsored IRA.

a holding tank for funds that originally came from a qualified plan and are on their way to another qualified plan. No withholding tax is necessary unless any of the funds are distributed directly to the individual

provides the most sweeping reform of America’s pension laws in over 30 years. It improves the pension system and increases opportunities to fund retirement plans. The act encourages workers to increase their contributions to employer-sponsored retirement plans and helps them manage their investments.

a vehicle for providing a higher education expenses and is named after the tax code that governs it. There are two types:

• Prepaid tuition plans: allows contributors to prepay college tuition and other fees for designated beneficiary

• College savings plan: allows contributors to invest after-tax dollars in professionally managed accounts