3.e Flashcards
(10 cards)
What is a deferred compensation plan and who is it for?
It’s a nonqualified plan where an employee (usually a key executive) agrees to defer part of their salary until retirement.
- Risk: The employee is a general creditor of the company. If the business fails, they could lose their money.
- Discrimination: The employer can discriminate and offer it only to specific employees.
- Taxation: Taxable as ordinary income to the employee when it’s finally paid out.
Who are Section 457 plans for?
They are nonqualified, deferred compensation plans for employees of state and local governments.
Earnings grow tax-deferred, and all withdrawals are taxed as ordinary income.
What is the main difference between a Defined Benefit plan and a Defined Contribution plan?
- Defined Benefit: Promises a specific payout at retirement (like a pension). The employer is responsible for funding it to meet the promise. Favors older employees.
- Defined Contribution: Specifies the amount contributed today (e.g., 5% of your salary). The final payout is unknown. Favors younger employees.
What are the key features of a 401(k) plan?
It’s the most popular type of defined contribution plan.
* Contributions: Employees contribute a percentage of their salary pre-tax.
* Employer Match: Employers may match employee contributions up to a certain percentage.
* Growth: Accumulates tax-deferred.
* Withdrawals: All withdrawals are taxed as ordinary income.
How does a Roth 401(k) differ from a traditional 401(k)?
- Contributions: Made with after-tax dollars (not deductible).
- Withdrawals: Withdrawals are tax-free if the owner is at least 59½.
- Employer Match: Any employer match must go into a separate, traditional 401(k) account.
- RMDs: Unlike a Roth IRA, a Roth 401(k) does have RMDs starting at age 73 (unless still working).
What are Profit-Sharing and Money-Purchase plans?
Both are types of defined contribution plans.
* Profit-Sharing: The employer is not required to make a contribution every year. They can skip contributions in years with low or no profits.
* Money-Purchase: The employer is required to contribute a fixed percentage of each employee’s salary every year, regardless of company profits.
What is a SEP-IRA and who is it for?
A qualified plan for small businesses that is easy to administer.
* The employer makes contributions directly into an employee’s traditional IRA (the “SEP-IRA”).
* Only the employer can contribute (up to 25% of the employee’s salary).
* Allows for much higher contribution limits than a regular IRA.
When must a person start taking RMDs from a qualified corporate plan (like a 401(k))?
The RMD must begin by April 1 of the later of:
1. The year after they turn 73.
2. The year after they retire.
This means if you are over 73 but still working for the company that sponsors the plan, you do NOT have to take an RMD from that plan.
What is an ESPP?
A plan that allows employees to buy company stock through payroll deductions.
* Contributions: Made with after-tax dollars.
* Purchase Price: Employees get to buy the stock at a discount from the market price. The discount is typically applied to the lower of the stock’s price at the beginning or end of the purchase period.
What are employee stock options?
They give an employee the right to buy company stock at a fixed price (the “strike price”) for a set period.
* Goal: The employee hopes the stock’s market price will rise above the strike price, allowing them to buy low and sell high.
* Nondiscrimination: These plans can be discriminatory and are often offered only to management or key employees.
