Bryant - Course 5. Retirement Planning & Employee Benefits. 5. Other Tax-Advantaged Retirement Plans Flashcards

Question

Which of the following are advantages of traditional IRAs? (Select all that apply) * Eligible individuals can contribute up to the maximum annual contribution amount to a traditional IRA * This amount may be deducted from their current taxable income * Investment income earned on the assets held in a traditional IRA is not taxed until it is withdrawn from the account * Traditional IRAs do not have the early withdrawal penalty

Answer 1

Eligible individuals can contribute up to the maximum annual contribution amount to a traditional IRA This amount may be deducted from their current taxable income Investment income earned on the assets held in a traditional IRA is not taxed until it is withdrawn from the account * Eligible individuals can contribute up to the maximum annual contribution amount to a traditional IRA, and the amount may be deducted from their current taxable income. Income earned from the assets in a traditional IRA is not taxed until it is withdrawn (subject to the 10% early withdrawal penalty).

Answer 2

$7,000 * He can contribute $7,000, the $6,000 regular contribution and an additional $1,000 as a “catch-up” contribution as he age 50 or older. He may not be able to deduct his contribution but he can make it.

Answer 3

They may make a contribution to an IRA, but it will not be deductible * For married filing jointly taxpayer who are both participants in an employer-sponsored retirement plan, the deduction for traditional IRA contributions is fully phased out at MAGI of $125,000 (2021). However, they can make nondeductible contributions to the traditional IRA within limits.

Answer 4

April 1st following the calendar year in which the participant turns 72 * Distributions must begin by April 1 of the year after the year in which age 72 is attained. * If the first RMD is deferred until April 1 of the year following the year in which age 72 is attained, the participant will be required to make two RMDs that year; **one distribution by April 1 and the second by December 31**.

Answer 5

False * A person needs to have earned income to be able to contribute to an IRA.

Answer 6

To ensure that you have a solid understanding of the Roth IRA, the following topics will be covered in this lesson: * When Is It Used? * Advantages * Disadvantages * Tax Implications Upon completion of this lesson, you should be able to: * Explain when a Roth IRA is used, * Point out advantages and disadvantages of a Roth IRA, * Point out the differences between a traditional IRA and Roth IRA, * Describe the tax implications of a Roth IRA, * Define the distribution rules of a Roth IRA, and * Describe the rollover rules guiding Roth IRA plans.

Answer 7

Roth IRAs are applicable in certain situations and are used when: * It is **desirable to defer taxes on investment income**, * **Long-term accumulation**, especially for retirement purposes, is an important objective, and * A **supplement or alternative to a qualified pension or profit-sharing plan is needed**. The Roth IRA is used as an alternative to a traditional IRA when the particular tax benefits available under the Roth IRA are better suited to the individual's planning needs than the tax benefits from a traditional IRA. * **The Roth IRA may provide slightly more money at retirement depending on future tax brackets**. * However, individual circumstances may dictate otherwise. The figure depicted below shows a comparison of various features of Roth and traditional IRAs. Comparison of Traditional and Roth IRA:

Answer 8

* Can a Roth IRA roll over to a traditional IRA? **NO** * Are withdrawals tax-free in a traditional IRA? **NO** * When do the required minimum distributions start in a Roth IRA? **NO RMD** * Does a Roth IRA have a tax-free buildup during the accumulation period? **YES**

Answer 9

Eligible individuals **may contribute up to $6,500 in 2023 to a Roth IRA.** Participants **aged 50+ may contribute an additional $1,000.** **Contributions, called basis, can be redeemed from the Roth-IRA at any time without tax liability or penalty**. **All growth and income (gains) generated inside a Roth-IRA are tax-sheltered. Earnings from the account can be distributed tax-free if two requirements are satisfied: 1)The account has existed for at least five years 2) One of the following circumstances is associated with the distribution**: * upon the **death** of the owner * the owner is **disabled** * the distribution is for a first-time **home** purchase ($ 10,000-lifetime limit), or * the owner is age **59 1/2 or older** If the two requirements are both satisfied **the initial investment, as well as all investment income, capital gains, or other gains, would be entirely tax-free at the time of withdrawal**. There are several differences between traditional IRAs and Roth IRAs. Unlike traditional IRAs, **Roth IRA contribution eligibility is not restricted by active participation in an employer's retirement plan**. There is **no age limit for Roth IRA contributions**. * **Roth IRAs are not subject to minimum distribution rules until the death of the Roth IRA owner**. * For **traditional IRAs, required minimum distribution (RMD) rules apply upon attainment of age 73**. * Moreover, **minimum distributions from traditional IRAs are generally taxable**.

Answer 10

Upon death or disability First-time home-buying expense **Withdrawals are tax-free in their entirely in a Roth IRA: After a five-year wait, and either**: * Upon death or disability * First time home-buying expense * After the age of 59 ½

Answer 11

The Roth IRA contribution is limited each year for each individual. * **The limit is reduced for single annual Modified Adjusted Gross Income (MAGI) above $138,000 (2023) and eliminated entirely for a single filer with MAGI of $153,000 (2023) or more**. * The corresponding **limits for joint-return filers are $218,000 and $228,000 (2023).** **Premature Roth IRA withdrawals in excess of contributions are taxed in full and are also subject to a 10% penalty on early withdrawal similar to that applicable to traditional IRAs**. **Practitioner Advice:** * Unlike a traditional IRA, distribution from a Roth IRA are first considered return of principal and thus nontaxable, even before age 59½.

Answer 12

The tax implications of Roth IRA plans are explained by taking into consideration the following: * Contribution rules that set the annual dollar limit on contributions and the phaseout that is applicable for taxpayers with higher adjusted gross incomes. These rules also set the time limits for establishing a Roth IRA account, the nonrefundable credit that is available to certain lower-income taxpayers and the employer's alternative of sponsoring Roth IRAs for employees. * Distribution rules that specify if Roth IRA distributions are tax-free or taxable. These rules also define the minimum distribution requirements, rollovers and conversions from Roth IRA plans.

Answer 13

The maximum Roth IRA contribution for an individual is the **lesser of $6,500 or 100% of the individual's earned income, less contributions to traditional IRAs** (not including rollovers to such IRAs). For example, in 2023, if an individual under age 50 contributes $3,500 to a traditional IRA, then no more than an additional $3,000 can be contributed to a Roth IRA. Earned income means income from employment or self-employment. Investment income is not counted. Earned income is computed the same way for both traditional and Roth IRAs. For example, taxable alimony payments are included for both types of IRAs.

Answer 14

$4,500 * The maximum Roth-IRA contribution for an individual is the lesser of the dollar limit for 2023 ($6,500) or 100% of the individual's earned income. * Since Kate has contributed $2,000 to a traditional deductible IRA, she can only contribute an additional $4,500($6,500-$2,000=$4,500) to a Roth IRA for 2023.

Answer 15

For individuals who have attained **age 50 before the close of the tax year, an additional dollar amount is allowable. This is known as a "catch-up contribution"**. In 2023, the age 50 catch up election is **$1,000**. For individuals age 50 or older, the largest contribution to a traditional and/or Roth-IRA is $7,500 a year including any catch-up contribution. **Exam Tip:** * If the MAGI for a given client allows for a contribution to a Roth IRA and an above-the-line deduction for a Traditional IRA, the total combined annual contribution cannot exceed the limits of $6,500 (2023), and an over-50 catch-up of $1,000, or the total taxable compensation (if less than the contribution limits).

Answer 16

The contribution limit described in the previous screen is phased out for taxpayers with higher adjusted gross incomes. **The phase-out MAGI limits for 2023** are: * **Single Filers $138,000-$153,000** * **Married joint return filers $218,000-$228,000** * **Married separate filers $0-$10,000** The adjusted gross income used for these limits is **modified AGI, which excludes taxable income from a conversion of a traditional to a Roth IRA**. The reduction in the dollar limit in the phase-out AGI region is proportional to the amount by which the AGI exceeds the lower limit. For example, suppose that a single taxpayer's 2023 MAGI is $145,500. * **The taxpayer is halfway into the $15,000 phase-out threshold, so their annual contribution limit for 2023 is reduced by half of the maximum amount (½ of $6,500, or $3,250)**.

Answer 17

As with a traditional IRA, eligible persons may establish a Roth IRA account any time prior to the due date of their tax return, without extensions, even if taxpayers actually receive an extension of the filing date. **For most individuals or married couples, the contribution cutoff date is April 15th**. However, since earnings on a Roth IRA account accumulate tax-free, **taxpayers may want to make contributions as early as possible in the tax year**. There is no maximum age limit to make Roth IRA contributions, as long as the taxpayer has compensation income at least equal to the Roth contribution, up to the annual limit.

Answer 18

April 15th * For most individuals or married couples, the contribution cutoff date is April 15th. However, since earnings on a Roth IRA account accumulate tax-free, taxpayers may want to make contributions as early as possible in the tax year.

Answer 19

Employers can sponsor Roth IRAs for employees as a limited alternative to an employer-sponsored qualified retirement plan. Employers who have a qualified plan can also sponsor a deemed IRA as part of the qualified plan, to provide an additional form of retirement savings for employees. An IRA can be made available to any employee or a discriminatory group of employees. **Contributions to the IRA can be made either as additional compensation from the employer or as a salary reduction elected by the employee**. * **If the employer contributes extra compensation, it is taxable to the employee, but the employee may be eligible for the IRA deduction**. * **The maximum annual contribution limit for an employer-sponsored IRA is the same as for traditional individual IRAs**. With a Roth IRA, the employee will elect a voluntary employee contribution that will not reduce the employee's salary.

Answer 20

Employers may amend their Section 401(k) or Section 403(b) plan to provide that **participants' elective deferrals may be contributed to a Qualified Roth Contribution Program, which would be a separate account under the Section 401(k) or Section 403(b) plan**. **Contributions are made with after tax dollars and gains may be tax-free if withdrawn after retirement or certain other circumstances**.

Answer 21

Account holders with more than one Roth IRA must treat the Roth IRAs as a single account when calculating the tax consequences of distributions from any of them.

Answer 22

Tax-free **Distributions of contributions from a Roth IRA are always tax-free**. **Distributions of tax-sheltered gain, called a qualified distribution, may be tax-free if the Roth-IRA is over five years old and meets one of the following purposes for distribution**: * The distribution must be made after the **five-year period** beginning with the first taxable year in which the individual made a Roth IRA contribution, and the distribution must be either: * Made on or after the individual attains **age 59½**, * Made to a beneficiary or the individual's estate after the individual's **death**, * Attributable to the individual's being **disabled**, or * Made for a **first-time home** purchase. * The five-year holding period is defined as **beginning with the first taxable year for which the account holder has a Roth IRA contribution of any kind**. Subsequent rollovers into a Roth IRA will not require a new five-year holding period. **The first-time homebuyer exception is somewhat misleadingly titled**. It is available for **purchasing a principal residence of the individual, spouse, child, grandchild or ancestor of the individual or spouse**. * It **can be used at any time if the individual and spouse did not own a principal residence within the preceding two years**. * The exception **can be used more than once.** * However, there is a **$10,000 lifetime limitation on the use of the first-time homebuyer exception for Roth IRAs**.

Answer 23

**Qualified distributions are completely tax free**. * There are 2 levels of requirements for a qualified distribution * **First level - 5 year holding period** * **Second level - death, disability, home ($10k max), age 59.5yo** * Don't have to be 59.5yo if met other requirement Five year holding period example: * Made contribution 4-1-2020 * **But Actual holding period began January 1, 2019** * Actual holding period ends January 1, 2024 * (even though that's actually only 3 years and 9 months)

Answer 24

If a Roth IRA distribution is not tax-free under the rules described in the above screens, the **distribution is subject to federal income tax, except that the total of the original nondeductible contributions is distributed first**. * **Only after all contributions have been distributed will the earnings be deemed to have been withdrawn**. * In addition, **there is a 10% penalty imposed on the taxable amount of any distribution, unless the distribution meets one of the exceptions to the 10% penalty for traditional IRAs**.

Answer 25

**Distributions are non-qualified - if they did not meet the 5 years or 4 qualifying circumstances**. **Distribution ordering / Layers**: * **First layer that gets distributed are the regular Roth contributions**. **No income tax. No penalty** bc it's a return of the contribution. * **Second layer - distributing Roth conversion contributions (traditional IRA converted to Roth IRA). No income tax bc they paid tax on the conversion. But if before 5 years, there could be a 10% penalty**. * **Third layer - Account earnings. There will be regular income tax at the marginal bracket level and 10% penalty**. Example. Regular Roth contributions: $24,000 Roth conversion contributions: $50,000 Account Earnings: $26,000 Total Account: $100,000 If client needs $40k. * first $24k, no tax, no penalty * next $16k, no tax, maybe 10% penalty depending on 5 year holding window ($1600) If client wants to liquidate $100k. * first $24k, no tax, no penalty * next $50k, no tax, maybe 10% penalty depending on 5 year holding window ($5000) * next $26k, Income tax, 10% Penalty ($2600)

Answer 26

There are **no minimum distribution requirements at age 73 as there are for traditional IRAs**, and the Roth IRA owner can, therefore, accumulate the fund, if appropriate, until death.

Answer 27

**The SECURE Act changes discussed previously for inherited traditional IRAs also apply to RMDs from an inherited Roth IRA**. * Under the legislation, **distributions to individuals other than the surviving spouse of the employee (or IRA owner), disabled or chronically ill individuals, individuals who are not more than 10 years younger than the employee (or IRA owner), or child of the employee (or IRA owner) who has not reached the age of majority are generally required to be distributed by the end of the tenth calendar year following the year of the employee or IRA owner’s death**. **If the beneficiary is the owner's spouse, the surviving spouse can elect to treat the Roth IRA as his or her own, which means the beneficiary-spouse is not required to take distributions while living**. * **Distributions to beneficiaries after the owner's death are tax-free to the recipients, assuming the original 5 year holding period has been satisfied**, but they lose their character as Roth IRAs when distributed. * **Further investment returns on the amounts distributed are taxable.**

Answer 28

Tax-free * Distributions to beneficiaries after the owner’s death are tax-free to the recipients, but they lose their character as Roth IRAs when distributed. Had the Roth-IRA been established for less than five years, any gain would be taxable at the owner’s death.

Answer 29

Transfers between Roth-IRA and Traditional IRAs are possible under certain conditions. There may or may not be income tax and penalties due, depending on the type of transfer.

Answer 30

A Roth IRA can be rolled over to another Roth IRA tax-free. As with traditional IRA rollovers, the transaction may either be a direct transfer between trustees or a rollover. In the case of the rollover, **the owner must deposit all assets withdrawn within 60 days, and only one rollover is permitted within a 12-month period**.

Answer 31

There is no Code provision for rolling over a Roth IRA to a traditional IRA. A withdrawal can be made from a Roth IRA and contributed to a traditional IRA (deductible or nondeductible) within the annual limit for the year of the contribution. There is also no provision for rolling over a Roth IRA to a qualified plan or tax-deferred annuity (Section 403(b)) plan.

Answer 32

**A traditional IRA or any part of a traditional IRA can be rolled over to a Roth IRA. This is referred to as a conversion of a traditional IRA to a Roth IRA**. **All money converted from an IRA to a Roth-IRA will represent a taxable distribution for the year**. * However, if the IRA owner is under age 59 1/2, the 10% penalty will not be due on all money rolled into, or converted to, the Roth-IRA account. * Note, any of these "converted" dollars that are removed from the Roth-IRA during the five years following the conversion will be subject to a 10% penalty if the conversion occurred when the owner was under age 59 1/2. **Within a Roth-IRA, the order of withdrawals is**: * Contributions * Conversions (FIFO) * Gain

Answer 33

True **Traditional IRAs that are converted to Roth IRAs are not subject to minimum distributions during life**. **Qualified distributions from a Roth IRA are not taxable**, and this can be very advantageous during retirement or for the beneficiaries.

Answer 34

The **chief disadvantage of conversion is that the entire amount of the traditional IRA that is converted to a Roth IRA is generally taxable to the owner as ordinary income in the year of the conversion**. Thus, **conversion accelerates all the taxes on the traditional IRA that could otherwise be deferred** within the limits of the minimum distribution rules. The 10% premature distribution penalty for withdrawals prior to age 59½ will apply to all nonqualified distributions that are attributable to taxable conversion amounts, and earnings thereon, which are distributed within the five-year period beginning with the year the contribution was made.

Answer 35

Common Questions Some of the common questions asked about Roth IRAs are listed in the table below: * If a taxpayer is eligible for the maximum annual contribution to either a traditional or a Roth IRA, which should be chosen? When a taxpayer has $6,000 to invest on a before-tax basis, **Roth IRAs and traditional IRAs are actually equivalent, assuming the same tax rate is in effect today as in their retirement years**. The **deductible IRA is preferable if taxpayers are in a higher tax bracket today than in their retirement years**.

Answer 36

Common Questions Some of the common questions asked about Roth IRAs are listed in the table below: * Is it advisable to convert a traditional IRA to a Roth IRA? **The Roth IRA conversion produces better results, especially if taxes are not paid out of the amount converted**, and is therefore a good idea on paper. The longer the converted assets remain in the Roth IRA before withdrawal, the greater the advantage.

Answer 37

Common Questions Some of the common questions asked about Roth IRAs are listed in the table below: * If I decide to convert my traditional IRA to a Roth IRA, can I move the money back to a traditional IRA within the same year? **The Tax Cuts and Jobs Act tax reform bill has removed the ability to recharacterize any Roth IRA conversions done in 2018 and onward**.

Answer 38

* **Disadvantage** of conversion from traditional IRA to Roth IRA is that the **entire amount of the traditional IRA that is converted to a Roth IRA is generally taxable to the owner as ordinary income in the year of the conversion**. * **Differences between traditional IRAs and Roth IRAs**: Unlike traditional IRAs, **Roth IRA contribution eligibility is not curbed due to participation in an employer's retirement plan**. Unlike traditional IRAs, **contributions to Roth IRAs are not allowed if a person's MAGI is above a certain level**. Roth IRAs are **not subject to minimum distribution rules until the death of the Roth IRA owner**. For traditional IRAs, minimum distribution rules that apply begin at the age of 72.

Answer 39

Income from employment Income from self-employment Taxable alimony payments * Earned income refers to income from employment or self-employment. * Taxable alimony payments are considered earned income. * Investment income is not counted as earned income.

Answer 40

100% tax 10% penalty * Premature Roth IRA withdrawals in excess of contributions are taxed in full and may also be subject to a 10% penalty on premature withdrawals.

Answer 41

Tax-free * A Roth IRA can be rolled over to another Roth IRA tax-free. There are no tax liabilities.

Answer 42

To ensure that you have a solid understanding of SEPs, the following topics will be covered in this lesson: * When Is It Used? * Advantages * Disadvantages * Tax Implications * How to Install a Plan * ERISA Requirements Upon completion of this lesson, you should be able to: * Outline when SEPs are used, * Explain the advantages and disadvantages of SEPs, * List the criterion for SEP coverage, * Describe the tax treatment for SEP, and * discuss the ERISA requirements.

Answer 43

SEPs are used when the employer is looking for an **alternative to a qualified profit sharing plan that is easier and less expensive to install and administer**. * For **very small employers**, a SEP is one of the simplest types of tax-deferred employee retirement plans available. * **For larger employers, with more than 10 employees, the cost of installing and administering a regular qualified plan can be spread over enough employees**, thus making the advantages of a SEP less significant. **Qualified plans must be adopted before the end of the year in which they are to be effective**. * But, on the other hand, **SEPs can be adopted as late as the tax return filing date for the year (including extensions) in which they are to be effective**. So, when an employer wants to install a tax-deferred plan, and it is **too late to adopt a qualified plan for the year in question, SEP is the best bet**. SEPs are also **used when an employer who adopted a SAR-SEP prior to 1997 wants to continue to operate a simplified plan funded through employee salary reductions (before-tax contributions)**. While such plans may not be adopted after 1996, plans in existence before 1997 may continue to operate and add new participants. Employers wishing to adopt a simplified plan after 1996 that is funded through employee salary reductions **may wish to consider a SIMPLE IRA plan.**

Answer 44

False. * Qualified plans must be adopted before the end of the year in which they are to be effective. But, on the other hand, SEPs can be adopted as late as the tax return filing date, including extensions, for the year in which they are to be effective.

Answer 45

A SEP can be **adopted by completing IRS Form 5305-SEP rather than by the complex procedure required for qualified plans**. * However, **if the employer adopts a master or prototype qualified plan, the installation costs and complexity may not actually be much greater than that for a SEP, even though the documentation is more voluminous**. Benefits of a SEP are **totally portable by employees, since funding consists entirely of IRAs for each employee and employees are always 100% vested in their benefits. Employees own and control their SEP/IRA accounts, even after they terminate employment with the original employer**. A SEP **provides as much or more flexibility in the timing of contributions as a qualified profit sharing plan**. * The **employer is even free not to make any contribution to the plan in a given year**. Individual SEP IRA accounts allow participants to benefit from good investment results as well as run the risk of bad results. A SAR-SEP adopted before 1997 can be funded through salary reductions by employees, when certain conditions are met.

Answer 46

Employees c**annot rely upon a SEP to provide an adequate retirement benefit**. Benefits are not significant unless the employer makes substantial, regular contributions to the SEP. Such regular contributions are not a requirement for a SEP. Furthermore, employees who enter the plan at an older age have only a limited number of years left prior to retirement to build up their SEP accounts. **Distributions from SEPs are not eligible for special averaging available for certain qualified plan distributions**. **Employers often see the immediate vesting of their contributions as a disadvantage**.

Answer 47

An **employer can deduct contributions to a SEP up to 25% of the total payroll of all employees covered under the plan if the contributions are made under a written formula that meets various requirements of the Internal Revenue Code**. * Each individual **can receive and exclude from income** **the lesser of 25% of the employee's income or $66,000 (2023**). Furthermore, **elective deferrals in Salary Reductions SEPs are not included for purposes of the employer's deduction limit**.

Answer 48

The major SEP coverage requirements include: * A **SEP must cover all employees who are at least 21 years of age and who have worked for the employer during three out of the preceding five calendar years**. Part-time employment counts in determining years of service. If the employer wishes, the plan can be modified to allow participation at younger ages or with fewer years of service. * Contributions need not be made on behalf of employees whose compensation for the calendar year was less than **$750** (2023). * The plan can** exclude employees who are members of collective bargaining units** if retirement benefits have been the subject of good faith bargaining. Nonresident aliens can also be excluded.

Answer 49

**The employer need not contribute any particular amount to a SEP or make any contribution at all**. * The recurring and substantial contributions requirement applicable to qualified profit sharing plans has no effect on SEPs, so **SEP contributions are more flexible than those to a qualified plan**. * An employer can freely omit any year's contribution to a SEP without having to worry about adverse tax consequences.

Answer 50

No specific employer amount Can omit a contribution * An employer offering a SEP does not have to contribute a specific amount or make contribution every year.

Answer 51

The employer contribution, if made, **must be allocated to plan participants under a written formula that does not discriminate in favor of highly compensated employees**. * SEP formulas usually provide allocations as a **uniform percentage of the total compensation of each employee**. * In the allocation formula, **only the first $330,000 (2023) of each employee's compensation can be taken into account**. * SEP allocation formulas can be integrated with Social Security under the integration rules applicable to qualified defined contribution plans.

Answer 52

While **new SAR-SEPs may not be adopted after 1996**, an employer who has 25 or fewer eligible employees and who adopted a salary reduction SEP, which means **one funded through employee salary reductions prior to 1997, can continue to operate the plan and may add new participants**. Under a salary reduction plan, **employees have an election to receive cash or have amounts contributed to the SEP**. * The arrangement **works similarly to a Section 401(k) salary reduction arrangement**. Salary reductions are subject to an **annual limit**. * The employee **must add together, each year, all elective deferrals to salary reduction SEPS, Section 401(k) plans, SIMPLE IRAs and Section 403(b) tax-deferred annuity plans**. * All elective deferrals from all employer plans that cover the employee must be aggregated. The **total must not exceed $22,500 (2023)**. In addition to the foregoing salary reductions, employees who have reached the **age of 50** during the plan year may be able to make **catch-up contributions of an additional $7,500 (2023).** Note that **the above limits are higher than those applicable to SIMPLEs**, so employers with grandfathered salary reduction SEPs may wish to continue them. **An employer cannot use a salary reduction SEP unless 50% or more of the employees eligible to participate elect to make SEP contributions.** * In addition, rules similar to the **actual deferral percentage (ADP) test apply to a salary reduction SEP**. Under the ADP rules for SAR-SEPs, **the deferral percentage for the highly compensated eligible group must be no more than 1.25 times the ADP of non-highly compensated eligible employee group**. * For example, if non-highly compensated employees elect salary reductions averaging 6% of compensation, The ADP for the no highly compensated employee cannot be more than 7.5%. **Salary reductions, but not direct employer contributions, are subject to Social Security (FICA) and federal unemployment (FUTA) taxes**. The impact of state payroll taxes depends on the particular state's law. Both salary reductions and employer contributions may be exempt from state payroll taxes in some states.

Answer 53

In a SEP plan, **each participating employee maintains a traditional IRA**. * Employer contributions are made directly to the employee's IRA. * **Employer contributions are not included in the employee's taxable income**

Answer 54

Direct employer contributions to a SEP are **not subject to Social Security (FICA) or federal unemployment (FUTA) taxes**. The impact of state payroll taxes depends on the particular state's laws. Both salary reductions and employer contributions may be exempt from state payroll taxes in some states.

Answer 55

Distributions to employees from the plan are **treated as distributions from an IRA**. **All the restrictions on traditional IRA distributions apply and the distributions are taxed in the same manner**.

Answer 56

Installation of a SEP is very simple. The employer only has to **complete Form 5305-SEP**. To adopt a SEP, the employer completes the form and signs it prior to the tax filing date for the year in which the SEP takes effect. The form does not have to be sent to the IRS or any other government agency. A SEP adopted by filling out Form 5305-SEP is somewhat inflexible, since it must follow the provisions set out on the IRS model form. Some of the provisions in this form are more stringent than are actually required by the SEP rules; in particular: * The plan set out on Form 5305-SEP is **not integrated with Social Security**. * By its terms, Form 5305-SEP cannot be used if the employer: * **Currently maintains a qualified plan, or * Maintained a qualified defined benefit plan at any time in the past covering one or more of the employees to be covered under the SEP**. **If the employer wants to adopt a SEP plan that avoids the limitations of the IRS model form, the plan must be custom designed**. Costs for custom designing and installing a SEP are **comparable to those for a qualified profit sharing plan**. Click here to view a sample of the Form 5305-SEP.

Answer 57

* The reporting and disclosure requirements for SEPs are simplified if the employer uses Form 5305-SEP. * **The annual report form from the 5500 series need not be filed if these forms are used**. * In other cases, **reporting and disclosure requirements are similar to those for a qualified profit sharing plan**.

Answer 58

* **Disadvantages** include those relating to employees who cannot rely upon a SEP to provide an adequate retirement benefit. **Regular contributions are not a requirement for a SEP**, and benefits are insignificant unless the employer makes substantial, regular contributions to the SEP. They are also unfavorable towards employees who enter the plan at an older age. Also, **distributions from SEPs are not eligible for special averaging**. * Tax Implications presently stipulate that **an employer can deduct contributions to a SEP up to 25% of the total payroll of all employees covered under the plan**. Each **individual can receive and exclude from income the lesser of 25% of the employee's income or $66,000 (2023)**. * **Installation** of a SEP is very simple. To adopt a SEP, the employer has to complete Form 5305-SEP. But the **form cannot be used if the employer has a qualified plan or had maintained a qualified defined benefit plan at any time in the past covering one or more of the employees to be covered under the SEP**. * **ERISA Requirements** for SEPs are simplified if the employer uses Form 5305-SEP. The annual report form from the **5500 series** need not be filed if these forms are used. In other cases, reporting and disclosure requirements are similar to those for a qualified profit-sharing plan.

Answer 59

Simple to implement Not expensive to administer A preferred option when an employer wishes to install a retirement plan after the time to adopt a qualified plan has passed. * A SEP tax-deferred employee retirement plan is very simple to implement and not at all expensive to administer, hence making it a popular choice for employers, and even more so for employers who wish to install a tax-deferred plan and are too late to adopt a qualified plan for the year in question.

Answer 60

May not provide an adequate retirement benefit for him. May not provide significant benefits * Employees must not rely upon a SEP to provide them with an adequate retirement benefit. Benefits are significant only if the employer makes substantial, regular contributions to the SEP. But such regular contributions are not a requirement for a SEP, so it may not provide significant benefits.

Answer 61

Lesser of 100% of compensation or $66,000 (2023) * The annual additions limit is the lesser of 100% of the participant's covered compensation or $66,000 (2023). * Annual additions include employee contributions, employer contributions, and reallocated forfeitures.

Answer 62

Both lawyers and the secretary but not the clerks * Contributions do not need to be made to employees until their third year of service.

Answer 63

The term SIMPLE plan, as used in the Internal Revenue Code, refers to a SIMPLE IRA plan. Section 401(k) plans are permitted to satisfy the nondiscrimination in amount requirement (ADP test) by adopting provisions that are similar to the SIMPLE IRA requirements, but they are subject to additional requirements.

Answer 64

A SIMPLE IRA is **ideal in a situation when the employer is looking for an alternative to a qualified profit sharing plan that is easier and less expensive to install and administer**. * **For very small employers**, the SIMPLE IRA is **one of the simplest types of tax-deferred employee retirement plans available**. * However, for larger employers, the cost of installing and administering a regular qualified plan can be spread over enough employees so that the advantages of these are less significant. SIMPLE IRAs are used extensively in cases where: * An employer **has 100 or fewer employees and wants an easy-to-administer plan funded through employee salary reductions**, or * An **individual has a relatively small amount of self-employment income, and the SIMPLE IRA contribution limit is higher than that available for any other form of tax-favored plan, such as a Keogh plan or SEP**.

Answer 65

A SIMPLE IRA may be **adopted by completing the IRS Forms 5304-SIMPLE or 5305-SIMPLE**. However, if the employer adopts a master or prototype qualified plan, the installation costs and complexity may not actually be much greater than that for a Simple IRA, even though the documentation is more voluminous. Benefits of a SIMPLE IRA are **totally portable by employees, since funding consists entirely of IRAs for each employee, and employees are always 100% vested in their benefits**. Employees own and control their accounts, even after they terminate employment with the original employer. Individual IRA accounts allow participants to benefit from good investment results as well as run the risk of bad results. **SIMPLE IRAs can be funded in part through salary reductions by employees** if certain conditions are met. Click here to view a sample of the Form 5304-SIMPLE and here to view Form 5305-SIMPLE.

Answer 66

Employees cannot rely upon a SIMPLE IRA to provide an adequate retirement benefit. Annual contributions are generally restricted to lesser amounts than would be available in a qualified plan. * **SIMPLE IRA salary reduction contributions are limited by the maximum $15,500 (2023) salary reduction permitted for each participant (plus the employer's matching contribution)**. * This contrasts with the $22,500 (2023) annual salary reduction permitted for traditional 401(k) plans or for 403(b) plans. * The **catch-up contribution limits are also lower** for SIMPLE IRAs (and SIMPLE 401(k) plans) than for traditional 401(k) plans and 403(b) plans. **Distributions from SIMPLE IRAs are not eligible for special 10-year averaging available for certain qualified plan distributions**. If an employer adopts a SIMPLE IRA plan, it **cannot also maintain a qualified plan, SEP, 403(a) annuity, 403(b) tax-sheltered annuity, or a government plan (other than Section 457 plan) for that year**. However, certain collective bargained plans will not affect an employer's eligibility to establish a SIMPLE IRA.

Answer 67

The tax implications in the case of a SIMPLE IRA involve conditions of **contributions that the employer must follow while deducting contributions**. * If an organization maintains a SIMPLE IRA plan, it has restrictions in maintaining other plans. * Every employee participating in the SIMPLE IRA plan maintains his or her own IRA. * Employer **contributions are made directly to the employee IRA as salary contributions**. * These are **not subject to taxes**. But salary contributions of employees are **subject to Social Security taxes**.

Answer 68

The **employer may deduct employer contributions if certain Code requirements are met**. The principal requirements are as follows: * Employers must **have 100 or fewer employees** on any day of the year. However, **only employees with at least $5,000 in compensation for the preceding year are counted**. * Contributions may be made to an IRA established for each employee. * Employees who earned at least $5,000 from the employer in any two preceding years, and are reasonably expected to earn at least $5,000 in the current year, can contribute through salary deductions up to $15,500 (2023), annually. * Participants **aged 50 and older** may be permitted to make additional **catch-up contributions of $3,500 (2023)**. The employer is required to make a contribution equal to either: * A **dollar-for-dollar matching contribution of 3% of the employee's compensation** (the employer **can elect a lower percentage, not less than 1%, in no more than two out of the five years ending with the current year**), or * **2% of compensation for all eligible employees earning at least $5,000 (whether or not they elect salary reductions)**.

Answer 69

If the employer maintains a SIMPLE IRA, it may not maintain **a qualified plan, SEP, 403(a) annuity, 403(b) tax-sheltered annuity or a governmental plan other than a Section 457 plan, for that year**. * However, **an employer who has only a collectively bargained qualified plan but not any other qualified plan may adopt a SIMPLE IRA plan for the noncollectively bargained employees,** provided none of the SIMPLE IRA participants are participants in the collectively bargained plan.

Answer 70

Each participating employee **maintains an IRA for the SIMPLE IRA plan contributions**. Employer contributions are made directly to the employee's IRA, as are any employee salary reduction contributions. **Employer contributions and employee salary reductions are not included in the employee's taxable income** (except that **employee salary reductions do not reduce taxes paid for Social Security**).

Answer 71

**Direct employer contributions are not subject to the Social Security Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA) taxes**. * However, **employee salary reduction contributions are subject to FICA and FUTA**. * The impact of state payroll taxes depends on the particular state's laws. * Both salary reductions and employer contributions may be exempt from state payroll taxes in some states.

Answer 72

Distributions to employees are **generally treated as distributions from a traditional IRA**. All the restrictions on traditional IRA distributions apply, and the distributions are **taxed in the same way**. * However, **the 10% penalty on premature distributions is increased to 25% during the first two years of participation**. Furthermore, while a rollover may be made at any time from one SIMPLE IRA to another SIMPLE IRA, **a rollover from a SIMPLE IRA to a traditional IRA during the first two years of participation is permitted only in the case of distributions to which the 25% early distribution penalty does not apply**. In particular, remember that the 10-year averaging provisions are not available for SIMPLE IRA distributions.

Answer 73

True * A limited, nonrefundable tax credit is available to certain lower-income taxpayers who make salary deferrals to a SIMPLE IRA.

Answer 74

Installation of a SIMPLE IRA plan is very **easy**. The employer merely completes **Form 5304-SIMPLE or Form 5305-SIMPLE**. * Form 5304-SIMPLE **does not provide for a designated financial institution for participant investments**, while * **Form 5305-SIMPLE does, which some plan sponsors and participants may find restrictive** Employees must make salary reduction elections during a 60-day period prior to January 1 of the year for which the elections are made. The form does not have to be sent to the IRS or any other government agency.

Answer 75

The reporting and disclosure requirements for SIMPLE IRA plans are **simplified**, particularly **if the employer uses Form 5304-SIMPLE or 5305-SIMPLE**. The **annual report forms (5500 series) are not required for SIMPLE IRA plans**.

Answer 76

* Advantages of adopting a SIMPLE IRA include **flexibility in the timing** of contributions. The **employer has to contribute 3% match to all participating employees or 2% to everyone**. A SIMPLE IRA does have the flexibility to **lower the 3% match down to 1% in not more than 2 out of 5 years**. Individual IRA accounts allow participants to benefit from good investment results as well as to run the risk of bad results. * **Disadvantages** of a SIMPLE IRA include the fact that it is **not favorably disposed towards employees who enter the plan at an older age**. * Installation of a SIMPLE IRA plan is very easy. The employer merely completes **Form 5304-SIMPLE or Form 5305-SIMPLE**. * **ERISA Requirements** include reporting and disclosure requirements for SIMPLE IRA plans. However, the **annual report forms (5500 series) are not required for SIMPLE IRA plans**.

Answer 77

When an employer is looking for an inexpensive plan When an employer has less than 100 employees * A SIMPLE IRA is attractive for employers who are looking for inexpensive and easy to install plans. It is ideal for employers with 100 or less employees so that the employer can fund the plan with an employee salary reduction. SIMPLE IRAs are useful for individuals with a small amount of self-employment income, and not for individuals with high self-employment income.

Answer 78

Dollar limitation * The SIMPLE-IRA does not have a percentage limit. In 2021, the maximum dollar limit for employee deferrals is $13,500.

Answer 79

To ensure that you have a solid understanding of 403(b) plans, the following topics will be covered in this lesson: * When Is It Used? * Advantages * Disadvantages * Design Features * Tax Implications * ERISA Requirements * How to Install a Plan Upon completion of this lesson, you should be able to: * Explain when the 403(b) plan is used, * Describe the advantages and disadvantages of the 403(b) plan, * Point out the differences between 403(b) and qualified plans, * Outline the design features of the plan, * Explain 100% vesting in amounts contributed to the 403(b) plan by salary reduction, * Explain plan investment options for a 403(b) plan, * Describe the ERISA requirements of the plan, and * Explain how the plan is installed.

Answer 80

When Is It Used? The 403(b) plan (TSA) is most commonly used by tax-exempt entities such as public schools, colleges, universities, churches and hospitals. It can be used by an organization that meets the following requirements: When and only when the employer organization is eligible under the 403(b) provisions of the Code. An organization must be one of the following in order to adopt a 403(b) plan: A tax-exempt employer described in Section 501(c)(3) of the Code. This means that: The employer must be organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes; or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals. The organization must benefit the public, rather than a private shareholder or individual. The organization further must refrain from political campaigning or propaganda intended to influence legislation. In other words, most familiar nonprofit institutions, such as churches, hospitals, private schools and colleges, and charitable institutions are eligible to adopt a 403(b). An educational organization with: A regular faculty and curriculum A regularly enrolled student body in attendance Operated by a state or municipal agency In other words, most public schools and colleges may adopt a 403(b) plan. A 403(b) plan can also be adopted for certain employees outside of the schools who perform services involving the operation or direction of the public school education program. Assuming the employer organization is eligible, the positive indications for a 403(b) plan are: When the employer wants to provide a tax-deferred retirement plan for employees but can afford only minimal extra expense beyond existing salary and benefit costs. A 403(b) plan can be funded entirely from employee salary reductions except for installation and administration costs, which must be paid for by the employer. In most plans, however, some additional employer contribution to the plan can enhance its effectiveness. The only extra cost is plan installation and administration. The plan may actually result in some savings as a result of lower state or local (but not federal) payroll taxes. In-service withdrawals by employees are permitted. These are not available in qualified pension plans, although they are available in profit sharing plans. Design similar to qualified Section 401(k) plans Any kind of formula can be used, subject to two major limitations: First, salary reductions elected by participants are subject to the salary reduction, or elective deferral, limit. Second, the total amount of tax-deferred employer and employee contributions to the employee's account is subject to the annual Section 415 limitation of the lesser of 100% of compensation or $66,000 (2023). The 100% limit is applied to the participant's gross compensation, unreduced by the participant's salary reduction contributions to the 403(b) plan or any Section 401(k), 457, SIMPLE or Flexible Spending Arrangement (FSA) plan.

Answer 81

constructive receipt * Salary reductions elected after compensation is earned are ineffective as a result of the tax doctrine of constructive receipt.

Answer 82

Hospitals Schools Adventist Church * Health care insurance agencies, law firms and health maintenance organizations are not tax-exempt organizations, so they cannot install a Section 403 (b) plan.

Answer 83

Lump-sum distributions qualify for special 5-year averaging. * Contributions to a 403(b) tax deferred annuity plan may or may not be currently taxable. It depends on whether the contributions are traditional or Roth. * The plan account balances can accumulate tax-free (and may even be distributed under certain circumstances tax free). * Lump sums do not qualify for any special averaging.

Answer 84

$29,000 * Normally, Sara could contribute the maximum salary deferral amount for **2021 of $19,500**. * However, she can take advantage of the **age 50 or older catch-up of $6,500** and the **"15 years of service" catch-up of another $3,000** for a total of $29,000 assuming that her income from the university is at least that amount.

Answer 85

To ensure that you have a solid understanding of the HR10 (Keogh) plan, the following topics will be covered in this lesson: * When Is It Used? * Advantages * Disadvantages * Types of Keogh Plans * Keoghs versus Other Qualified Plans * Tax and ERISA Implications * Alternatives Upon completion of this lesson, you should be able to: * Explain when the Keogh plan is used, * Explain the advantages and disadvantages of this plan, * Identify the different kinds of Keogh plans, * Compare and contrast Keogh plans with other qualified plans, * Explain tax implications of Keogh plans, and * Explain how to nullify disadvantages of the 403(b) by adopting alternative plans.

Answer 86

Payments must be substantial and recurring. * The IRS requires substantial and recurring contributions, or the plan may be deemed to have terminated. This contribution flexibility is very advantageous for small business, whose income may fluctuate substantially from year to year.

Answer 87

False * A money purchase plan is subject to the Code’s minimum funding requirements. These require the employer to make contributions to each employee’s and self-employed person’s account each year equal to the percentage of compensation stated in the plan.

Answer 88

True * Plan loans to an owner-employee are not prohibited transaction under the code, provided the other plan code regulations for loans are followed.

Answer 89

* **Disadvantages** include **high costs**. A 10% penalty is imposed, in addition to federal income tax, for withdrawal of plan funds before the age of 59½, death, or disability. * Types of Keogh plans can be designed to cover self-employed persons. Such plans include the **profit-sharing plan, money purchase plan, target benefit plan, and defined benefit plan**. * **Keoghs versus Other Qualified plans** -the unique feature of a Keogh plan, as compared with qualified plans adopted by corporations, is that the Keogh plan **covers self-employed individuals, who are not technically considered employees**. The amount of money contributed to a Keogh for the owner's benefit is based on earned income as opposed to compensation. * **Tax and ERISA Implications** Keogh plans generally have the same tax and ERISA implications as regular qualified plans. * **Alternatives** are sometimes used to offset the disadvantages of Keogh plans. Under current law, it is **not advantageous to incorporate a business simply to obtain corporate treatment for qualified plans, as it may backfire and result in higher taxes**. A **simplified employee pension (SEP) may be even simpler to adopt than a Keogh plan, particularly if only one self-employed individual is covered**. In addition, SEPs can be adopted as late as the individual's tax return filing date, when it is too late to adopt a new Keogh plan.

Answer 90

Self employed individuals Employees of an unincorporated business * A Keogh plan only covers one or more self-employed individuals and the employees of an unincorporated business.

Answer 91

No * A Keogh plan can only be set up for an unincorporated business.

Answer 92

Long-term capital accumulation Retirement purposes Loan purposes To shelter current earnings from federal income tax for a self-employed individual * A Keogh plan is used for long-term capital accumulation, loan purposes, retirement purposes, and to shelter current earnings from federal Income tax for a self-employed individual. It is also applicable in the case of an employee of a self-employed individual.

Answer 93

* **SIMPLE IRA** is an employer-sponsored plan under which plan **contributions are made to a participating employee’s IRA**. As compared to other plans, it is **easier and less expensive to install and administer**. It is **ideal for small employers** as it is one of the simplest types of tax-deferred employee retirement plans available. Like the traditional IRA, the SIMPLE plan is not favorably disposed towards employees who enter the plan at a later age. * **403(b) plan** is used when the employer organization is eligible under the 403(b) provisions. It offers employees flexibility in the amount they wish to save under the plan. This plan, too, is not favorable to older employees. People opting for this plan bear the risk of their investments. The plan is not difficult to set up. * **Keogh plan** is a tax-deferred **qualified** retirement savings plan for the **self-employed**. The Keogh plan offers the individual tax-free savings growth. **Taxes are paid only after the individual begins withdrawing funds from the plan**.

Answer 94

$7,500 * Sally can contribute and deduct $7,500 (2023). * She is not an active participant in a retirement plan, therefore, her earnings do not prohibit her from deducting the full contribution. * She is eligible for a $6,500 regular contribution plus a $1,000 age 50+ catch-up contribution.

Answer 95

$3,250 * Jolene can contribute $3,250 (2023) equally to a traditional IRA and a Roth IRA. Because her divorce was finalized prior to 2019 the alimony she receives is considered compensation for IRA contribution purposes. IRA contributions must be aggregated for purposes of applying the annual maximum. * Jolene's alimony ($36,000, annually) + earned income ($5,000) = $41,000 of total income. Therefore, she can fund a total of $6,500 to the IRAs, $3,250 each if evenly split.

Answer 96

$18,587 * Maria may contribute up to $18,587 to a SEP plan on her behalf this year. * Net earnings from self-employment ($100,000) minus ½ of the SE tax ($7,065) = $92,935 * $92,935 x 0.20 (0.25/1.25) = $18,587

Answer 97

The lesser of 25% of compensation or $66,000 (2023) * The 2023 annual employer SEP contributions on behalf of a participant are limited to the lesser of 25% of compensation (capped at $330,000), not to exceed $66,000.

Answer 98

$12,000 * Ernesto and Maria may each contribute $6,000 (2022) to an IRA this year. * Although Maria is an active participant in a retirement plan, she is not prohibited from contributing to an IRA.

Answer 99

A 5-year holding period has been met * Only a 5-year holding period is an absolute requirement for a qualified distribution. There cannot be a qualified distribution without meeting the 5-year holding period requirement. Death, disability, attainment of age 59.5, or first-time home purchase are possible qualifying circumstances for a qualified distribution.

Answer 100

$6,000 * Joe can contribute $6,000 (2022) to an IRA. * Because his divorce was finalized prior to 2019 the alimony he receives is considered compensation for IRA contribution purposes. * The maximum IRA contribution for an individual younger than 50 is $6,000.

Answer 101

$33,000 * Sue may contribute up to $33,000 (2023). * Because Sue has been employed by the same school for at least **15 years** and has not previously contributed the maximum amount, she is eligible for a **special catch-up contribution allowance of $3,000** in addition to the regular contribution limit of **$22,500** and the **age 50+ catch up allowance of $7,500**.

Answer 102

A distribution from a SIMPLE IRA within the first two years of participation may be subject to a 10% penalty. * **A distribution from a SIMPLE IRA within the first two years of participation may be subject to a 25% penalt**y.

Answer 103

$5,000 * Jerome can contribute $5,000 (2023) to an IRA. Because his divorce was finalized after January 1, 2019, the alimony he receives is not considered compensation for IRA contribution purposes. * He may **contribute the lesser of $6,500 (2023) or 100% of his compensation income**.

Answer 104

$6,000 * Ernesto and Maria may each contribute $6,000 (2022) to an IRA this year but only $6,000 may be deducted. * Maria is an active participant in a retirement plan and their MAGI exceeds the deduction phase-out threshold, therefore, no deduction for her contribution is available. * Ernesto’s contribution is fully deductible because their MAGI is below the applicable deduction phaseout.

Bryant - Course 5. Retirement Planning & Employee Benefits. 5. Other Tax-Advantaged Retirement Plans Flashcards

(134 cards)