Chapter 11 - Retirement Plans Flashcards
What is the major difference between qualified and non-qualified plans?
Whether the contributions are tax deductible.
What is nonqualified deferred compensation plan
An agreement between the company and employee (usually executive) to defer receipt of current income in favor of payout at retirement.
What is a payroll deduction plan?
Employees allow employers to deduct a specific amount from their paycheck for retirement savings. Considered non-qualified.
If the contribution limit for an IRA is exceeded is there a penalty?
Yes, a 6% penalty in excess of contribution is assessed.
How late may you contribute to an IRA, year and age wise?
April 15th of the year following the tax year. Up to age 70 1/2.
If someone turns age 70 1/2 when do they have to take a distribution?
April 1st of the year after the individual turns 70 1/2. If they do not a 50% penalty is assessed.
What happens if you take a distribution of an IRA before age 59 1/2? Exceptions?
A 10% penalty is assessed as well as regular income tax. Exceptions are in the event of a death, disability, first time home buyer, education expense, medical premiums for unemployed, medical expense in excess of adjusted gross income limits.
Which investments are unacceptable for funding an IRA?
Collectibles such as; antiques, gems, rare coins, art.. Also life insurance contracts, municipal bonds. Also short selling stock, speculative options, margin accounts, but covered call writing is ok.
What is an IRA rollover?
Individuals move a qualified plan to another qualified plan. May do so but no more than once a year, and must be completed within 60 calendar days.
When can you withdraw from a Roth IRA?
Age 59 1/2, and as long as the money has been in the account 5 taxable years.
What is an Education IRA?
Coverdell Education IRA allows after tax contributions up to $2000 per student per year. Distributions are tax free when used for education expenses. Must be used by age 30 or get 10% penalty and income tax of it, or can roll it to another education IRA for another family member.
Explain a college savings section 529 plan.
Savings plan designed for educational use. Any donor can open a 529 plan and contribute a lump sum or periodically. Withdrawals are tax free at the federal level and most likely the state level, but depends if it is an in state plan. Most contributions are tax deductible at state level.
Explain a SEP IRA.
Simplified employee pension plans are qualified plans for self-employed and small businesses. Employer contributes to employees retirement plan. Generally employer can take a tax deduction. Contributions are not considered part of employees gross income.
What is a Keogh or HR-10 plan?
Qualified plan for self-employed persons filing a schedule C. Planholder may make tax deductible contributions each year up to a max amount. High income employers who have employees make contributions at a rate of 25% of employee’s compensation.
Explain Tax Sheltered Annuities (403b plans)
Available to public education institutions, tax exempt organizations, and religious organizations. Employee elects to contribute and is excluded from employee’s adjusted gross income. Distributions are taxable and 10% penalty applies before age 59 1/2.
