Chapter 20- (5Qs) Retirement Plans And Educational Funding Flashcards
Individual Retirement Arrangement (IRAs)
- Traditional IRAs
- Max per individual is $5,500 or 100% of taxable compensation if less
- Tax deferred
- Deductibility is phased out
- May not contribute after 70 1/2 (must take contributions then)
- Alimony is considered compensation
- May make catch up contributions of 1,000 if over 50 due to the Economic Growth and Tax Relief Reconciliation Act of 2001 - Roth IRAs
- Not tax deductible
- Withdrawals of gains are tax free if in the account for 5 years and the client is over 59.5, disabled, dead, or buying their first home
- Contributions may be made after 70.5, no required distribution
- Must be under 131,000 AGI to contribute if single 193 if couple
- Ira contributions, alimony paid, self-employment tax and penalties are paid before AGI (does not include MUNI income)
- IRA to Roth conversion is taxable, but do not have to pay 10% early withdrawal fee if done in 60 days
MyRA
- New type of Roth IRA backed by the government
- Contribution and income limits are same
- Invested in US Treasuries
- Must be rolled into private sector IRA after 30 years or 15k is save
Simplified Employee Pensions (SEP)
Qualified plan
Allows employer to contribute directly to an IRA set up for each employee
Must be 21, 3 of last 5 years worked with company and $600 in comp
May contribute 25% of employee salary or 53,000
Taxable upon withdrawal
Withdrawals from traditional IRAs and SEP IRAs
Must begin April 1 following individual turning 70 1/2
59 1/2 to withdraw without 10% penalty
Must take Required Minimum Distribution by end of calendar year or face 50% penalty
Taxed as ordinary income
No penalty if withdrawn due to: Death, disability, first time purchase of home (up to 10K), education expenses for immediate family including grand children, med expenses upto 10% AGI
IRA Contributions
May be made between January 1st and April 15th of the following year
May not make a contribution after even if you have a tax extension
Contribution above 5500 are given a 6% penalty
IRA investments
Should be relatively conservative
Cannot include: life insurance, artifacts, tax free munis, short sales of stock, speculative options (covered calls are ok), margin trades
May have real estate, but may not allow prohibited persons to use (does not include bro’s and sisters)
IRA Rollovers
Complete within 60 calendar days
May move any qualified plan into a rollover IRA
Original account location must hold 20% as a withholding tax if not a direct transfer
Must still rollover the full 100% and apply for a refund on next tax return
May rollover a plan into an inherited nonspousal plan but must be direct transfer
IRA Transfers
Moving an IRA from one custodian to another
May make unlimited transfers per year
Inherited IRA
- Spousal Rollover
- May be rolled into your own IRA or be continued separately
- May not take penalty free distributions if rolling into your own
- If left separated then must start RMDs when deceased would have, based on your age - Nonspouse Beneficiary
- May take withdraw 100% now
- Take it out over 5 year period
- Establish an IRA account in deceased name FBO beneficiary and take RMDs over life
403 (B) Plans
Qualified Tax Deferred
Public Schools (must be state supported), nonprofits, zoos, museums, private hospitals
Contributions are deductible from a tax return
Typically develop into tax sheltered annuities, but can also by mutual funds
Also have guaranteed investment contracts that pay a rate slightly above bank cds
Independent contractors are not eligible
Max employer contribution is 53K or 100% of compensation
18k for employees
Must start distributions at 70.5
Corporate Sponsored Plans
ERISA regulates establishment and management of private plans
Established by a trust agreement
Include- Pension plans, profit-sharing plans, 401 K plans
Employee Retirement Income Security Act (ERISA)
Must cover employees over 21 working 1,000 hours per year
Must segregate funds from corporate assets
Employees must be entitled to benefits
Employees must be kept informed of plan benefits
Private Sector plans only
Fiduciary must take prudence in regards to the portfolio as a whole
Allowed to delegate investment responsibilities
Must take into account: General economic conditions Inflation/deflation Tax Total return from income and appreciation of capital
Section 404 of ERISA
Specific to retirement plans
May not delegate fiduciary duties but may delegate investment management
Must be as prudent as the average expert, not the average person
Transaction costs are not a determining factor for security selection
ERISA Investment Policy Statement
Strongly suggested but not mandated
Will not include specific security selection
Prohibited transactions by a plan fiduciary
Strictly prohibits any conflicts of interest
May not deal plan assets for his own account or with those parties opposing the plan
May not own employer assets totaling more than 10%
Any transactions with parties of interest in the plan (including employees)
May not loan assets to the employer even if it could affect the company
Safe harbor provisions (ERISA)
Provides safe harbor to trustee if the participant is in charge of selecting their portfolio
Must at least offer 3 investment class alternatives
Must allow employees to change their allocation at least quarterly
Make prospectuses and financial statements available
