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Flashcards in Retirement and Education Plans Deck (52):

A retirement or education plan that can discriminate and does not need IRS approval. Dollars are invested on an after-tax basis. When money is withdrawn at retirement, investor pays taxes on amount of withdrawal that exceeds cost basis. 

Nonqualified Plan


Type of nonqualified plan in which the employer promises to pay compensation to the employee in the future. Compensation is effectively deferred until a specified future date or retirement, and is authorized under IRS code 457

Deferred Compensation Plan


Nonqualified, tax-deferred account available to employees of public institutions, such as state and local governments, and to private, or nongovernmental, tax-exempt organzations, such as hospitals. Public governmental plans are funded by funds held in a trust. Private plans allow a select group to participate. It can be transferred into another retirement account, or even an IRA.



Act that was passed to protect employees in the private sector against abuse and discrimination in pension and retirement plans, which established guidelines for the following:

  • Eligibility rules for plan participation
  • Proper account and administration of plan funds
  • Vesting schedules for employer contributions
  • Nondiscrimination
  • Naming of beneficiaries
  • Communication of plan rules and benefits to employees

Employee Retirement Income Security Act (ERISA)


What are the requirements for being an eligible employee in an ERISA plan?

Must be age 21 or older, full time or equivalent (1,000 hours) and 1 year or longer of service.


Purchase of options, or sale of short uncovered options in a qualified plan is generally not allowed, except for...?

Covered Call Writing


Pension fund managers may not purchase gold and silver, unless...

The Gold or silver purchased is coins minted by the US Government


Retirement account where anyone who has earned income is allowed to contribute but not past 70 1/2, can grow on a tax-deferred basis and is taxed upon withdrawal, and has a maximum contribution of $5,500 or 100% of earned income. In order to be tax deductible, needs cash contribution.

Individual Retirement Account (IRA)


In a marriage, if only one spouse is earning income and has already contributed to an IRA, the nonwage earning spouse may also contribute to a spousal IRA if...

The earned income from the wage-earning spouse is greater than the total contributions to both IRA.


What can the money in an IRA be used to purchase?


What can't be purchased?

Can: Stocks, bonds, mutual finds or annuities


Can't: Life insurance, art, antiques, stamps and margin trades


Provision that allows taxpayers who are age 50 or older to contribute addition $1,000 into IRA

Catch-Up Provision


A cash or asset contribution to a new IRA by an individual within 60 days of receiving an eligible rollover distribution from an old plan. Individual may roll over all or part of amount received, but is subject to 20% federal withholding on distribution from old plan. Individual deposits full amount into new plan, then files for refund of 20% withholding. Cannot be done more than once every 23 months.



Movement of cash and/or assets that takes place directly between the trustee/custodian of an old plan and trustee of new plan. By directly transferring the distribution from one custodian to another, individual avoids 20% withholding.



If an eligible person is not participating in a qualified retirement plan, then...

They can take a full deduction from taxable income up to limit


If an individual is a participant in an employer's qualified retirement plan, then...

an income limitation test is done to determine how much of the contribution is tax-deductible


How long can IRA contributions be made for current tax year?

Up to April 15 of the following year


How is an excess contribution in an IRA treated?

6% penalty until it is removed, not deductible and earnings on excess do not accumulate tax-deferred


What happens when an individual withdraws from an IRA before age 59 1/2?

10% early withrawal penalty assessed by IRS


When is a premature distribution allowable?

  • Death to account owner
  • Permanent Disability
  • Pay for medical insurance premiums if disabled for 12 weeks, or in excess of 7.5% of owner's income
  • If distributions are made in equal periodic installments for minimum 5 years, or age 59 1/2
  • Pay for education expenses for the owner
  • Down payment on first home, limited to $10,000


IRA that is a top choice for immediate tax savings because contributions can be deducted form year's taxable income, and taxes are not due until withdrawals are made. Normal distributions can occur at any point after the account holder reaches 59 1/2.

Traditional IRA


Requirement for IRA owners who reach age 70 1/2 that will have a 50% tax penalty levied on requirement not taken 

Required Minimum Distribution (RMD)


What happens when an IRA owner dies?

  • Beneficiary cashes in IRA and will be taxed without penalty
  • Funds can be withdrawn based on the beneficiary's life expectancy
  • If the beneficiary is surviving spouse, they can treat funds in IRA as their own, and roll it into IRA or employer sponsored qualified plan (401k)


Individual retirement account that allows additional contributions beyon age 70 1/2, tax free withdrawals as long as account is open for at least 5 years, funded with after-tax dollars, with income limits for singles at $114-$129k, married for $181 - $191k. Best choice for future tax savings

Roth IRA


Qualified distributions from a Roth IRA include...

  • For estate or beneficiary at owner's death
  • Disabled owner
  • First-time homebuyer (subject to a lifetime cap, currently $10,000)
  • For paying qualified higher education expenses for the owner, owner's spouse, children or grandchildren


Qualified plan restricted to self-employed individuals who earn all their income from self-employment. Employees who work for a corporation but have additional income from self-employment are eligible to open a keogh plan on specified income. Individual opening the plam must make contributions to his or her employees in percentage equal to employer's contribution. In excess of $100,000 per year, you must give employees the greater of 7.5% or same percentage.

Keogh Plan (HR-10)


What are the qualifications to be in a Keogh Plan?

  • 21 years old
  • Employed for at least 1 year
  • Work for minimum 1,000 hours per year


What is Keogh plan contribution limit?

  • 20% of pretax earnings for self-employed persons
  • 25% of salary, if employee of self-owned corporation
  • Not exceeding $49,000


How much are additional voluntary tax-deferred contributions to a Keogh plan?

Limited to lesser of 10% of earned income or $2500.


Retirement Plan that allows self-employed individuals to contribute to their retirement in amounts greater than traditional IRAs. These plans are written to allow the self-employed individual to make contribution to their own and employee retirement without getting involved in a more complex qualified plan. Employer contributes directly to the plan for all eligible employees.


Simplified Employee Pension Plans (SEP IRA)


What is eligibility for SEP IRA?

  • Reached Age 21
  • Worked for same employer in at least 3 of last 5 years
  • Received IRS specified amount in compensation from employer


Who is excluded from SEP coverage?

  • Employees covered by a union agreement
  • Nonresident alien employees who have received no US source wages, salaries or other compensation



What is the SEP IRA limit?

Cannot exceed lesser of 25% fo gross earnins or max contribution limit of $52k


What are the advantages of a SEP plan for small employers?

  • Tax deductible contributions and the business doesn't pay taxes on earnings
  • Employers are not locked into making annual contributions
  • Sole proprieters and partnerships can set up a SEP
  • Low admin costs


Plan available to a small business that only employs not more than 100 employees. Employer must have a qualified plan in place. Plan funding comes from voluntary employee salary deferral with no salary percentage limit, but with a maximum annual deferral amount.

Savings Incentive Match Plan for Employees (SIMPLE)


This savings plan has a dollar for dollar match of up to 3% of employees salary. The employer may lower the percentage to 1% for any 2 years out of every 5 year period. As an alternative, the employer can choose to contribute 2% of salary for all eligible employees. Participants are immediately 100% vested. 2 Year waiting period before assets rolled into IRA



Retirement plan that allows employees to take a reduction in their current salaries by deferring amounts into the plan. The company can also match contribution either dollar for dollar or percentage basis.

401(k) plan


What are the contribution limits for a 401k?



Defined contribution plan where employers are allowing their employees to share in the profitability of the company. The company does not need profits in order to contribute. Employer contributions must be allocated in a nondiscriminatory manner. Companies of any size can establish this plan.

Profit Sharing Plan


Method of determining each participant's allocation where the employer first calculates the sum of employee compensation (total comp), then divides individual employee comp by total comp, then multiplies each employee's fraction by amount of employer contribution.

Comp to Comp Method


What is the maximum annual contribution to a PSP?

25% of total employee compensation or IRS defined $49,000 limit


The systematic transfer of ownership between the employer and employee of employer's matching funds in a qualified retirement plan, that includes a schedule.



When an employee receives a lump-sum distribution from a retirement plan prior to retirement, the employee can either...

  • Receive the proceeds directly
  • Have the current custodian make a direct transfer to either another qualified plan or rollover IRA


If employee chooses to receive proceeds directly, employer withholds 20% of taxable sum due as prepayment of income taxes. However, in order to recover withheld taxes, what must the employee do?

 Employee must roll an amount equal to 100% of the total distribution to another plan or rollover IRA within 60 days


Qualfied plan also known as a tax-deferred annuity (TDA) or tax-sheltered annuity (TSA), that is available to employees of nonprofit organizations under Section 501(c)(3), and to employees of public school systems. These plans are not governed by ERISA.

403(b) plan


Education account that is a trust or custodial account created for purpose of paying for education expenses. Contributions are made after tax, but can be deductible for donors in low tax brackets. $2000 per year contribution limit for child younger than 18. Parents, grandparents, and other family members may contribute to this account.



What is the tax treatment for a Coverdell account?

Contributions are after-tax dollars, grows tax-deferred until distributed, and the child will not owe tax on any withdrawal from the account if education expenses for the year equal or exceed the amount of withdrawal.


When must the money be used?

By age 30, or rolled over to qualified family member who is 18 years of age, blood related, marriage or adoption.


What happens to Coverdell if not used by another family member for qualified education expenses?

Account growth becomes taxable and subject to 10% penalty


What type of education can a CESA make tax-free payouts for?

K-12 and college


Amounts withdrawn from the Education IRA that exceed the child's qualified education expenses in a tax year are...

generally subject to income tax and an additional tax of 10%. The hope scholarship credit and lifetime learning credit may be claimed for student's expenses.


State sponsored college savings plan or prepaid tuition plan with after tax contributions, tax deferred growth, and withdrawals are tax-free when used for college. Contributions are treated as gifts, which if exceeding $14,000, are taxable to the donor. Contributions may be tax deductible at state level.

529 Plan


What is 5 years worth of contributions with no gift tax liability if there are no other contributions during the 5 year period? These limits are increased periodically for inflation. Limits are $70k for single, $140k for couples.

Accelerated Gift