Tax Advantaged Plans Flashcards
What are key differences between tax advantaged and qualified plans?
Tax advantaged have different nondiscrimination rules
No 10-year forward averaging
No special pre-1974 capital gains treatment
No NUA treatment
What are key characteristics of a SIMPLE IRA?
Not generally subject to nondiscrimination or top-heavy rules
ER contributions are deductible and are not subject to FICA taxes
Contributions by EEs are excludable from gross income, but still subject to payroll tax
No ROTH or after-tax options available - only deductible contributions allowed
Plan assets cannot be rolled into another plan within 2 years of initial participation
Who are the two types of EEs who can be excluded from a ER-sponsored SIMPLEs?
Those covered by a collective bargaining agreement
Non-resident alliens
What are key characteristics of a SIMPLE IRA?
14k contribution / 3k catch-up
CY plan only
No other plans except eligible 457
Not subject to nondiscrimination or top heavy rules
What are the two ways ERs can contribute to a SIMPLE IRA?
-A match up to 3% or as little as 1% in no more than two of the five years
-A 2% of compensation nonelective contribution
What is the max salary for contribution rule specifically for ER 3% match in a SIMPLE IRA?
If the 3% match is selected, then the max compensation increases to ensure that EE contributions can reach $14k. That is 14k/.003 equals $466,667, which is the allowable salary contribution.
What is the penalty for early withdraw (before 59 1/2) from a SIMPLE IRA?
25% of any distribution made in the first two years
What are the key characteristics of a Simplified EE Pension (SEP)?
-ER Sponsored IRA in which the ER aggrees to contribute retirement monies on behalf of EEs on a nondiscriminatory and fully vested basis, avoiding nondiscrimination testing.
-An ER can’t have another plan in addition to a SEP
-All contributions are considered to come from the ER, not the EE
-Totally portable
What are the major SEP requirements?
Plan must cover all EEs 21 and over who’ve worked 3 of 5 last years, including part-time
Contributions are made on behalf of EEs who make at least $650 for the tax year
Contributions are only made by the ER
How do contribution rules differ between a SEP and SIMPLE?
SEP requires ER to contribute to those who make more than $650 per year, but does allow for higher contributions (lesser of 25% or $61k)
SIMPLE requires contributions for those making over $5k per year, but only allowed EE contributions up to $14kl
What are the top-heavy rules for SEPs?
Subject to controlled group rules and nondiscrimination requirements
60% test: total of all ER contributions made to the SEP plan for participants.
If top-heavy, ER must made 3% contribution to all EEs.
What are disadvantages of a SEP?
EEs cannot rely on a SEP only for retirement - not enough contributions (likely)
The EE bears the investment risk
Only the ER can contribute
SEP cannot receive ROTH contributions
If an ER has both a SEP and a qualified plan, contributions to the SEP reduce the allowable contributions to the qualified plan.
What are the tax implications of a SEP?
10% excise tax to the ER for excess contributions
6% excise tax for the EE for excess contributions
Considered active participant for deductibility of separate IRA contributions
What is a SARSEP?
Stopped in 1997, they will go away.
Usual contribution limits apply
EE can only open account if it is still offered by the business
25 or fewer EEs to be eligible and at least 50% must participate
What is the aggregation rule?
The EE can only contribute a total of $20.5k in one year and must aggregate all contributions across:
-traditional and Roth 401(k)
-SIMPLE IRA and 401(k)
-SARSEP plans
-Section 403(b)
