Topic 12: Retirement Benefits Flashcards
(24 cards)
Pension Plans Eligibility Standards
Minimum age cannot exceed 21 and
Minimum service requirement cannot exceed one year
Normal Retirement Age (NRA)
Earliest age at which EEs can retire and receive full benefits
Early Retirement Age
Earliest at which an EE may retire and receive some benefit
Usually paid a reduced benefit (full actuarial equivalent)
Late Retirement Age
Retirement after NRA
ER should increase benefit but is not required to do so
Vesting
The degree to which a plan participant’s pension rights are non-forfeitable, regardless of whether the EE continues working for a particular ER
Just refers to status of ER contributions
Is An Employee Always Entitled to His/Her Own Contributions to Pension?
Yes with interest
Defined Contribution Plans Known and Unknown
Known: Annual ER contribution
Unknown: Annual retirement benefit received at retirement
Unknown in Defined Contribution Plan is Unknown Because…
EE may also contribute
Funds are invested until retirement
Different EEs have different number of years of service
Future salary is unknown
Who Burdens the Risk in Defined Contribution Plans?
Employee
ER liability is limited to cash contributions in that specific year making it easy to run and account for
Advantage of Defined Contribution Plans
EEs see exactly the balance at all times throughout working life
Defined Benefit Plans Known and Unknowns
Known: Formula that determines benefit at retirement (with proper info, EE can calculate benefit at retirement fairly precisely)
Unknown: Amount that ER must contribute in any particular in order to fund the promised benefit
Who Bears the Risk in Defined Benefit Plans?
ER bears uncertainty and investment risk
Creates a future liability for ER
Employee Savings Plans
Voluntary plans designed to supplement other qualified plans or to be used in place of an ER sponsored and funded plan
Receive certain tax advantages from participations
In theory, a way to ween people off Social Security
401K (profit) or 403B (non-profit)
Most Popular Form of Defined Contribution Plan?
Employee Savings Plan AKA 401K
Section 401K Plans (Employee Savings Plans)
Also known as a cash or deferred arrangement
Immediate income tax deduction of EE contribution
ERs may or may not match EE contributions
EE contributions are referred to in the tax code as elective deferrals
EEs generally have the choice of investment vehicles for their accounts
Annual limit on 401K
$18,000 as of 2016
IRA (Individual Retirement Accounts)
Designed to supplement other types of retirement income
Funds are invested in a variety of financial instruments and accumulate on a tax-deferred basis until distributed
Tax deduction for IRA is limited to individuals who do not have access to 401K plan
Maximum contribution to IRA
$5,500 Annually
Minimum Age Funds Can Be Withdrawn From IRA or 401K
59.5 Except in case of death or disability
Penalty For Early Distribution of 401k or IRA
10% Penalty on top of tax implications
Tax Implications of 401K and IRA Funds
Income goes in tax free but is taxed as ordinary income when withdrawn
IRA and 401K Rollovers
Occurs when the owner takes funds out of one account and places them in another (Qualified Retirement Account)
What Rollovers Are Allowed?
One IRA to another IRA
401K to IRA
One 401K to another 401K
Cannot transfer IRA to 401K
ROTH IRA (1997 Tax Reform Act)
No tax deduction for contributions
Interest grows tax-free
Withdrawals are tax-free
Can contribute up to $5,500 annually
