Lesson 9 Review
Retirement plans can be categorized as qualified or nonqualified. Retirement plans that are considered qualified meet requirements by the federal government and receive certain tax benefits. Retirement plans that do not meet the requirements of the federal government are nonqualified plans and do not receive tax benefits.
In order for retirement plans to be approved by the IRS for favorable tax treatment, they must fulfill the basic requirement categories of: Participation, coverage, vesting, funding, and contributions.
The Employee Retirement Income Security Act of 1974 (ERISA) was created to protect employees from possible loopholes in retirement plans and to allow them to receive their own contributions and company contributions for retirement.
Defined Contribution plans address the funds that are literally deposited into the employee account. A predetermined amount is contributed and grows over a period of time with timely contributions, interest and earned dividends.
Profit sharing plans allow employees to participate in the company's profits through a plan formula established and maintained by the employer. It is not necessary for the employee to make yearly contributions; however, in order to qualify for favorable tax treatment by the IRS, the plan must be maintained with recurring and substantial contributions.
Stock bonus plan benefits are delivered in the form of company stock instead of relying on the profits of the company.
Money-purchase plans depend on fixed contributions. Contributions and earnings adhere to a definite formula, distributions are made only in accordance with amounts credited to participants, and accounts are adjusted according to annual valuations.
Defined Benefit plans are pension plans devised through a specifically designed formula to provide future benefits that are tied to the employee's years of service, amount of compensation, or both. The maximum annual benefit an employee may receive is limited and set by tax law and must be indexed for inflation - the lesser of 100% of the employee's average compensation in the highest three consecutive years of employment or $200,000 (2012).
The maximum annual amount under a 401(k) plan that an employee can defer is $17,000 and $22,000 for those age 50 and older (2012).
A 403(b) tax sheltered annuity plan is similar to a 401(k) plan except it is for nonprofit organizations; i.e., charitable, educational, religious, and public school teacher organizations.
The allowed deferred amount under IRC Section 457 plans is 33 1/3% of the participant's applicable income or $17,000, whichever was less (2012). For the three years preceding retirement, the deferral limit in each year will be twice the applicable limit.
A Keogh plan is a qualified plan that allows unincorporated business owners to participate in the retirement plan as an employee. The plans can be either defined contribution or defined benefit plans and are subject to the same maximum contribution and benefit limits, participation and coverage requirements, and nondiscrimination rules as corporate plans.
Anyone under the age of 70 1/2 with earned income may open a traditional IRA.
Traditional IRAs allow contributions to grow tax deferred, and the funds extracted from the employees' compensation are not taxable as income. Participants can contribute up to $5,000 per year. Contributions exceeding limits are subject to a 6% excise tax. Those participants who are 50+ years of age may contribute an additional $1,000 to compensate for prior missed contributions. Withdrawals must start no later than April 1 following the year in which the participant reaches the age of 70 1/2, and the law specifies a minimum amount that must be withdrawn every year.
In a traditional IRA, contributions are nontaxable as income until the funds are withdrawn; then they become taxable.
With the Roth IRA, the funds are taxed as income before the contribution is made. Therefore, at the time of payout, the funds are tax free. The Roth imposes no age limits and withdrawals are either qualified or nonqualified. Roth distributions are not mandatory and therefore can be inherited and passed down through generations.
In a qualified withdrawal, earnings are distributed tax-free. In a nonqualified withdrawal, earnings are subject to tax.
A rollover IRA is any IRA whose funds have been distributed and reinvested in another IRA within 60 days of distribution.
The information contained in Unit 13 of the Florida study manual has been presented in Lesson 9 of the online course.
