Tax-Qualified Individual Retirement Plans
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______ are personal savings plans which give an individual certain incentives to invest money today to finance their retirement. With some exceptions, (the Rothand Education IRAs), the plans which will be discussed briefly in this text have the following characteristics:
Qualified plans must be formally written and approved by the Internal Revenue Service.
Contributions are tax-deductible (except Roth and Education IRAs)
Interest earned on contributions are tax-deferred (until withdrawn), and since the accumulated funds are 100% vested, they may be withdrawn at any time.
There is an early withdrawal penalty of 10% by the IRS if the funds are withdrawn before age 59½ (subject to a few exceptions).
There is a late withdrawal penalty of 50%. Funds need to start being liquidated byage 70½ and the 50% penalty applies only on the funds which should have beenwithdrawn and not on the entire account balance.
A deferred annuity can be used to fund these individual qualified programs,not life insurance.
Qualified Retirement Plans
1. A _____ (_____) may be deductible or non-deductible(depending on IRS qualifications). If the individual or the individual's spouse, if married and filing jointly, has available to them an employer-maintained retirement plan, contributions are deductible if adjusted gross income (AGI) is less than a certain amount.
Traditional IRA (Individual Retirement Account)
2. A - The _____ is treated the same as a traditional IRA with a few exceptions. No tax deduction is allowed for any contribution to a ____. Unlike a traditional IRA, contributions to a ____ are permitted after the individual has reached age 70½. Further, the mandatory distribution rules do not apply; thus, required minimum distributions need not begin by April 1 of the year following the year the individual attains age 70½. Qualified distributions from Roth IRAs are not includible in income.Thus, earnings are tax-free, not tax-deferred as with traditional IRAs.
Maximum contributions for both the Traditional IRA and Roth IRA:For the year 2013, $5,500 per individual and $11,000 total for individual and spouse,plus an additional $1,000 for individuals age 50 and older.
Roth IRA (Individual Retirement Account)
3. _____ - Anyone with income from self-employment may establish a ____ or ___ plan. The ____ Plan was designed to help small businesses which includes sole proprietors, partnerships, or professionals who are not incorporated. Individuals who are employed by corporations but who earn self-employment income on the side may establish a Keogh for that self-employment income. The maximum contribution is 100% of earned income, up to a certain dollar maximum, whichever is less.
HR10 (Keogh Plan)
4. _____ - Employees of tax exempt,charitable, educational, nonprofit or religious organizations may have a portion of their income put into a TSA. The maximum contribution is 100% of earned income, up to a certain dollar maximum, whichever is less.
T.S.A. (Tax Sheltered Annuity) (a.k.a. 403b or 501C-3 Plans)
5. _____ - is similar to the traditional IRA except that the insured can save more of their earned income. The SEP was established for small businesses with the intention of simplifying the administration and reporting requirements for the employer. The maximum contribution is 25% of the employees' earned income, or a maximum of a certain dollar amount, whichever is less.
S.E.P. (Simplified Employee Pension)
Recognizing the necessity for working people to provide for their own retirements, the government offers some significant tax benefits for certain kinds of retirement plans. These are called _____ Retirement Plans. In order to be qualified, a retirement plan must meet certain requirements of the Internal Revenue Code with respect to participation,funding, benefits, vesting, and so on. A qualified retirement plan offers significant tax advantages.
Tax Advantages Include:
Tax deductible contributions
Tax deferred accumulation of funds
Taxed as liquidated
Employer Sponsored Plans Must:
Be for the employees and their beneficiaries
Be formally written and communicated to the employees
Be approved by the Internal Revenue Service
Have a vesting requirement
Deferred Compensation (a.k.a. salary continuation) is a nonqualified incentive plan that allows an employer to provide certain employees (as opposed to all employees) with compensation at some predetermined future date. The "deferred" refers to taking current compensation awayfrom the employee by means of a salary cut or the forgoing of raises or bonuses and thenpaying it to the employee at a later time, most commonly after retirement.
★ Section 457 Plans are available to employees or independent contractors of state and local governments and most tax exempt organizations. Such individuals may elect to defer aportion of their salary or hourly compensation, subject to limitations. Such deferrals will NOT be taxed currently on the amount deferred, but will be taxed upon distribution.
★ Perfect for fire and police department employees, and other city and state workers.
★ Life insurance may be used to fund certain non-qualified retirement programs such as Split Dollar, Deferred Compensation Plans and Executive Bonus plans. These plans are discussedunder Business Uses of Life Insurance on the next pages.
Nonqualified Plans (a.k.a. Section 457)
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