module 30 retirement planning. menu the need for retirement planning tax deferral and retirement...
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Menu
The need for retirement planning
Tax deferral and retirement planning
Qualification of pension plans
Other retirement savings vehicles
Types of retirement vehicles
Payouts from retirement plans
Penalties for excess distributions and accumulations
Tax and other planning
The Need for Retirement Planning
Key Learning ObjectivesKey Learning Objectives IntroductionIntroduction Accumulations needed for retirementAccumulations needed for retirement
Tax Deferral and Retirement Planning
Key Learning Objectives Introduction to tax deferrals Before- and after-tax savings comparison Cost of deferral to the government Tax deferral vehicles Pension plans
Qualification of Pension Plans and other Retirement Vehicles
Key Learning ObjectivesKey Learning Objectives Exclusive benefit §401(a)(2)Exclusive benefit §401(a)(2) Nondiscrimination §401(a)(5)Nondiscrimination §401(a)(5) Participation §401(a)(3)Participation §401(a)(3) Coverage §410(b)Coverage §410(b) Vesting §401(a)(7)Vesting §401(a)(7) Distribution §401(a)(9)Distribution §401(a)(9)
Types of Plans
Key Learning Objectives (1) Defined contribution plans Defined benefit plans Combined defined benefit and contribution
plans Excess contributions Keogh (self-employed pension) plans
Defined Contribution PlansContribution is defined by specified formulaContribution is defined by specified formula
Maximum amount lesser ofMaximum amount lesser of
25% of the employee's compensation 25% of the employee's compensation
or or
$30,000 (2000), indexed for inflation$30,000 (2000), indexed for inflation Once contribution is given to the pension Once contribution is given to the pension
trustees, employer has no further financial trustees, employer has no further financial responsibility responsibility
Risk falls on the employeeRisk falls on the employee
Defined Benefit PlansBenefit is defined by specific formulaBenefit is defined by specific formula
Maximum benefit is smallest ofMaximum benefit is smallest of
* $10,000, * $10,000,
* 100% of the participant’s average * 100% of the participant’s average compensation for 3 highest paid compensation for 3 highest paid
years, ORyears, OR
* $135,000 (2000), inflation adjusted* $135,000 (2000), inflation adjusted Risk associated with investing the plan’s Risk associated with investing the plan’s
assets falls on employer not the employeeassets falls on employer not the employee
Excess Contribution
Contributions to a plan in excess of the Contributions to a plan in excess of the limits are not deductible to the employerlimits are not deductible to the employer
Trigger a 10% excise tax on the employerTrigger a 10% excise tax on the employer Excess funds can be Excess funds can be
returned to employerreturned to employer retained in plan and retained in plan and
used in future yearsused in future years
Keogh (Self-Employed Pension) Plans
No significant difference from other pension plansNo significant difference from other pension plans Net income from self-employment is substituted for Net income from self-employment is substituted for
compensationcompensation Gross income from self-employment reduced byGross income from self-employment reduced by
All normal deductions of earning that All normal deductions of earning that incomeincome
Half of the person’s self-employment taxHalf of the person’s self-employment tax The amount contributed on that person’s The amount contributed on that person’s
behalf to the Keogh planbehalf to the Keogh plan
Other Types of Plans
Key Learning Objectives (2)Key Learning Objectives (2) CODA--CODA-- Cash or deferred arrangement
§401(k)§401(k)
Tax deferred annuity §403(b) §403(b)
IRA -- IRA -- Individual retirement account §408(a)§408(a)
Cash or Deferred ArrangementsCODA--§401(k)
Allow employees to elect to defer part of their Allow employees to elect to defer part of their compensationcompensation
Vest immediatelyVest immediately Income earned by contributions tax deferredIncome earned by contributions tax deferred Tax is deferred until money is paid out of the Tax is deferred until money is paid out of the
planplan Elective deferrals may not exceed $10,500 Elective deferrals may not exceed $10,500
(2000)(2000)
Tax Deferred Annuities-- §403 (b) Plans
Employees ofEmployees of Public educational organizationsPublic educational organizations Charitable Charitable organizations--§501 (c)(3)organizations--§501 (c)(3)
Defined contribution pension planDefined contribution pension plan Basic limit is 25% of compensation up Basic limit is 25% of compensation up
to $30,000 to $30,000
Tax Deferred Annuities-- Other Limits that Apply
Elective deferrals cannot exceed Elective deferrals cannot exceed $10,500 $10,500 (2000)(2000)
Amount deferred for any year is limited to Amount deferred for any year is limited to
20% of compensation times the 20% of compensation times the number number of years of serviceof years of service
Reduced by excludable contributions Reduced by excludable contributions made in prior yearsmade in prior years
Individual Retirement Accounts IRA--§408 (1)
Every individual with earned income is Every individual with earned income is entitled to contribute to an IRAentitled to contribute to an IRA not everyone is entitled to deduct contributionnot everyone is entitled to deduct contribution
Earnings in an IRA accrue without being Earnings in an IRA accrue without being subject to taxsubject to tax Even if contribution is not deductibleEven if contribution is not deductible
Individual Retirement Accounts IRA--§408 (1)
Maximum annual contribution is lesser ofMaximum annual contribution is lesser of the individual’s earned income orthe individual’s earned income or $2,000$2,000
Married couple--each may contribute Married couple--each may contribute $2,000 even if only one had income$2,000 even if only one had income
Individual Retirement Accounts Deductible Contribution?
May be deductible in computing AGIMay be deductible in computing AGI Deduction is limited if Deduction is limited if
Covered by qualified pension Covered by qualified pension plan ANDplan AND
AGI > base amountsAGI > base amounts determined by determined by
filing statusfiling status
The Roth IRATax now, proceeds tax free
The contribution is taxable Withdrawals (and earnings) are not taxed Must be identified as Roth IRAs when
made Maximum contribution to ALL IRAs
limited to $2,000 per taxpayer All IRA contributions must be grouped in
considering the limit
The Roth IRAFurther Limits on Contribution
The allowable contribution is reduced when the taxpayer’s AGI exceeds For single taxpayer -- $95,000. For married, filing jointly -- $150,000. For married, filing separately -- $0.
The allowable contribution is phased out proportionately over the next $15,000 of AGI
Types of Plans
Key Learning Objectives (3)Key Learning Objectives (3) SEP --SEP -- Simplified employee pension
plan §408(k)§408(k)
SIMPLE -- SIMPLE -- Savings Incentive Match Plan for Employees §408(p)§408(p)
Simplified Employee Pension Plan SEP--408(k)
Avoids the trouble and expense of setting up and maintaining a pension trust
Contribution is made to an IRA established by/or for the individual employee
Simplified Employee Pension Plan SEP--408(k)
Maximum contribution is limited to the lesser of
15 percent of compensation
or
$30,000
Simplified Employee Pension Plan SEP--408(k)
The employee can still contribute $2,000 to this or other IRAs, $4,000 if spousal IRA
BBut deductibility of this contribution may be affected by the SEP Can’t deduct a contribution to an IRA if Can’t deduct a contribution to an IRA if
covered by pension plancovered by pension plan
Savings Incentive Match Plan for Employees--SIMPLE--§408(p)
Company must have <100 employeesCompany must have <100 employees No other qualified plans allowedNo other qualified plans allowed No non-discrimination testsNo non-discrimination tests No top-heavy rulesNo top-heavy rules 100% vesting of employer 100% vesting of employer
contributionscontributions
Savings Incentive Match Plan for Employees--SIMPLE--§408(p)
Employee eligible ifEmployee eligible if
Compensation > $5,000Compensation > $5,000
In any two previous yearsIn any two previous years Employee can defer lessor ofEmployee can defer lessor of
$6,000 $6,000 or or 25% of compensation25% of compensation
Can adopt either IRA or 401(k) structureCan adopt either IRA or 401(k) structure
Payouts From Retirement Plans
Key Learning Objectives (1) Early withdrawals
Generally subject to penalty if made before age 59 1/2
Some plans have exceptions for education first homemedical expenses
Payouts From Retirement Plans
Key Learning Objectives (1) Rollover distributions
reinvested within 60 days to IRA New employer plan Keogh if self employed
Normal payouts from tax deferred vehicles taxed as ordinary income (unless ROTH)
Payouts from Retirement Plans
Key Learning Objectives (2)Key Learning Objectives (2) Lump-sum distributions
May be able to pay tax over 5 years Minimum required distributions
Must be made by age 701/2 (except ROTH) Penalty for not taking the required minimum
distribution
Penalties for Excess Distributions and Accumulations
Key Learning Objectives Excess distributions Penalty tax on excess lump-sum
distributions Penalty tax on excess accumulations at
death (except ROTH)
Tax and Other Planning
Key Learning ObjectivesKey Learning Objectives Using IRA as savings accountUsing IRA as savings account IRA savings benefit worksheetIRA savings benefit worksheet Should the tax on excess distributions Should the tax on excess distributions
or accumulations be avoided?or accumulations be avoided?