Retirement Plans Review

Employer sponsored nonqualified retirement plans: payroll deduction plan, deferred compensation, Section 457(b) plan

Qualified retirement plans: funded by before tax dollars, money grow tax deferred, everything taxed at distribution as ordinary income taxes

Traditional IRA

• Qualification - anyone with earned income under age 70.5
• Limits - 100% of earned income, catch up contributions at age 50+, spousal IRA (for spouse with min or no income, must be set up as two separate IRAs, must file a joint tax return)
• Investments by IRA participants may self direct contributions, 6% penalty for excess contribution
• If covered by retirement plan, contribution may or may not be tax deductible, depends on adjusted gross income (AGI).
• Withdrawal of funds: if funded with qualified contribution, the entire amount is taxed, payout allowed between ages 59.5 and 70.5 without penalty
• Pre-59.5 payments subject to ordinary income tax plus 10% penalty, exceptions: death or disability, education or first time home purchase, health insurance premium for the unemployed, medical expenses in excess of defined AGI limits, Rule 72-t (annutize prior to age 59.5)
• Post-70.5 insufficient distribution subject to ordinary income tax plus 50% penalty, MRD by April 1 of the year following the year of turning 70.5
• Rollovers: from one trustee to you to another trustee, initial within 60 days of distribution, once every 12 months
• Transfers: no limit on how often 

Roth IRA

• Limits: 100% of earned income, not to exceed indexed maximum, offset by traditional IRA contribution
• Contributions not deductible
• Earnings accrue tax deferred
• Withdraws are tax free if account held 5 years and owner is at least 59.5
• Prior to age 59.5: contributions are withdrawn tax free, withdrawals of earnings from account held 5 years are tax free in the event of death, disability, first time home purchase up to $10000
• Withdrawals of earnings are subject to tax but no 10% penalty in case of life annuity, education expenses, medical expenses, health insurance for the unemployed
• No 70.5 age rule - not for contributions, not for distributions

Employer sponsored Qualified retirement plans

Simplified employee pension (SEP IRA)
Employer sponsored contributions to individuals IRAs established for employees

Simple Plan
For small businesses, fewer than 100 employees
Employee makes pre-tax contributions

Keogh plan - HR-10

• Self-employed persons, unincorporated businesses
• Tax deductible contributions
• Withdrawals of funds: entire amount is taxed, pre-59.5 distributions subject to 10% penalty, excess accumulation - insufficient distributions after 70.5 subject to 50% penalty
• Eligible employees covered at same rate as owners

Corporate Sponsored Plans

Defined contribution plan: annual contribution is predetermined, retirement benefits are uncertain, younger employees benefit most
Defined benefit plan: annual contribution is determined by yearly actuarial calculations, retirement benefits are targeted for a certain amount, older employees benefit most, fully funded by employer

Profit Sharing Plans
Annual contribution is not mandatory

401(k)
Fully funded by employee - salary reduction
Contributions not included in income and earnings tax deferred
Distributions 100% taxable

Self-employed 401(k) Plan
Company with no full time employees (excluding owner/spouse)

Roth 401(k) Plan
After-tax contributions/earnings tax deferred
No income limitations
Premits employer match to traditional 401(k)

403(b) Plans
Available to employees of public educational institutions, 501(c)3 tax-exempt organizations
Salary reduction, employer may match contributions
Investment options: typically an annuity but other investments are available, no life insurance policies
Distribution: follows the same rule for all qualified plans

Coverdell Education Savings Account (ESA)
After-tax contribution, must be established for beneficiary before 18 old, max $2000 per child per year until 18th birthday
Subject ot income limitations
Money grows tax deferred, withdrawn tax-free for qualified education expenses (very broad, academic tutoring, transportation, etc.)
Must be used by age 30 or passes to beneficiary unless redesignated, otherwise subject to income tax and 10% penalty

Section 529 Plans

• Plans vary from state to state
• After-tax contribution, no income limitation
• Distributions federally tax-exempt if used for qualified post-secondary (college) education
• Two types of plans: pre-paid tuition (offers inflation protection), college savings plan (3rd party contract with professional money mgrs, investment risk, contributions limits vary by state, subject to Fed gift tax rules, 5-year aggregate rules), distributions federally tax exempt, money distributed for other than qualified education is subject to income taxes plus 10% penalty on earnings

ERISA
Established 1974
Establishes guidelines on eligibility: 21 years of age or older, one year of service, worked 1000 hours in the previous year
Funding: funds contributed must be segregated, plans trustees have a fiduciary responsibility
Fiduciary responsibilities: establish and follow a written investment policy for the plan, diversify plan assets, monitor investment performance, not engage in prohibited activities
Vesting schedules: gradual, cliff
Nondiscrimination