Chapter 16: Basic Retirement Plans Chapter 16 Basic Retirement Plans.

Chapter 16: Basic Retirement Plans

Chapter 16

Basic Retirement Plans


2005 Kaplan Financial

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Basic Retirement Plans

Qualified Plans Pension Plans Profit-Sharing Plans

Other tax-advantaged plans Nonqualified plans



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Characteristics of Qualified Retirement Plans

Employer contributions are not subject to federal income tax or payroll tax

Employee contributions are not subject to federal income tax

Employee contributions are subject to payroll tax Tax-deferred growth Special income tax averaging/NUA ERISA protection Timing of income tax deduction Small business tax credit Retirement plans as part of a compensation

package



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Disadvantages of Qualified Retirement Plans

Costs to qualify, fund, and administer the plan

Annual compensation limit Eligibility requirements Coverage of employees Vesting requirements Top-heavy plans Disclosure requirements Annual testing



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Benefits of Tax Deferral Tax deferral is perhaps the biggest

benefit for an employee who participates in a qualified retirement plan.

Neither plan contributions nor earnings on contributions are currently subject to income tax.

In retirement, when distributions begin, the plan participant generally will be in a lower income tax bracket than during the working years.



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Types of Qualified Retirement Plans

Classified as: Pension or Profit-sharing Defined-benefit or Defined-

contribution Contributory or Noncontributory Corporate or Keogh



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Pension Plan vs. Profit-Sharing Plan

A pension plan is a qualified plan structured to provide a regularly paid fixed sum at retirement

A profit-sharing plan is a qualified defined-contribution plan featuring a flexible (discretionary) employer-contribution provision



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Defined-Benefit Plan vs. Defined-Contribution Plan

A defined-benefit plan specifies the actuarially determined benefit that each employee receives at retirement.

A defined-contribution plan specifies the annual employer current contribution. The amount of benefit received by an employee depends on what the account balance is at retirement.



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Contributory Plan vs. Noncontributory Plan

Qualified retirement plans may be distinguished as either contributory (employee makes some contribution) or noncontributory (employer pays all).

Most pension and profit-sharing plans are noncontributory. Exceptions are the 401(k) and thrift plan

(an after-tax savings plan).



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Corporate Plan vs. Keogh Plan

Corporate-sponsored plans Regular C corporations or S corporations

Keogh plans (a qualified plan for unincorporated businesses) Self-employed, Schedule C,

partnerships, LLCs filing as partnerships



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Other Tax-Advantaged Plans

Individual Retirement Account (IRA) or IRA Annuity Traditional – pretax Roth – after tax

Simplified Employee Plan (SEP) Savings Incentive Match Plan for

Employees (SIMPLE) 403(b) Plan



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Distributions from Qualified and Other Tax-Advantaged Plans

If the contributions were pretax, then both contributions and earnings are treated as ordinary income equal to the distribution, and thus receive ordinary income tax treatment.

If the contributions were after tax, the contributions are treated as a return of capital and the earnings are treated as ordinary income. Each distribution is prorated as to return of taxable basis and ordinary income subject to income tax.



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Nonqualified Plan

A retirement plan that can discriminate in favor of executives, but which is not eligible for the special tax benefits available for qualified or other tax-advantaged retirement plans. Deferred-compensation plans Section 457 Plans Split-dollar life insurance Employee stock option plans (ESOP)

Chapter 16: Basic Retirement Plans Chapter 16 Basic Retirement Plans.

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Transcript of Chapter 16: Basic Retirement Plans Chapter 16 Basic Retirement Plans.