Module 30 Retirement Planning

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Module 30Retirement Planning
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• 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

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The Need for Retirement Planning

• Key Learning Objectives
• Introduction
• Accumulations needed for retirement

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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

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Qualification of Pension Plans and other
Retirement Vehicles

• Key Learning Objectives
• Exclusive benefit 401(a)(2)
• Nondiscrimination 401(a)(5)
• Participation 401(a)(3)
• Coverage 410(b)
• Vesting 401(a)(7)
• Distribution 401(a)(9)

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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

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Defined Contribution PlansContribution is
defined by specified formula

• Maximum amount lesser of
• 25 of the employee's compensation
• or
• 30,000 (2000), indexed for inflation
• Once contribution is given to the pension
  trustees, employer has no further financial
  responsibility
• Risk falls on the employee

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Defined Benefit PlansBenefit is defined by
specific formula

• Maximum benefit is smallest of
• 10,000,
• 100 of the participants average
  compensation for 3 highest paid years, OR
• 135,000 (2000), inflation adjusted
• Risk associated with investing the plans assets
  falls on employer not the employee

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Excess Contribution

• Contributions to a plan in excess of the limits
  are not deductible to the employer
• Trigger a 10 excise tax on the employer
• Excess funds can be
• returned to employer
• retained in plan and used in future years

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Keogh (Self-Employed Pension) Plans

• No significant difference from other pension
  plans
• Net income from self-employment is substituted
  for compensation
• Gross income from self-employment reduced by
• All normal deductions of earning that income
• Half of the persons self-employment tax
• The amount contributed on that persons behalf
  to the Keogh plan

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Other Types of Plans

• Key Learning Objectives (2)
• CODA-- Cash or deferred arrangement
• 401(k)
• Tax deferred annuity
• 403(b)
• IRA -- Individual retirement account
• 408(a)

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Cash or Deferred ArrangementsCODA--401(k)

• Allow employees to elect to defer part of their
  compensation
• Vest immediately
• Income earned by contributions tax deferred
• Tax is deferred until money is paid out of the
  plan
• Elective deferrals may not exceed 10,500 (2000)

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Tax Deferred Annuities-- 403 (b) Plans

• Employees of
• Public educational organizations
• Charitable organizations--501 (c)(3)
• Defined contribution pension plan
• Basic limit is 25 of compensation up to 30,000

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Tax Deferred Annuities-- Other Limits that Apply

• Elective deferrals cannot exceed 10,500 (2000)
• Amount deferred for any year is limited to
• 20 of compensation times the number of years
  of service
• Reduced by excludable contributions made in
  prior years

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Individual Retirement Accounts IRA--408 (1)

• Every individual with earned income is entitled
  to contribute to an IRA
• not everyone is entitled to deduct contribution
• Earnings in an IRA accrue without being subject
  to tax
• Even if contribution is not deductible

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Individual Retirement Accounts IRA--408 (1)

• Maximum annual contribution is lesser of
• the individuals earned income or
• 2,000
• Married couple--each may contribute 2,000 even
  if only one had income

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Individual Retirement Accounts Deductible
Contribution?

• May be deductible in computing AGI
• Deduction is limited if
• Covered by qualified pension plan AND
• AGI gt base amounts
• determined by filing status

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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

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The Roth IRAFurther Limits on Contribution

• The allowable contribution is reduced when the
  taxpayers 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

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Types of Plans

• Key Learning Objectives (3)
• SEP -- Simplified employee pension plan
• 408(k)
• SIMPLE -- Savings Incentive Match Plan for
  Employees
• 408(p)

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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

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Simplified Employee Pension Plan SEP--408(k)

• Maximum contribution is limited to the lesser of
• 15 percent of compensation
• or
• 30,000

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Simplified Employee Pension Plan SEP--408(k)

• The employee can still contribute 2,000 to this
  or other IRAs,
• 4,000 if spousal IRA
• But deductibility of this contribution may be
  affected by the SEP
• Cant deduct a contribution to an IRA if covered
  by pension plan

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Savings Incentive Match Plan for
Employees--SIMPLE--408(p)

• Company must have lt100 employees
• No other qualified plans allowed
• No non-discrimination tests
• No top-heavy rules
• 100 vesting of employer contributions

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Savings Incentive Match Plan for
Employees--SIMPLE--408(p)

• Employee eligible if
• Compensation gt 5,000
• In any two previous years
• Employee can defer lessor of
• 6,000 or
• 25 of compensation
• Can adopt either IRA or 401(k) structure

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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 home
• medical expenses

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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)

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Payouts from Retirement Plans

• 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

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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)

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Tax and Other Planning

• Key Learning Objectives
• Using IRA as savings account
• IRA savings benefit worksheet
• Should the tax on excess distributions or
  accumulations be avoided?