Final review 6

Chapter Recap

In this chapter you learned about different types of individual and group qualified plans and their characteristics. Let’s recap the major points:

GENERAL CONCEPTS
General Requirements	Approved by the IRS Tax benefits for employers and employees Must be permanent and have a versing requirement Cannot discriminate in favor of the prohibited group
TYPES OF PLANS
Individual Qualified Plans	Traditional IRA requirements and features: Earned income Pretax contributions Contributions: Age limit - 70 ½ Dollar limit - up to a maximum allowed amount Married couples - double the amount for singles Withdrawals must begin at age 59 ½ and not later than 70 ½ Roth IRA: Earned income After-tax contributions Contributions: Beyond age 70 ½ Dollar limit - up to a maximum allowed amount Withdrawals do not have to begin at age 70 ½
Employer-sponsored Qualified Plans	General characteristics: Contributions up to an IRS-specified amounts Both employer and employee can contribute Types of plans: Keogh (HR-10) - self-employed; funds retirement programs with pretax dollars SEP - small employer/self-employed; employer funds an employee's IRA SIMPLE - small employer (no more than 100 employees); set up as IRA or as 401(k) 401(k) - any employer; cash or deferred arrangements; profit sharing 403(b) - nonprofit organizations; a tax-sheltered annuity

7: How are contributions to a tax-sheltered annuity treated with regards to taxation?

A They are taxed as income for the employee, but are tax free upon withdrawal.

B They are not included as income for the employee, but are taxable upon distribution.

C They are never taxed.

D They are taxed as income for the employee.

Funds contributed are excluded from the employee's current taxable income, but are taxable upon withdrawal.

9: In a defined contribution plan,

A The benefit is known and the contribution is unknown.

B The contribution and the benefit are unknown.

C The contribution and the benefit are known.

D The contribution is known and the benefit is unknown.

In a defined contribution plan the contribution is defined (known) and the benefit is undefined (unknown).

11: Which of the following characteristics applies to defined benefit plans but not defined contribution plans?

A Employers can choose not to make contributions for a particular year.

B They are subject to the rules of ERISA.

C The amount of contributions made by the employer is determined by an actuarial formula.

D They are qualified plans.

Defined benefit plans offer benefits that are based on a definite contribution formula. Defined contribution plans may specify that contributions are made based on corporate profits, so contributions may not be made when that corporation is not profitable. Both are qualified plans subject to the rules of ERISA.