1. Module 30 Retirement Planning

2. 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

3. The Need for Retirement Planning Key Learning Objectives n Introduction n Accumulations needed for retirement

4. Tax Deferral and Retirement Planning Key Learning Objectives n n Introduction to tax deferrals n n Before- and after-tax savings comparison n n Cost of deferral to the government n n Tax deferral vehicles n n Pension plans

5. Qualification of Pension Plans and other Retirement Vehicles Key Learning Objectives n Exclusive benefit §401(a)(2) n Nondiscrimination §401(a)(5) n Participation §401(a)(3) n Coverage §410(b) n Vesting §401(a)(7) n Distribution §401(a)(9)

6. Types of Plans Key Learning Objectives (1) n n Defined contribution plans n n Defined benefit plans n n Combined defined benefit and contribution plans n n Excess contributions n n Keogh (self-employed pension) plans

7. Contribution is defined by specified formula Defined Contribution Plans Contribution is defined by specified formula n Maximum amount lesser of 25% of the employee's compensation or $30,000 (2000), indexed for inflation n Once contribution is given to the pension trustees, employer has no further financial responsibility n Risk falls on the employee

8. Benefit is defined by specific formula Defined Benefit Plans Benefit is defined by specific formula n Maximum benefit is smallest of * $10,000, * 100% of the participant’s average compensation for 3 highest paid years, OR * $135,000 (2000), inflation adjusted * $135,000 (2000), inflation adjusted n Risk associated with investing the plan’s assets falls on employer not the employee

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

10. Keogh (Self-Employed Pension) Plans n No significant difference from other pension plans n Net income from self-employment is substituted for compensation n Gross income from self-employment reduced by u All normal deductions of earning that income u Half of the person’s self-employment tax u The amount contributed on that person’s behalf to the Keogh plan

11. Other Types of Plans Key Learning Objectives (2) n CODA-- n CODA-- Cash or deferred arrangement u §401(k) n n Tax deferred annuity u §403(b) n IRA -- n IRA -- Individual retirement account u §408(a)

12. Cash or Deferred Arrangements CODA--§401(k) n Allow employees to elect to defer part of their compensation n Vest immediately n Income earned by contributions tax deferred n Tax is deferred until money is paid out of the plan n Elective deferrals may not exceed $10,500 (2000)

13. Tax Deferred Annuities-- §403 (b) Plans n Employees of u Public educational organizations u Charitable organizations--§501 (c)(3) n Defined contribution pension plan n Basic limit is 25% of compensation up to $30,000

14. Tax Deferred Annuities-- Other Limits that Apply n Elective deferrals cannot exceed $10,500 (2000) n 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

15. Individual Retirement Accounts IRA--§408 (1) n Every individual with earned income is entitled to contribute to an IRA u not everyone is entitled to deduct contribution n Earnings in an IRA accrue without being subject to tax u Even if contribution is not deductible

16. Individual Retirement Accounts IRA--§408 (1) n Maximum annual contribution is lesser of u the individual’s earned income or u $2,000 n Married couple--each may contribute $2,000 even if only one had income

17. Individual Retirement Accounts Deductible Contribution? n May be deductible in computing AGI n Deduction is limited if u Covered by qualified pension plan AND u AGI > base amounts F determined by filing status

18. The Roth IRA Tax now, proceeds tax free n n The contribution is taxable n n Withdrawals (and earnings) are not taxed n n Must be identified as Roth IRAs when made n n Maximum contribution to ALL IRAs limited to $2,000 per taxpayer u u All IRA contributions must be grouped in considering the limit

19. The Roth IRA Further Limits on Contribution n n The allowable contribution is reduced when the taxpayer’s AGI exceeds u u For single taxpayer -- $95,000. u u For married, filing jointly -- $150,000. u u For married, filing separately -- $0. n n The allowable contribution is phased out proportionately over the next $15,000 of AGI

20. Types of Plans Key Learning Objectives (3) n SEP -- n SEP -- Simplified employee pension plan u §408(k) n SIMPLE -- n SIMPLE -- Savings Incentive Match Plan for Employees u §408(p)

21. Simplified Employee Pension Plan SEP--408(k) n n Avoids the trouble and expense of setting up and maintaining a pension trust n n Contribution is made to an IRA established by/or for the individual employee

22. Simplified Employee Pension Plan SEP--408(k) n n Maximum contribution is limited to the lesser of 15 percent of compensation or $30,000

23. Simplified Employee Pension Plan SEP--408(k) n n The employee can still contribute $2,000 to this or other IRAs, u u $4,000 if spousal IRA n B n But deductibility of this contribution may be affected by the SEP u Can’t deduct a contribution to an IRA if covered by pension plan

24. Savings Incentive Match Plan for Employees--SIMPLE--§408(p) n Company must have <100 employees n No other qualified plans allowed n No non-discrimination tests n No top-heavy rules n 100% vesting of employer contributions

25. Savings Incentive Match Plan for Employees--SIMPLE--§408(p) n Employee eligible if Compensation > $5,000 In any two previous years n Employee can defer lessor of $6,000 or 25% of compensation n Can adopt either IRA or 401(k) structure

26. Payouts From Retirement Plans Key Learning Objectives (1) n n Early withdrawals u u Generally subject to penalty if made before age 59 1/2 u u Some plans have exceptions for F F education F F first home F F medical expenses

27. Payouts From Retirement Plans Key Learning Objectives (1) n n Rollover distributions u u reinvested within 60 days to F F IRA F F New employer plan F F Keogh if self employed n n Normal payouts from tax deferred vehicles u u taxed as ordinary income (unless ROTH)

28. Payouts from Retirement Plans Key Learning Objectives (2) n n Lump-sum distributions u u May be able to pay tax over 5 years n n Minimum required distributions u u Must be made by age 701/2 (except ROTH) u u Penalty for not taking the required minimum distribution

29. Penalties for Excess Distributions and Accumulations Key Learning Objectives n n Excess distributions n n Penalty tax on excess lump-sum distributions n n Penalty tax on excess accumulations at death (except ROTH)

30. Tax and Other Planning Key Learning Objectives n Using IRA as savings account n IRA savings benefit worksheet n Should the tax on excess distributions or accumulations be avoided?