1. Basic Retirement Plans
Chapter 19
Basic Retirement Plans
Chapter 19: Basic Retirement Plans

2. Basic Retirement Plans
Qualified Plans
Other tax-advantaged plans
Nonqualified plans
Chapter 19: Basic Retirement Plans

3. Chapter 19: Basic Retirement Plans
Qualified Plans
Pension plans
Profit-sharing plans
Chapter 19: Basic Retirement Plans

4. 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
Chapter 19: Basic Retirement Plans

5. 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
Chapter 19: Basic Retirement Plans

6. 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.
Chapter 19: Basic Retirement Plans

7. Types of Qualified Retirement Plans
Classified as:
Pension or Profit-sharing
Defined-benefit or Defined-contribution
Contributory or Noncontributory
Corporate or Keogh
Chapter 19: Basic Retirement Plans

8. 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
Chapter 19: Basic Retirement Plans

9. 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.
Chapter 19: Basic Retirement Plans

10. 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).
Chapter 19: Basic Retirement Plans

11. 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
Chapter 19: Basic Retirement Plans

12. 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
Chapter 19: Basic Retirement Plans

13. 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.
Chapter 19: Basic Retirement Plans

14. Chapter 19: Basic Retirement Plans
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
Split-dollar life insurance
Employee stock option plans (ESOP)
Chapter 19: Basic Retirement Plans