Retirement plans and educational funding programs

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Traditional IRAs
This account allows a maximum tax-deductible annual contribution of the lessor of $5,500 per individual or $11,000 per couple, or 100% of taxable compensation for the taxable year of 2016.
Earnings are tax-deferred.
Does not involve employer contributions and, thus, is not a plan qualified by ERISA.
Distributions may be in lump sum or periodic payments.
Penalty tax of 6% for excess contributions.
Penalty tax of 10% for early withdrawals.
Penalty tax of 50% for insufficient withdrawals after 70 ½.
Can take a distribution from IRAs without imposition of a tax penalty as long as it is made in payment of higher education costs (tuition, fees, books, supplies, and equipment)
Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)
Responsible for the catch-up provision.
Roth IRAs
Not tax-deductible.
Earnings accumulated may be withdrawn tax-free, five years following the initial deposit, provided the:
- account holder is 59 1/2 or older;
- money withdrawn is used for the first time purchase of a principal residence (over $10,000); or
- account holder has died or become disabled.
Contributions can be made passed age 70 1/2 as long as a taxpayer has earned income.
If withdrawn prior to 59 ½ the contributions are tax free but the earnings are not.
A minor can be named as beneficiary.
The ability to contribute to a Roth IRA is gradually phased out if the taxpayer's AGI is between $117,000 and $133,000. For married taxpayers who file joint tax returns, the AGI limit is $184,000.
Simplified Employee Pensions (SEP IRAs)
To be eligible, an employee must be at least 21 years of age, have performed services for the employer during at least three of the last five years, and have received at least $600 in compensation from the employer in the current year.
A SEP allows the employer to contribute up to 25% of an employee's salary to the employee's SEP IRA each year, up to a maximum of $55,000 per employee for 2016.
Employer contributions are tax deductible to the employer.
Keogh (HR-10) Plans
Employee retirement income security act (ERISA) - qualified plans intended for self-employed individuals and owner-employees of unincorporated business concerns or professional practices.
Adult employees are employees 21 years of age and older and, just as with traditional IRAs, not in excess of 70 1/2.
Distributions may be in lump sum or periodic payments.
Owner-employee businesses and professional practices must show a gross profit in order to qualify for a tax deductible contribution.
403 (B) Plans (tax-exempt organizations)
Qualified tax-deferred retirement plans for employees of public school systems, and tax-exempt, nonprofit organizations, or churches.
Tax advantages:
- Contributions are excluded from participant's gross income.
Participant's earnings accumulate tax free until distribution.
The plan must be in writing and must be made through a plan instrument, a trust agreement, or both.
The employer must remit plan contributions to an annuity contract, a mutual fund, or another approved investment.
The employee retirement income security act of 1974 (ERISA)
Federal legislation that regulates the establishment and management of corporate pension or retirement plans, also known as private sector plans.
It sets up protection for individual participants enrolled in these plans.
All qualified corporate plans must be established under a trust agreement.
A trustee is appointed for each plan and has a fiduciary responsibility for the plan and the beneficial owners.
Does not apply to public sector plans.
Qualified plan
Contributions tax deductible.
Plan approved by the IRS.
Plan cannot discriminate.
Subject to ERISA.
Tax on accumulation is deferred.
All withdrawals taxed.
Plan is a trust.
Must have a vesting schedule.
Must be in writing.
Nonqualified plan
Contributions are not tax-deductible.
Plan does not need IRS approval.
Plan can discriminate.
Not subject to ERISA.
Tax on accumulation may be deferred.
Excess over cost base is taxed.
Plan is not a trust.
Employee contributions grow tax deferred if they are invested in an annuity.
Payroll deduction plan
A retirement plan not subject to eligibility, vesting, or funding standards as required by ERISA plans.
Coverdell Education Savings Account (ESAs)
Contributions can be made by parents and other adults; the total for one child is still $2000.
Contribution limit is $2000 per year per child until the child's 18th birthday.
Contributions or not tax deductible, but all earnings are taxed deferred.
Distributions are tax free if they are taken before age 30 and used for eligible education expenses.
A beneficiary's unused balance may be rolled over to an ESA account for another child.
Funds may be used to fund education at any level.
Prepaid tuition plan
Locks in tuition prices at eligible public and private colleges and universities.
All plans cover tuition and mandatory fees only.
Most plans set lump sum and installment payments prior to purchase based on age of beneficiary and number of years of college tuition purchased.
Most state plans guaranteed or backed by state.
Most plans have age/grade limit for beneficiary.
Most state plans require either owner or beneficiary of plan to be a state resident. Most plans have limited enrollment period period.
College savings plan
No lock on college costs.
Covers all qualified higher education expenses.
Many plans have contribution limits in excess of $250,000.
No state guarantee.
Most investment options are subject to market risk.
No age limits.
No residency requirement.
Entollment open all year.
Section 529 Plans
The dollar amount of allowable contribution varies from state to state and may be as high as $300,000.
Assets in the account remain under the donor's control even after the student is of legal age.
There are no income limitations on donors making contributions to a 529 plan.
Cannot be used for educational expenses incurred below the post secondary level.
Municipal bond securities.
UGMA/UTMA
All gifts are irrevocable.
An accountant may have only one custodian and one minor or beneficial owner.
A donor of securities can act as custodian or appoint someone to do so.
Unless they are acting as custodians, parents have no legal control over this account or the securities in it.
A minor can be the beneficiary of more than one account, and a person may serve as custodian for more than one of these accounts, provided each account benefits only one minor.
The minor has the right to sue the custodian for improper actions.
The beneficiary (the child) is responsible for the taxes that need to be paid (although they are usually taken care of by the parent).
UGMA
Must be cash accounts.
Section 457
This plan, that is, it must hold plan assets in trust or custodial accounts for the benefit of individual participants.
Fiduciary duties under ERISA
Exercises any discretionary authority or control over the management of the plan or over the management or disposition of plan assets.
Renders investment advice for a fee or other compensation.
Direct or indirect, with respect to any monies or other property of such plan.
Has any discretionary authority or discretionary responsibility in the administration of such plan including appointing other plan fiduciaries or selecting and monitoring third-party service providers.
ERISA Section 404(c) - Safe Harbor
Required to provide at least three different investment alternatives with a range of risk.
Provide account access no less frequently than quarterly.
Traditional 401(k)
Provide hardship withdrawals.
A choice of investment options.
Employer matching.
Life insurance capital needs analysis
Takes into consideration the future needs of the insured and family and then factors in how much needs to be filled in by life insurance.