1. Copyright © 2007, The American College. All rights reserved. Used with permission. Planning for Retirement Needs Pension and Retirement Planning Overview Chapter 1

2. Copyright © 2007, The American College. All rights reserved. Used with permission. Chapter 1: Overview Business opportunities in the pension field What types of plans are available? Why have tax-advantaged retirement plans? –From the employee’s perspective –From the employer’s perspective –From the small business owner’s perspective

3. Copyright © 2007, The American College. All rights reserved. Used with permission. Let’s Talk About You How many work with employer-sponsored plans? What services does your firm offer? How many have prepared a personal retirement plan—either for a client or for themselves? Who understands the basics of IRAs? Looking at the list on pages 2-3, in what other activities do you see yourself getting involved?

4. Copyright © 2007, The American College. All rights reserved. Used with permission. Your Own Pension Answer the following for each type of plan in which you participate: ₋ What type of plan is it? ₋ What benefit will you receive? ₋ When do you become vested? ₋ When can you receive benefits? ₋ Are plan assets secure? ₋ What (if any) investment alternatives do you have?

5. Copyright © 2007, The American College. All rights reserved. Used with permission. Tax-Advantaged Retirement Plans Qualified Plans –Defined benefit –Cash balance –Money purchase –Target benefit –Profit-sharing –401(k) –Stock bonus –ESOP Other Plans –SEP –SIMPLE –Tax-sheltered annuities

6. Copyright © 2007, The American College. All rights reserved. Used with permission. Tax-Advantaged Plan Attributes Employer deduction at time of contribution Income is not taxed at the trust level Employees pay tax on distributions Distributions can generally be rolled into other tax- deferred vehicles

7. Copyright © 2007, The American College. All rights reserved. Used with permission. Additional Tax Advantages for Qualified Plans Grandfathered 10-year averaging Grandfathered capital-gains provision Deferral of gain on unrealized appreciation

8. Copyright © 2007, The American College. All rights reserved. Used with permission. Requirements Broad participation by rank and file Vesting Employee communications Nondiscrimination Prefunded Plan document

9. Copyright © 2007, The American College. All rights reserved. Used with permission. Nonqualified Deferred Compensation For executives only Few design restrictions Employer deduction matched to the year in which the employee has income Not prefunded

10. Copyright © 2007, The American College. All rights reserved. Used with permission. Individual Retirement Plans Deductible and nondeductible contributions Roth IRA SEPs and SIMPLEs are funded with IRAs Rollover business involves big dollars

11. Copyright © 2007, The American College. All rights reserved. Used with permission. Why Have Employer Plans? Employee motivation Business reasons Other businessowner concerns

12. Copyright © 2007, The American College. All rights reserved. Used with permission. The Power of Pre-tax Savings Deferring taxes is powerful White-collar worker at age 65 in Table 1-1 has $207,047 saving with a qualified plan, compared to $166,240 after-tax

13. Copyright © 2007, The American College. All rights reserved. Used with permission. Why Employers Need Qualified Retirement Plans Attraction and retention of employees Avoidance or appeasement of unions Employee motivation Graceful transition in turning over the workforce (superannuated employees) Social responsibility Retirement saving as part of successful compensation planning

14. Copyright © 2007, The American College. All rights reserved. Used with permission. Why Businessowners Need Qualified Retirement Plans For maximizing tax shelter For solving liquidity problems that occur at retirement or death For sheltering their assets from legal liability and bankruptcy For avoiding taxes on excess accumulated earnings

15. Copyright © 2007, The American College. All rights reserved. Used with permission. Cost of Covering Employees Benefits for employees have value May have to pay more cash if no benefits There are ways to limit costs ­ Cross-tested profit sharing ­ 401(k) and profit sharing ­ SIMPLE

16. Copyright © 2007, The American College. All rights reserved. Used with permission. Setting Up a Retirement Plan Find service providers and choose a plan Design particulars of the plan based on goals and budget Write plan, submit to IRS for approval Inform participants, enrollment meetings Establish trust or IRA accounts Make first-year contributions

17. Copyright © 2007, The American College. All rights reserved. Used with permission. Administration Invest contributions Annual reporting to government Financial reconciliation, report to company Determine contributions Notify participants of benefits

18. Copyright © 2007, The American College. All rights reserved. Used with permission. Benefit Management Calculate and notify participants Payouts at termination of employment Loan program

19. Copyright © 2007, The American College. All rights reserved. Used with permission. Plan Termination Plans are voluntary, can be terminated at any time Participants become fully vested Notification to government Benefits distributed

20. Copyright © 2007, The American College. All rights reserved. Used with permission. True/False Questions 1. One important role for the financial planner is to review the current plan to see if it meets the client’s current needs. [1-1] true 2. A review may result in modifying the plan’s benefit formula or adding a second retirement plan. [1-1] true 3. The qualified pension trust is required to pay income tax on trust earnings. [1-1] false 4. Certain tax-advantaged retirement plans can cover the owners and exclude the nonhighly compensated employees. [1-1] false 5. In a nonqualified plan, the employer’s deduction occurs at the same time the employees have taxable income. [1-1] true

21. Copyright © 2007, The American College. All rights reserved. Used with permission. True/False Questions 6. Contributions to a qualified plan are deductible to the employer and taxable to the employee at the time they are made. [1-1] false 7. Participants in a tax-advantaged plan can generally delay paying taxes at termination of employment by rolling the benefit into another tax-advantaged plan or IRA. [1-1] true 8. A SEP is categorized as a qualified plan. [1-1] false 9. Saving on a tax-deferred basis in a qualified plan generally results in a larger accumulation than saving on an after-tax basis. [1-2] true 10. The higher the employee’s tax bracket, the greater the tax savings using a tax-advantaged retirement plan. [1-2] true

22. Copyright © 2007, The American College. All rights reserved. Used with permission. True/False Questions 11. An employer that establishes a retirement plan is exempt from negotiating with the union concerning retirement benefits. [1-3] false 12. Business owners are often concerned about protecting assets from creditors in cases of bankruptcy or lawsuits. [1-4] true 13. A business owner is often concerned about the cost of providing benefits for the rank and file employees. [1-4] true