1. Chapter 16: Basic Retirement Plans Chapter 16 Basic Retirement Plans

2.  2005 Kaplan Financial 2 Chapter 16: Basic Retirement Plans Basic Retirement Plans Qualified Plans Pension Plans Profit-Sharing Plans Other tax-advantaged plans Nonqualified plans

3.  2005 Kaplan Financial 3 Chapter 16: Basic Retirement Plans 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

4.  2005 Kaplan Financial 4 Chapter 16: Basic Retirement Plans 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

5.  2005 Kaplan Financial 5 Chapter 16: Basic Retirement Plans 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.

6.  2005 Kaplan Financial 6 Chapter 16: Basic Retirement Plans Types of Qualified Retirement Plans Classified as: Pension or Profit-sharing Defined-benefit or Defined-contribution Contributory or Noncontributory Corporate or Keogh

7.  2005 Kaplan Financial 7 Chapter 16: Basic Retirement Plans 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

8.  2005 Kaplan Financial 8 Chapter 16: Basic Retirement Plans 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.

9.  2005 Kaplan Financial 9 Chapter 16: Basic Retirement Plans 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).

10.  2005 Kaplan Financial 10 Chapter 16: Basic Retirement Plans 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

11.  2005 Kaplan Financial 11 Chapter 16: Basic Retirement Plans 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

12.  2005 Kaplan Financial 12 Chapter 16: Basic Retirement Plans 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.

13.  2005 Kaplan Financial 13 Chapter 16: 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 Section 457 Plans Split-dollar life insurance Employee stock option plans (ESOP)