Planning for Retirement Needs

1. Planning for Retirement Needs Pension and Retirement Planning Overview Chapter 1

2. 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 Chapter 1: Overview

3. Qualified Plans 401(a) Defined benefit Cash balance Money purchase Target benefit Profit-sharing 401(k) Stock bonus ESOP Other Plans SEP 408 (k) SIMPLE 408 (p) Tax-sheltered annuities 403(b) Tax-Advantaged Retirement Plans

4. 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 Tax-Advantaged Plan Attributes

5. Investment in life insurance Special tax treatment of lump sum Grandfathered rules for those born before 1936 Deferral of gain on unrealized appreciation Additional Tax Advantages for Qualified Plans

6. Broad participation by rank and file Vesting Employee communications Nondiscrimination Prefunded Plan document General Requirements—All Tax Advantaged Plans

7. For executives only Few design restrictions Employer deduction matched to the year in which the employee has income Not prefunded Nonqualified Deferred Compensation

8. Deductible and nondeductible contributions Roth IRA SEPs and SIMPLEs are funded with IRAs Rollover business involves big dollars Individual Retirement Plans

9. Why Have Employer Plans? • Employee motivation • Business reasons • Other businessowner concerns

10. 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 The higher the tax rate the greater the savings with the pre-tax approach The Power of Pre-tax Savings

11. Accumulation after One Year

12. Word of Caution1040 Tax Table Any example must at the top and stay at the top of income level.

13. 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 Why Employers Need Qualified Retirement Plans

14. 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 Why Businessowners Need Qualified Retirement Plans

15. 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. 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 Setting Up a Retirement Plan

17. Invest contributions Annual reporting to government Financial reconciliation, report to company Determine contributions Notify participants of benefits Administration

18. Calculate and notify participants Payouts at termination of employment Loan program Benefit Management

19. Plans are voluntary, can be terminated at any time Participants become fully vested Notification to government Benefits distributed Plan Termination

20. Tax-advantaged retirement plans Qualified plans Nonqualified plan Individual retirement account (IRA) Superannuated employees Accumulated earnings tax (S-Corp) Key Term Review

21. True/False Questions • 1. The qualified pension trust is required to pay income tax on trust earnings. • 2. Certain tax-advantaged retirement plans can cover the owners and exclude the nonhighly compensated employees. • In a nonqualified plan, the employer’s deduction occurs at the same time the employees have taxable income. • 4. Contributions to a qualified plan are deductible to the employer and taxable to the employee at the time they are made. • 5. 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.

22. True/False Questions • 6. A SEP is categorized as a qualified plan. • 7. Saving on a tax-deferred basis in a qualified plan generally results in a larger accumulation than saving on an after-tax basis. • The higher the employee’s tax bracket, the greater the tax savings using a tax-advantaged retirement plan. • 9. An employer that establishes a retirement plan is exempt from negotiating with the union concerning retirement benefits. • 10. An employer may establish a retirement plan to create a graceful transition in the workforce because employees will have sufficient assets to retire.

23. True/False Questions 11. Business owners are often concerned about protecting assets from creditors in cases of bankruptcy or lawsuits. 12. A business owner is often concerned about the cost of providing benefits for the rank and file employees.

24. Tax advantaged plans Employer deduction Tax exempt trust Employee tax on withdrawal Rollover 8 Qualified plans 3 other tax-sheltered Nonqualified No design restrictions Matching tax rule Compare pre-tax and post-tax savings Employer reasons Orderly transition Attract and retain Unions and pensions Must negotiate Can exclude under coverage Small business Maximize tax shelter Creditor protection Accumulated earnings tax Liquidity Chapter 1 Review