Retirement Plans and Accounts

The U.S. government through tax laws have encouraged taxpayers to save for retirement. Those retirement accounts established under qualified retirement plans will ultimately serve as a supplement or perhaps a replacement for social security retirement benefits.
The primary types of qualified retirement plans are: pension plans and profit-sharing plans. Individual Retirement Plans are considered nonqualified retirement plans.

Pension Plans:

1) Defined-Benefit Plans (the maximum amount of compensation
considered for benefits and contributions is increased to$160,000. The
annual limit on total contributions is increased to the lessor of 100% of
compensation or $40,000
2) Money Purchase Plans
3) Target-Benefit Plans

Profit-Sharing Plans:

1) Corporate Profit-Sharing Plans
2) 401 (k) Plans
3) Stock Bonus Plans

Individual Retirement Plans:

1) Individual Retirement Account (IRA)
2) Simplified Employee Pension (SEP- IRA)
3) Roth IRA

Annual contributions to 401(k) plans, 403(b) plans, SAR-SEP’s and 457 Plans are scheduled to increase as follows:

Contribution:
  Maximum Catch-Up *
Year Annual Amount Contribution
2002 $11,000 $1,000
2003 $12,000 $2,000
2004 $13,000 $3,000
2005 $14,000 $4,000
2006 $15,000 $5,000

* Individuals aged 50 and over can make additional catch-up contributions.

These amounts are indexed annually for inflation after year 2006, in $500 increments.

Individual Retirement Accounts (IRA’s)

Earnings such as interest, dividends and capital gains on the assets inside an IRA are not taxed until funds are withdrawn. This deferral provides years of income tax-free compounding to help increase retirement savings. Depending on the taxpayer’s income tax bracket, the annual contribution into the IRA account may be deductible as an adjustment to the taxpayer’s adjusted gross income. Withdrawals from the IRA Account cannot be made from the account before age 59 ½ without penalty (10%) unless certain conditions are met. Contributions after age 70 ½ cannot be made. Distributions must commence by age 70 ½ to avoid penalties.

Simplified Employee Pension (SEP-IRA’s)

SEP-IRA’s are arrangements that allow self-employed taxpayer’s to make IRA contributions for themselves and their employees. SEP rules permit employer contributions for each employee of up to 15% of an employee’s compensation or $30,000 whichever is less.

Roth IRA’s

The Roth IRA means funds contributed to these accounts are not deductible on your income tax return. Earnings accumulate income tax-free within the Roth IRA account. Because contributions to a Roth IRA are made with after-tax dollars, the taxpayer is able to make withdrawals tax-free. Contributions can be withdrawn at any time without an early withdrawal penalty. Most withdrawals of earnings after age 59 ½ and more than 5 years after the establishment of the Roth IRA will also be completely tax-free. Taxpayer’s are not required to begin taking minimum distributions by age 70 ½ from a Roth IRA. Contributions can be made after age 70 1/2.

The maximum annual contribution for both traditional and Roth IRA Accounts will increase from the current $2,000 as follows:

Year Amount
2002-2004 $3,000
2005-2007 $4,000
2008 and later $5,000

Prohibited Transactions for IRA’s

a) Borrowing money from an IRA Account.
b) Selling property, real or personal, to the IRA Account.
c) Investing in certain collectibles and other tangible personal property.
d) Using the IRA Account as collateral or security for a loan.
e) Using IRA funds to purchase property for personal use.
f) Paying the IRS owner for management of the IRA Account.

Distributions from IRA Accounts and Qualified Plans

Generally a 10% penalty on distributions taken before age 59 ½ will occur. There are exceptions to this penalty:
• Distributions made to a beneficiary or participant’s estate on or after the participant’s death.
• Distributions related to disability or mental incompetency.
• Funds of up to $10,000 withdrawn to buy a first home within 120 days from the date of distribution.
• Unlimited withdrawals for higher-education expenses for the participant, spouse, children and grandchildren.
• Withdrawals if the participant is unemployed with certain qualifications.
• Distributions made in substantially equally annual payments, similar to an annuity, over the participant’s lifetime or life expectancy or the joint lifetimes or life expectancies of the participant and the beneficiary.
• A qualified rollover to another plan or IRA.

Distributions must begin by the participant’s required beginning date, which is generally April 1 of the year following the calendar year in which the participant becomes age 70 ½ years of age. Distributions must be paid over one of the following periods:
1) The lifetime of the participant
2) The lifetimes of the participant and a designated beneficiary (e.g. spouse)
3) A period which may be a term certain, not extending beyond the table of life expectancy set forth in IRS Life Expectancy tables I, II and III. See IRS Publication 590, Appendix E.

Rollovers from Employer Plan into IRA Account

Amounts distributed from a qualified employer retirement plan can be rolled over into an IRA within 60 days of receipt by the recipient. Better yet is to have the funds directly deposited from the employer plan into the IRA Account to retain their tax-deferred status and stave off a subsequent inquiry from the IRS proving the rollover was effective. A 20 % income tax withholding occurs on distributions that are not rolled over to an IRA.