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

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planning for retirement needs

Planning for Retirement Needs

Pension and Retirement Planning Overview

Chapter 1

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

Chapter 1: Overview
tax advantaged retirement plans
Qualified Plans 401(a)

Defined benefit

Cash balance

Money purchase

Target benefit



Stock bonus


Other Plans

SEP 408 (k)

SIMPLE 408 (p)

Tax-sheltered annuities 403(b)

Tax-Advantaged Retirement Plans
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

Tax-Advantaged Plan Attributes
additional tax advantages for qualified plans
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
general requirements all tax advantaged plans
Broad participation by rank and file


Employee communications



Plan document

General Requirements—All Tax Advantaged Plans
nonqualified deferred compensation
For executives only

Few design restrictions

Employer deduction matched to the year in which the employee has income

Not prefunded

Nonqualified Deferred Compensation
individual retirement plans
Deductible and nondeductible contributions

Roth IRA

SEPs and SIMPLEs are funded with IRAs

Rollover business involves big dollars

Individual Retirement Plans

Why Have Employer Plans?

  • Employee motivation
  • Business reasons
  • Other businessowner concerns
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

The higher the tax rate the greater the savings with the pre-tax approach

The Power of Pre-tax Savings
word of caution 1040 tax table
Word of Caution1040 Tax Table

Any example must at the top and stay at the top of income level.

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

Why Employers Need Qualified Retirement Plans
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

Why Businessowners Need Qualified Retirement Plans

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
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

Setting Up a Retirement Plan
Invest contributions

Annual reporting to government

Financial reconciliation, report to company

Determine contributions

Notify participants of benefits

benefit management
Calculate and notify participants

Payouts at termination of employment

Loan program

Benefit Management
plan termination
Plans are voluntary, can be terminated at any time

Participants become fully vested

Notification to government

Benefits distributed

Plan Termination
key term review
Tax-advantaged retirement plans

Qualified plans

Nonqualified plan

Individual retirement account (IRA)

Superannuated employees

Accumulated earnings tax (S-Corp)

Key Term Review

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.

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.

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.

chapter 1 review
Tax advantaged plans

Employer deduction

Tax exempt trust

Employee tax on withdrawal


8 Qualified plans

3 other tax-sheltered


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


Chapter 1 Review