Retirement and College Savings Plans - Other Qualified Retirement Plans



While the three plans discussed above are the most commonly used employer-sponsored plans, you should be familiar with several others, including:

  • Simplified Employee Pension (SEP) IRAs
    SEP IRAs were created to provide a simpler alternative to profit-sharing plans. SEP IRAs are easy to establish and run, yet employers may still vary their contributions to the plan from year to year, much in the same manner as with a profit-sharing plan.

    Under the rules of a SEP, the employer is required to include all employees that are 21 or older and have worked for the employer during three of the last five years.

    In 2006, an employer may contribute up to 25% of the employee's salary or $44,000, whichever is lowest, to the employee's individual SEP IRA account.

    Learn more about the eligibility requirements, and contributions and distribution rules of SEP IRAs within the SEP IRAs tutorial.

  • Savings Incentive Match Plans for Employees (SIMPLE)
    SIMPLE plans are available for small employers who have 100 or fewer eligible employees (those who make at least $5,000 per year) and who sponsor no other retirement plans for their employees. The SIMPLE contributions may be made either to an IRA or a 401(k). Employees can choose to contribute up to $10,000 per year (for 2005 and 2006, then indexed for inflation) via salary deferral. The employer must contribute either a matching amount up to 3% or a non-elective contribution of at least 2%. SIMPLE plans are so named because they require much less paperwork, administrative testing and costs than other employer sponsored retirement plans.

  • 457 Governmental Plans
    457 plans are similar to 403(b) plans and are available to governmental organizations such as state, county and municipal employers. They are known as deferred compensation plans, and contributions may only be made by the employee via salary deferral. Maximum salary deferral limits are the same as for 401(k) plans.

  • Keogh Plans
    Keogh plans, originally called HR 10 plans, were introduced in 1962 to give tax-deductible retirement benefits to self-employed individuals and owner-employees of unincorporated businesses or professional practices. As with all qualified plans, only earned income can be considered for contribution eligibility. Moreover, if a business is not profitable, no contribution is allowed.
    A self-employed individual is able to contribute to a Keogh even if he or she is also an employee of a corporation with a qualified employer-sponsored retirement plan. However, the investor can only base contributions to the Keogh plan on the income from self-employment activities.

    Employees of a self-employed person may participate in a Keogh plan subject to the following eligibility rules:
    • Full-time employees must receive compensation for at least 1,000 hours of work per year.

    • All employees who contribute to the Keogh plan must be 21 or older.

    • All employees who contribute to the Keogh must have completed one or more years of continuous employment or have been employed on a continual basis from the Keogh plan's start date if fewer than three years have elapsed.

    • An employee who has provided five years of employment must be fully vested in employer contributions.

    • The maximum contribution to a Keogh plan is the lesser of 25% of self-employment earned income or $40,000 indexed for inflation ($44,000 for 2006).

Withdrawals from Qualified Retirement Plans
The taxation of withdrawals is similar to those from an IRA. Withdrawals prior to reaching the age of 59.5 are subject to a 10% tax penalty, as well as ordinary income taxes. There are some exceptions to that 10% penalty:

  • The taxpayer becomes disabled.
  • The employee retires after reaching age 55 (this exception applies only to withdrawals from the current company's plan, not previous employer plans or IRAs).
  • Withdrawals made in case of divorce, as part of a Qualified Domestic Relations Order (QDRO).
  • The beneficiary withdraws funds from the plan after the employee's death.
  • The employee needs money to cover medical expenses that are in excess of 7.5% of adjusted gross income.
  • Withdrawals are made in a series of "substantially equal periodic payments" over the owner's life expectancy.

Funds in a qualified retirement plan may be transferred or rolled over to another retirement plan or IRA without taxation. In the case of a direct transfer or direct rollover, the money is sent directly from the custodian of the plan to the custodian of the new plan. No income taxes are withheld. However, if the employee withdraws the funds directly, there is a mandatory 20% income tax withholding. So if the employee chooses to roll the funds over to another plan, he or she will either have to find the money to deposit that additional 20%, or will have to pay taxes (and penalties, if under the age of 59.5) on the 20% that was not rolled over.

Required Minimum Distribution Rules
The IRS requires distributions to begin from qualified plans (and IRAs) by the April 1 of the year following your attainment of age 70.5. The only exception to this requirement is for those who are still working and the exception applies only to the current employer's plan (not previous employer plans or IRAs). The amount that must be withdrawn is calculated by dividing the account balance by a life expectancy factor. A 50% tax penalty applies to amounts that should have been withdrawn but were not.

Non-Qualified Employer-Sponsored Retirement Plans


Related Articles
  1. Term

    What Is Corporate Inversion?

    Corporate inversion occurs when a U.S. company buys or combines with a foreign company in a country with a lower corporate tax rate.
  2. Investing News

    Comcast Acquires Dreamworks Animation for $3.8B (DWA, CMCSA)

    A quick look at what Comcast owns!
  3. Savings

    The Difference Between Compounding Interest and Simple Interest

    Interest is the cost a borrower pays to use someone else’s money. Interest can be either simple or compounded.
  4. Term

    What Is Stockholders' Equity?

    Stockholders’ equity represents the equity that shareholders own in a company.
  5. Insurance

    Dear God, Please Pay My Hospital Bill

    As health insurance costs under Obamacare rise, some consumers are turning to health care sharing ministries. Here's how they work and what you risk.
  6. Investing

    Original Star Wars Trilogy Returning to Theatres in August

    The oldest three Star Wars movies return to the big screen in August in a special program called "Return of the Trilogy".
  7. Savings

    Get a More Comfortable Seat in Coach for Less

    Try these four strategies to get a better seat in economy class the next time you fly.
  8. Investing

    Buyers Want Yahoo Japan, Not Yahoo

    Buyers may be more interested in Yahoo’s Japanese counterpart than the company itself.
  9. Credit & Loans

    10 Ways To Improve Your Credit Report

    A good credit rating can make your life simpler in almost every way. Here's how to build up yours – and repair it if times get tough.
  10. Stock Analysis

    5 Stocks Below $10 That Have Crushed the Market

    These five small-cap stocks have been on fire. Should they be on your radar?
RELATED TERMS
  1. Bunny Market

    Bunny market describes a stock market that does not have an obvious ...
  2. Davos Man/Davos Woman

    Davos man/Davos woman refers to the members of the World Economic ...
  3. File and Suspend

    File and suspend is a Social Security claim strategy that allows ...
  4. Form 1095-B

    An IRS Form sent to individuals who received minimum essential ...
  5. Form 1095-A

    An IRS form sent to anybody who received health insurance coverage ...
  6. Kurtosis

    A statistical measure used to describe the distribution of observed ...
RELATED FAQS
  1. Is a money market account the same as a money market fund?

    Discover the differences between money market accounts and money market funds, including minimum balance requirements, withdrawal ... Read Answer >>
  2. What is the 1003 mortgage application form?

    Learn about the 1003 mortgage application form, what information it requires and why this form is the industry standard for ... Read Answer >>
  3. What typically comprises a money market fund?

    Learn about the basic types of money market funds and discover how they are characterized by the types of investments that ... Read Answer >>
  4. How can I budget for both short-term expenses and long-term goals?

    The first step in planning for long-term goals is actually determining how much you spend on short-term expenses. Once you ... Read Answer >>
  5. What are common advantages of investing in large cap stocks?

    Learn what large-cap stocks are and how investors can benefit from common advantages of adding large-cap stocks to their ... Read Answer >>
  6. How old should you be to get life insurance?

    There's really no pre-determined age when it suddenly becomes necessary to take out a life insurance policy. However, if ... Read Answer >>
Hot Definitions
  1. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  2. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  3. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  4. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  5. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  6. Economies Of Scale

    Economies of scale is the cost advantage that arises with increased output of a product. Economies of scale arise because ...
Trading Center