The Edge - Quarter 4, 2008 - (Page 33)

FINANCIAL PLANNING | by Ronald H. Zirkel and Yvonne Trella Revenue Code Section 401(a) or the Employee Retirement Income Security Act of 1974 (ERISA). These plans are funded by employers and are more flexible, but are not eligible for the tax benefits that qualified plans offer. They may be discriminatory in their application and are typically used to provide deferred compensation to key personnel. Benefits are paid at retirement age in the form of annuities, which are taxed as ordinary income, or in lump sum payments, which can be transferred into an Individual Retirement Account (IRA) to defer taxes. The tax deduction for these plans is generally when the payments are made, not the year of the deferral. what your ultimate goal is in establishing the plan and how much or how little you can afford to – or are willing to – contribute as the employer. are pooled together and the employer promises that the plan will pay a defined benefit to each employee. In order to ensure sufficient funds are contributed to and accumulated within the plan to pay the required benefits, the services of an actuary are required. Defined benefit plans include the following: Cash Balance Plans— In this type of defined benefit plan, the employer guarantees principal and interest rate. The participant’s account is credited each year with a pay credit (dependent upon the participant’s salary) and an interest credit (a fi xed rate or variable rate usually linked to an index such as the one-year Treasury bill rate.) The plan is based on the end benefit, but it is accounted for like a defined contribution plan. Because cash balance plans do not take longevity or age into account, they are more favorable for younger employees and those with fewer years of service than the traditional defined benefit plan. Keogh Plans—These plans can be defined benefit or defined contribution. Keogh plans are retirement plans for the self-employed professional (law partnerships, medical practices and family businesses) with 10 or fewer highly compensated employees. Defined benefit Keogh plans are complex, and the employer is responsible for administration and investment choices. Defined contribution Keoghs enable employees to make their own investment decisions, with the amount of the retirement benefit dependent on the amount of annual contributions and earnings. Defined Contribution Plan—A defi ned contribution plan is a qualified retirement plan in which the contribution is defi ned, but the ultimate benefit to be paid is not. These plans allow the employer and/or employee to make THE EDGE 33 Define QUALIFIED RETIREMENT PLANS Qualified retirement plans receive greater tax advantages than nonqualified plans, but are subject to stricter government regulations, meeting the requirements of both the IRC Section 401(a) as well as ERISA. These plans must be for the exclusive benefit of employees or their beneficiaries, and they provide several tax benefits. As an employer, you can deduct allowable contributions in the year they were made on behalf of your plan’s participants. Contributions and earnings on those contributions are tax-deferred until withdrawn by the participant. In addition, the plan’s earnings grow tax-free, and participants and/or beneficiaries can further delay taxation on the plan’s benefits by transferring those amounts into another tax-deferred vehicle such as an IRA. Qualified retirement plans can be a defined benefit plan, a defined contribution plan or a hybrid plan that combines various attributes of both. Defined benefit plan—Under a defined benefit plan (traditional pension plan), the benefit is defined so that employees know the amount of the benefit they will receive at retirement, based on their salary history and years of service. The employer bears the investment risk; the employee, the employer, or both may make contributions. Defined benefit plans do not maintain an individual account for each participant. Instead, the assets

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The Edge - Quarter 4, 2008 Contents The President’s Message New Pool/Spa Federal Safety Act Worried About the 2009 Market? Treating Hot Water? Project Focus The 411 on UV Disinfection for Pools and Spas The Advantages of Seeding Aggregate Surfaces Pool and Spa Industry Wins Gold Choosing a Retirement Plan To Get Best Coverage at Lowest Cost - Shop Now Index of Advertisers

The Edge - Quarter 4, 2008

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