Retirement Income Section 36.1. Understanding Business and Personal Law Retirement Income Section...

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Retirement Income Section 36.1

Transcript of Retirement Income Section 36.1. Understanding Business and Personal Law Retirement Income Section...

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Retirement Income Retirement Income Section 36.1Section 36.1

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Section 36.1Section 36.1Retirement Income Retirement Income

Section 36.2Section 36.2Estate Planning Estate Planning

3636ChapterChapter Retirement and WillsRetirement and Wills

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What You’ll Learn

How to describe the main features of social How to describe the main features of social security (p. 772)security (p. 772)

How to discuss the retirement benefits How to discuss the retirement benefits offered by employer pension plans (p. 773)offered by employer pension plans (p. 773)

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What You’ll Learn

How to explain the pension rights given to How to explain the pension rights given to employees under ERISA (p. 775)employees under ERISA (p. 775)

How to distinguish among the various How to distinguish among the various personal retirement plans (p. 776)personal retirement plans (p. 776)

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Why It’s Important

Learning about different types of retirement Learning about different types of retirement plans will help you predict what your financial plans will help you predict what your financial situation and needs will be when you retire.situation and needs will be when you retire.

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Legal Terms

pension plan (p. 773)pension plan (p. 773)401(k) plan (p. 774)401(k) plan (p. 774)vesting (p. 775)vesting (p. 775)portability (p. 775)portability (p. 775)Individual Retirement Account (IRA) Individual Retirement Account (IRA) (p. 776)(p. 776)Keogh Plan (p. 778)Keogh Plan (p. 778)

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Public Pension Plans Section OutlineSection Outline

Social Security

Employer Retirement Plans Defined-Benefit PlansDefined-Contribution PlansEmployee Retirement Income Security

Act

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Personal Retirement Plans Section OutlineSection Outline

Individual Retirement AccountsKeogh Plans

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Pre-Learning Question Pre-Learning Question

What are some public pension plans?

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Public Pension Plans Public Pension Plans

The federal government administersThe federal government administers

social securitysocial securityrailroad pensionsrailroad pensionsmilitary pensionsmilitary pensionscivil service pensions civil service pensions

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Public Pension Plans Public Pension Plans

Many state and local governments Many state and local governments also provide pensions for their also provide pensions for their employees.employees.

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Social Security Social Security

Social security provides income to Social security provides income to people when their regular income people when their regular income stops because of retirement, disability, stops because of retirement, disability, or the death of someone who had or the death of someone who had provided them with income.provided them with income.

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Social Security Social Security

You and your dependents become You and your dependents become eligible for social security benefits eligible for social security benefits when you work at a job that is covered when you work at a job that is covered by social security.by social security.

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Pre-Learning Question Pre-Learning Question

Why types of retirement plans do employers offer?

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Employer Retirement Plans Employer Retirement Plans

A A pension planpension plan is a retirement plan is a retirement plan that is funded at least in part by an that is funded at least in part by an employer. The company where you employer. The company where you work may offer a pension plan to work may offer a pension plan to supplement social security.supplement social security.

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Employer Retirement Plans Employer Retirement Plans

If the plan is financed entirely by the If the plan is financed entirely by the employer, it is called a noncontributory employer, it is called a noncontributory pension plan.pension plan.

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Employer Retirement Plans Employer Retirement Plans

If it is financed by the employee alone If it is financed by the employee alone or with contributions from both or with contributions from both employer and employee, it is called a employer and employee, it is called a contributory pension plan.contributory pension plan.

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Employer Retirement Plans Employer Retirement Plans

Under a Under a 401(k) plan401(k) plan, employees , employees agree to forgo a bonus or take a agree to forgo a bonus or take a salary reduction to invest in a salary reduction to invest in a retirement plan. Employers sometimes retirement plan. Employers sometimes match the amount contributed by match the amount contributed by employees.employees.

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Defined-Benefit Plans Defined-Benefit Plans

Defined-benefit plans are the most Defined-benefit plans are the most common type of employer pension common type of employer pension plan. plan.

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Defined-Benefit Plans Defined-Benefit Plans

Under this type of plan, employees Under this type of plan, employees receive a definite, predetermined receive a definite, predetermined amount of money upon retirement or amount of money upon retirement or disability. The fixed amount is based disability. The fixed amount is based on an employee’s years of service.on an employee’s years of service.

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Defined-Contribution Plans Defined-Contribution Plans

In defined-contribution plans, an In defined-contribution plans, an employer pays a certain amount into a employer pays a certain amount into a pension fund every month (or year) for pension fund every month (or year) for each employee. The amount is usually each employee. The amount is usually a fixed percentage of the employee’s a fixed percentage of the employee’s wages or salary.wages or salary.

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Employee Retirement Income Employee Retirement Income Security Act Security Act

The Employee Retirement Income The Employee Retirement Income Security Act (ERISA) places many Security Act (ERISA) places many controls on the management of controls on the management of pension funds and gives certain rights pension funds and gives certain rights to workers.to workers.

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36.136.1

Employee Retirement Income Employee Retirement Income Security Act Security Act

Under ERISA

Employers must place employees’ pension contributions into a pension trust,

independent of the employer.

Workers are guaranteed the right to receive pension benefits regardless of

whether they are working under the plan at the time of retirement.

All pension benefits must vest after a worker has been on the job for three years.

Workers may transfer benefits from one company’s pension plan to the plan of

another company or from an individual retirement plan to a company plan.

Employees’ contributions vest immediately.

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Employee Retirement Income Employee Retirement Income Security Act Security Act

The The vestingvesting of retirement benefits is of retirement benefits is the act of giving a worker a the act of giving a worker a guaranteed right to receive a future guaranteed right to receive a future pension.pension.

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Employee Retirement Income Employee Retirement Income Security Act Security Act

The ability to transfer pension benefits The ability to transfer pension benefits from one job to another is called from one job to another is called portability.portability.

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Rose works for a small steel manufacturer. Upon retirement Rose will receive $45 per month for each year of service. What type of benefit plan does her employer provide?

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ANSWERANSWER

Defined-benefit plan

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Alejandro’s employer, an architectural firm, pays 4 percent of Alejandro’s annual salary of $50,000 into a pension fund every year. What type of benefit plan does his employer provide?

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ANSWERANSWER

Defined-contribution plan

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Luther’s employer offers a pension plan in which it matches every dollar Luther contributes up to $2,500 per year. In other words, his employer will contribute as much as Luther does to his pension fund up to $2,500.

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So if Luther contributes $2,000 one year, his employer contributes $2,000 that year, too. What type of pension plan does Luther’s employer provide?

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ANSWERANSWER

Contributory pension plan.

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Pre-Learning Question Pre-Learning Question

When should a person begin planning for retirement?

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36.136.1

Benefits of Starting Benefits of Starting a Retirement Plan Early a Retirement Plan Early

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Self-employed persons and Self-employed persons and employees who are not covered by employees who are not covered by company pension plans have the company pension plans have the same retirement needs as others. same retirement needs as others. However, the retirement funds for However, the retirement funds for these people must come from their these people must come from their own pockets.own pockets.

Personal Retirement Plans Personal Retirement Plans

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An An Individual Retirement Account Individual Retirement Account (IRA)(IRA) is an individual’s own personal is an individual’s own personal pension plan. It is a system of pension plan. It is a system of providing for retirement by saving part providing for retirement by saving part of your earnings every year.of your earnings every year.

Individual Retirement Accounts Individual Retirement Accounts

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Regular or Traditional IRARegular or Traditional IRARoth IRARoth IRASimplified Employee Pension Plan Simplified Employee Pension Plan (SEP) IRA(SEP) IRA

Types of IRAs Types of IRAs

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Simple IRASimple IRASpousal IRASpousal IRARollover IRARollover IRAEducation IRA Education IRA

Types of IRAs Types of IRAs

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Amounts up to $3,000 (increasing to Amounts up to $3,000 (increasing to $5,000 by 2008) may be set aside $5,000 by 2008) may be set aside annually for retirement. annually for retirement.

Traditional IRA Traditional IRA

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Contributions are tax deductible if your Contributions are tax deductible if your income is below a certain amount, and income is below a certain amount, and interest is tax deferred until the money interest is tax deferred until the money is withdrawn. Funds cannot be is withdrawn. Funds cannot be withdrawn without penalty before age withdrawn without penalty before age 59½.59½.

Traditional IRA Traditional IRA

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Distributions, or withdrawals, are not Distributions, or withdrawals, are not required during your lifetime. When required during your lifetime. When taken after age 59½, distributions are taken after age 59½, distributions are tax free if you have had the account tax free if you have had the account for five years.for five years.

Roth IRA Roth IRA

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Can be established for a child under Can be established for a child under age eighteen by anyone who wants to age eighteen by anyone who wants to save for the child’s college education. save for the child’s college education. The interest on the savings is tax free, The interest on the savings is tax free, and there is no early withdrawal and there is no early withdrawal penalty.penalty.

Education IRA Education IRA

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This IRA is funded by an employer. This IRA is funded by an employer. Money is withheld from an employee’s Money is withheld from an employee’s pay and placed in the IRA. Employers pay and placed in the IRA. Employers may contribute up to 15 percent of the may contribute up to 15 percent of the employee’s pay or $25,500—employee’s pay or $25,500—whichever is lower. whichever is lower.

Simplified Employee Pension Plan Simplified Employee Pension Plan

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The money invested in the plan is not The money invested in the plan is not taxed until it is withdrawn and cannot taxed until it is withdrawn and cannot be withdrawn without penalty before be withdrawn without penalty before the age of 59½.the age of 59½.

Simplified Employee Pension Plan Simplified Employee Pension Plan

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A A Keogh planKeogh plan is a retirement plan for is a retirement plan for self-employed people and their self-employed people and their employees. Contributions to the plan employees. Contributions to the plan are tax deductible, and the interest are tax deductible, and the interest earned is tax-deferred until the money earned is tax-deferred until the money is withdrawn.is withdrawn.

Keogh Plans Keogh Plans

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Reviewing What You Learned

1. What is the purpose of social security?

Section 36.1 Assessment

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Provides income to people when their regular income stops because of retirement, disability, or the death of someone who has provided them with income.

Section 36.1 Assessment

Answer

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2. Explain the difference between a noncontributory and a contributory pension plan.

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A pension plan financed entirely by the employer is called a noncontributory pension plan. A plan financed by employees alone or jointly by employees and employers is contributory.

Section 36.1 Assessment

Answer

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3. What are the pension rights given to people under ERISA?

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Guaranteed the right to receive pension benefits regardless of whether they are working under the plan at the time of retirement.

Section 36.1 Assessment

Answer

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4. Describe a traditional IRA, a Roth IRA, an Education IRA, a Simplified Employee Pension Plan, and a Keogh plan.

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Traditional IRA: $3,000 annual contributions; contributions are tax deductible if income is below a certain amount and interest is tax deferred until the money is withdrawn; cannot withdraw money without penalty before age 59½.

Section 36.1 Assessment

Answer

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Roth IRA: does not require withdrawals during your lifetime and if you do withdraw, is tax free.

Section 36.1 Assessment

Answer

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Education IRA: established for children under age 18 by anyone who wants to save for a child’s college education; interest is tax free and there is no early withdrawal penalty.

Section 36.1 Assessment

Answer

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SEP: funded by an employer. Keogh: retirement plan for self-employed people and their employees; contributions are tax deductible and the interest is tax-deferred until the money is withdrawn.

Section 36.1 Assessment

Answer

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Critical Thinking ActivityPreparing for Retirement Many Americans believe that if they are covered under an employer’s retirement plan, they will have a satisfactory income after they retire. Explain the flaw in this reasoning.

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Critical Thinking Activity AnswerPreparing for Retirement Answers will vary, but should include that the cost of living or other unknown lifestyle changes may not guarantee that your pension will be a satisfactory income after retirement.

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Legal Skills in ActionEvaluating Retirement Plans As you begin to think about your future career, the type of retirement plan that a job offers is an important benefit to consider.

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Legal Skills in ActionEvaluating Retirement Plans Evaluate the different types of plans in this section, and choose the one you think would be best for you. With a partner, explain the reasons for your selection.

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Legal Skills in Action AnswerEvaluating Retirement Plans Answers will vary, but should demonstrate an understanding of the different types of retirement plans discussed in this section.

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Retirement Income Retirement Income End of Section 36.1End of Section 36.1