this post will get deleted.... just using google talk to "read" haha

Although retirement can represent time and opportunity for travel, hobby pursuit, and quality family-time, this period also brings the daunting challenge of living on a fixed income. To help individuals meet this challenge, the United States government implemented Social Security in 1937 and continues to offer tax incentives today for establishing and contributing to retirement savings plans.
Because many retirement plans are funded by insurance products - primarily annuities - it is important for insurance professionals to be able to explain them to customers. Unit 15 explores the various options individuals, families, businesses, and non-profit organizations have for funding retirement. It also examines the functions and benefits of the federal Social Security program.
This unit is divided into three sections:
Retirement Plans
Tax Considerations for Qualified Retirement Plans
Social Security

Retirement savings plans are classified as qualified or nonqualified based on whether or not they meet specific federal guidelines.

Qualified Plans
A qualified plan meets the requirements of the Internal Revenue Code section 401(a) and the Employee Retirement Income Security Act (ERISA) of 1974.
Qualified retirement plans receive favorable tax treatment. Contributions to a qualified plan can reduce current taxable income. In addition, money accumulated within the plan is not taxable until the owner begins receiving distributions at retirement.
Tax considerations for qualified retirement plans are discussed in Section 2.

Nonqualified Plans
Nonqualified plans do not meet federal guidelines for favorable tax treatment.
Under a nonqualified retirement plan, an employee defers receipt of current earnings—such as raises and bonuses—until retirement.
Deferred compensation and other nonqualified plans are most commonly used for highly compensated employees.
Certain nonqualified plans include additional features and considerations:
Nonqualified retirement arrangements are an option for individuals who are ineligible for participation in a qualified plan or have already invested the maximum amount they are allowed to contribute to a qualified plan for a given year.
Individuals can defer taxes on investment earnings, but contributions are still taxed before they are invested.
A nonqualified plan may be funded, which means it is backed by an annuity, or it may be unfunded, meaning the employer promises to issue additional capital in the future. Unfunded plans carry the risk of the employer becoming insolvent before the funds are proffered.

The two major classifications of qualified retirement plans are: defined benefit plans, and defined contribution plans. Both require continual reporting to the IRS, as well as other government entities, depending on the plan.

Defined Benefit Plans
A defined benefit plan provides a specific or “defined” benefit to employees upon retirement. The employer makes all contributions on behalf of eligible employees.
Benefit amounts are specified in retirement plans based on a formula utilizing factors such as salary history and length of employment. However, employer contribution amounts are not specified.
Funding for a defined benefit plan can be provided by the employer through either a group deferred annuity or an individual deferred annuity.

Defined Contribution Plans
A defined contribution plan controls how much is contributed to the plan on behalf of eligible employees, but not the amount in benefits to be received at retirement.
With a defined contribution plan, the employer generally agrees to contribute a set amount of money, often based on a percentage of an employee’s salary, to the retirement plan each year and offers a variety of investment options for the funds.

Defined benefit plans have traditionally been called pension plans. They are designed to provide a fixed or defined source of income when an employee retires.

The amount of money received at retirement is based on the:
Employee’s final or average salary
Length of employment with the company
Employee’s age at retirement

Defined benefit plans are set up by employers who make all the contributions and determine how all funds are invested. They generally pay a regular monthly benefit to retired employees for life.
In order to obtain pension benefits, an employee must be vested.
A vested employee has the right to collect a pension at a certain age, even if he moves to another company before reaching retirement age. Employees may need to be employed for a certain number of years before they are fully vested in a company plan, and those who leave their jobs before becoming vested may lose all of their pension rights.
Although the IRS allows companies to set their own vesting schedules, it places a maximum timeframe of six years.

A simplified employee pension (SEP) plan is an employer-sponsored defined benefit plan that has minimal IRS reporting and disclosure requirements for compliance.
Any type of business entity (such as a sole proprietorship, partnership, corporation, and certain tax-exempt organizations) can establish an SEP plan for its employees.
SEP plans allow small employers to make contributions directly into an individual retirement arrangement (IRA), more commonly referred to as an individual retirement account.
SEPs provide an easier means of offering a pension plan, since IRAs are less complicated to establish and administer.
SEPs can be set up by a business for employees or by a self-employed individual. Contributions made by an employer to an employee’s SEP are not part of the employee’s annual taxable income, provided the amount does not exceed $40,000 or 25% of the employee’s compensation.

Employers are required to make contributions for each of their employees who:
Is age 21 or older.
Has worked for the employer during the current year.
Received compensation from the employer in at least three of the past five years.

SEP contribution rates can vary over time, but the rate must be uniform for all employees. SEPs are vested immediately. Although an employee has some control over where the contributions are invested, only employer contributions are permitted.
An SEP plan can be used for a business of any size, but generally the business cannot simultaneously offer any other retirement plan. IRAs including SEPs may not be funded with a life insurance product unless it is an annuity.

Defined contribution plans differ from defined benefit arrangements in that there is no guarantee of a specific retirement benefit. The amount an employee receives is based on the amount contributed to the plan, how it is invested, and the return on the investment. Investments may not perform as well as expected, resulting in fewer funds available for retirement.
Defined contribution plans generally give employees greater control over where their retirement money is invested. Employees can also transfer the funds to a new employer’s plan upon changing jobs. Employee participation in defined contribution plans is generally optional.
An employer may offer only one kind of defined contribution plan to employees. Available options include:
IRAs – traditional and Roth
Profit sharing plans
CODA plans
403(b) tax sheltered annuities
SIMPLE plans
Keogh Plans for Self-Employed Individuals
Money purchase plans
These plans are discussed in detail throughout this section.

Since 1974, a defined contribution plan called an individual retirement arrangement, or IRA, has helped people with earned income—including the self-employed—save for retirement while simultaneously benefiting from several tax advantages. IRAs can also be opened by small businesses.
The only requirement for opening an IRA is having earned income – that’s money earned as compensation for employment rather than inheritance, life insurance benefits, or other non-work-related forms of income.
Individuals may contribute 100% of income earned to an IRA as long as total annual contributions do not exceed $5,000. This contribution limit applies whether the deposits are all placed in one account or divided between two or more accounts. Annual contributions can never exceed one’s earnings, so a person making $4,500 is allowed to contribute up to $4,500, while a person making $8,000 may only contribute up to $5,000.
Spousal IRAs for non-working or part-time employed spouses may be established based on the same limitations as those that apply to the working spouse. Contributions may not exceed 100% of the wage-earning spouse’s earned income.
Money in an IRA can be invested in a variety of options with the exception of collectibles, such as paintings, jewelry, or antiques. Popular vehicles used to fund IRAs include:
Mutual funds
Bank certificates of deposit (CDs)
Annuities
The two most common types of these accounts are the traditional IRA and the Roth IRA.

A traditional IRA is a tax-deferred retirement savings account with taxes being paid when the funds are withdrawn at retirement.
By deferring taxes, all dividends, interest, and capital gains earned on the investment grow over the years without being reduced by taxes.
To discourage people from using money in their retirement accounts before retirement, the federal government places penalties on early withdrawal of IRA funds. In most cases, funds cannot be withdrawn penalty-free until the IRA holder reaches age 59 ½.
If an IRA owner becomes disabled, early withdrawal may be possible without penalty. Also, if the IRA owner dies, IRA funds can be distributed to beneficiaries or the deceased’s estate penalty free.

Other exceptions to the early withdrawal penalty include the following:
Distributions used to cover medical care expenses that exceed 7.5% of the owner’s adjusted gross income
Distributions used to buy a first home
Distributions used to pay for higher education expenses
Distributions used to pay health insurance premiums if the owner is unemployed

In addition, when individuals reach age 70 ½ , they are required to begin taking minimum distributions from a traditional IRA if they have not already.
If they choose, individuals whose adjusted gross income is less than $100,000 can convert a traditional IRA to a Roth IRA without any penalty on early withdrawals.

Roth IRAs have most of the same investment restrictions as traditional IRAs. As with a traditional IRA, the maximum contribution allowable to a Roth IRA is generally $5,000 for individuals under age 50, or 100% of earned income, whichever is less. However, persons age 50 and older can make an additional “catch up” contribution of $1,000 annually, raising the total contribution level to $6,000.
Contributions to Roth IRAs are made with after-tax dollars.
To balance the fact that contributions to Roth IRAs are made with after-tax income, all earnings and distributions grow tax-free as long as the IRA is maintained for at least five years, and funds in a Roth IRA can be withdrawn tax-free after age 59 ½. Funds can also be withdrawn tax-free prior to age 59 ½ if they are used to purchase a first home or pay for qualified higher education expenses.
Roth IRA owners are not required to begin taking distributions by age 70 ½, and contributions to a Roth IRA may continue after that age.
An individual may contribute to both a traditional and a Roth IRA, but the total is subject to the same schedule of limits.