Retirement Plans

Updated : Sep 16, 2019 in Articles

Retirement Plans


My name is Dave Wilhelm; I’m a professor at the Business Administration department at Wake Technical Community College in Raleigh, NC. I teach classes both seated and online. This video is one in a series, to try to insure that my online students get
all of the same information I provided to my seated students. This particular topic is on Retirement Plans. And what we’ll talk about… well first of all Exclusions, what I’m not
going talk about. Um, then the two basic Retirement Plan types. Defined benefit plan and defined contribution plans, the portability and cashing them out, and finally something about Roth IRA’s. So what I’m not going talk about is eligibility for retirement plans. They are not generally a legal requirement. Although if a business is not offering anything; they be at a completive disadvantage for hiring employees. I’m also not going talk about the tax implications. Um, nor am I going get into other retirement plans or hybrids of defined contributions and defined benefit. So the two basic types are defined benefit and defined contribution. And during most of our lives we’re going
spend some time working, over there on the left. And then we’re going spend some time not
working, which we call retirement. For defined benefit, and this is generally
what’s considered -refer to- as a pension. We work and work and work and one day we stop working. And the beginning of that time we begin receiving a monthly payment; month, after month, after moth until we die. That is defined benefit, what’s defined in the contract is what our benefit is, what we’re going get. The other type of retirement plan is defined contribution. Where during the time that we’re working, we pay into a plan; our employer may also pay into that plan for us. At the end of our employment with the company, we receive that stream of payments we put into it. Perhaps with a little bit more as defined by the employment contract. We take our little bag of gold or silver and shakes hands with our employer and wave good bye and that’s it. So defined benefit; we’re going get a monthly benefit and it’s going be based on our years of service and our average pay or ten highest or some measure of how much we got paid and earned at that company. Plus perhaps some additional amount if it’s
in the employment agreement. You may have to be vested that is uh, you may have had to work there for five years, ten years, some number of years before you’re going be eligible for the pension. You could receive it as a single life annuity, which means you get so many dollars every month until you die and then it stops. Or you can arrange for your spouse or probably other person to receive… continue to receiving the benefits after you die. But if you do that it will be a lesser amount because they just using actuarial tables to…to determine the amount. Compare to this joint and survivor annuity
you may want to consider just taking the single life annuity and then investing in a separate term life insurance policy if you turn [inaudible] it depends on the numbers…come out. The funds supporting the pension could be
in a funded, that is a “qualified” trust fund. The employee has typically no control over the investment types. The other is a unfunded uh, defined benefit plan. Funded there’s a trust fund that’s somewhat independent of your organization. Unfunded there is no specify fund to collect the benefits; the benefits are going to be paid out from the organization’s earnings, uh, somewhere. And it is a pool, you do not have an individual account, there’s a pool of money that is paid out to the retirees. You do have an ongoing link with that organization, ther… they are your trust fund, they are going be
paying you money over quite a long period of time. It’s not portable, if you go from one company to another company; whatever you have there if you’re vested will stay there. Something called ERISA; Employment Retirement Income Security Act and that works with the Pension Benefit Guaranty Corporation that says if that trust fund dries up or for an unfunded pension fund if the company goes bankrupt um, there is some insurance so you will be receiving… continuing to receive a pension, but it may
not be as large as it was originally. The other type of retirement plan is defined contribution. And And typically a company will set up a
401k plan because it’s advantagous to do so, especially with regard to the taxation. It is company sponsored, as opposed to
an individual retirement account. The contributions to it are tax deferred, not tax exempt, tax deferred. The government will collect taxes on it someday. There is a limit on employee contributions and depending on how it’s set up the employee may have some control over the invested types. Unlike the pension defined benefit, there are individual accounts for the defined contribution plans. Employer contributions: Typically 50% of the employee contributions up to the employee… contributing 6% of their pay So maybe they’ll be contributing 3% of our
pay, there’s a benefit you cannot afford to pass up. Uh, now your employee contribution may be stock, but it’s still… still a good contribution. And there’s probably vesting requirement
as well, not for the employee’s contribution, but for the employer’s contribution there may
be a vesting requirement. Separation is not equal to retirement. That is you do not have to retire to get this
benefit, any time you separate form that organization, you will receive the value of that 401k plan. The amount you’re going to receive is typically the 401k assets, plus some lump sum; calculated by number of years of service and the salary measure. And maybe some sort of incentive for early retirement. You will not have an ongoing relationship with that organization that’s been severed. It is not covered by ERISA and it is portable. If you’re thinking well which one should
I choose, there… that really a choice pension’s be fine, benefit where the traditional type of retirement plan very much defined contributions are where most organizations are heading these days. Portability, if you have a 401k plan at company A and you move to company B; you can pack that up and take it with you. You move again and you can pack it up and take it with you. One caveat is that you do not cash out your 401k and go redeposit it in company B, you have to fill out some paperwork and if they do actually pay it to you, you get stuck with a penalty. So one needs to be careful in transferring
401k plans. When eventually you move out of actively working you probably want to transfer your 401k to a traditional IRA; Independent Retirement Account. And the same caveat applies, it doesn’t come to you, it goes to some bank for your benefit or something like that. Uh, if you’re in that position check with, um, some financial adviser. Cashing 401ks and traditional / standard IRA’s, uh, you can withdraw beginning at age 59 ½, actually you can withdraw at any time, but
until then there’s a 10% penalty. You have to start withdrawing by age 70 ½
and there’s a table somewhere that says how much you have to draw after you reach 70 ½. And the reason for this is the government
waited a long time to collect taxes on you, so they’d like to get that tax revenue. All withdrawals are taxable, remember those contributions to a 401k where tax deferred, not tax exempt. Another type of investment is a Roth IRA and to be very clear it’s not an investment type It’s a tax treatment that has been defined. 401(k)’s, standard IRA’s have a defined tax treatment so do Roth IRA’s. But the investments are things that are in that type of umbrella. 401(k)’s and standard IRA’s are pretax
investments and they’re taxed at withdrawals. Roth IRA’s are the flip side, they are … we put post taxed investments in them… and then when we withdraw the initial investment
in a year it’s {inaudible} tax-free. Roth IRA’s, if you contribute to them, that
is from your savings whatever invest… if… uh, put an investment into a Roth IRA there’s a five to six thousand dollar annual limit. If you’re converting a standard IRA or a 401k to a Roth IRA they call that a conversion and there’s no limit on how much you can
convert , however you still have to pay taxes on it. So one is not one to, um, convert huge amounts because your tax bill will be higher than it has to be. That’s it on Retirement Plans. My name is Dave Wilhelm; if you have any questions feel free to email me.

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