Tax Impact

In: Business and Management

Submitted By scotty
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1. How are defined benefit plans different from defined contribution plans? How are they similar?
As the name suggests, defined benefit plans spell out the specific benefit the employee will receive on retirement. In contrast, defined contribution plans specify the maximum annual contributions that employers and employees may contribute to the plan. Defined benefit plans are funded by the employer while defined contribution plans are funded by the employee. Both plans are generally classified as employer-provided qualified retirement plans and have similar rules for vesting (although the vesting rules are slightly more favorable for defined contribution plans than defined benefit plans) and required distributions.

2. What does it mean to vest in a defined benefit or defined contribution plan?
Vesting means that one obtains the legal right to something. An employee vests in (legally obtains the right to receive) her benefits of a defined benefit or contribution plan by meeting certain requirements set forth by her employer—usually the requirement is based on years of service.

3. Describe the maximum annual benefit that taxpayers may receive under defined benefit plans.
The maximum annual benefit an employee who retires in the year 2010 can receive from a defined benefit plan is the lesser of 100% of the average of the three highest years of compensation paid to the employee or $195,000.

4. What are the primary tax differences between traditional IRAs and Roth IRAs?
Traditional IRA contributions are deductible and distributions when received are taxable. Roth IRA contributions are not deductible and distribution when received are not taxable.

5. What is the limitation on a deductible IRA contribution for 2010?
For those not already participating in an employer sponsored retirement plan, deductible contributions to an IRA are…...

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