Tax Organizer

Frequently Asked Questions About Pension Plans

  1. How much can be contributed to a pension plan?
    It depends on the type of plan. Certain types of employees and types of accounts have different limits. Some limits increase annually. Contact us for more information.
  2. How much should be saved for retirement?
    Rule of thumb: In order to have an adequate retirement income, a minister usually needs to set aside at least 14% of salary (including housing) as well as pay Social Security taxes!
  3. Is there a minimum deposit?
    No, but small deposits usually grow more slowly than larger ones due to higher fees and account charges. Few ever retire and say, "I saved too much!"
  4. What kind of retirement income will I have?
    Future income depends on how much is invested, the number of years and the growth of the account over time. Those who sow little reap little. In general, we aim to match or exceed the stock market when measured over three, five, and ten year periods. Detailed projections can be drawn up to illustrate possible returns for each participant based on long-term average expected returns until retirement.
  5. What are the most common retirement and tax-deferred account choices?
    Here are definitions and descriptions of several common retirement plans allowed by Congress. Seek professional counsel to determine the best mix of plans.
    • Standard IRA's
      An Individual Retirement Account (IRA) is an individual account or annuity set up with a financial institution, such as a bank or a mutual fund company. Under federal law, individuals may set aside personal savings up to a certain amount, and the investments grow, tax deferred. Contributions may provide a tax deduction. Distributions are taxable. In addition, participants can transfer money from an employer retirement plan to an IRA when leaving an employer. IRAs also can be part of an employer plan.
      Best for those earning less than $62,000 with up to $5,000 to invest annually. Most common use is in the rollover form from a company 401K plan.
      Advantages: Current tax deduction and personal control.
      Disadvantages: All withdrawals including growth are subject to tax.
    • ROTH IRA's
      A Roth Individual Retirement Account (IRA) is a special type of IRA. Under federal law, individuals may set aside personal savings up to a certain amount, and the investments grow, tax free. Contributions are nondeductible. Distributions are tax-free after age 59 1/2. The account must be designated as a Roth IRA when it is established. In certain circumstances, a Standard IRA or 401(k) may be rolled over into a Roth IRA; however, you must pay tax on the accrued earnings in the Standard IRA or 401(k) when the account is rolled over.
      Best for anyone with savings to invest for at least five years.
      Advantages: Earnings are never taxed. Contributions may be withdrawn, penalty free after five years if you are over age 59 1/2.
      Disadvantages: No current tax deduction.
    • 401K's
      A 401(k) Plan is a defined contribution plan where an employee can make contributions from his or her paycheck either before or after-tax, depending on the options offered in the plan. The contributions go into a 401(k) account, with the employee often choosing the investments based on options provided under the plan. In some plans, the employer also makes contributions such as, matching the employee’s contributions up to a certain percentage. SIMPLE and safe harbor 401(k) plans have mandatory employer contribution requirements.
      Best for those with larger employers offering a match to employee contributions.
      Advantages: Contributions are not taxable except for FICA/Medicare.
      Disadvantages: All withdrawals including growth are subject to tax.
    • Keogh Plans
      A Keogh Plan is a "qualified retirement plan" set up by a self-employed individual. Contributions made to the plan for employees are deductible. Earnings on contributions are generally tax free until distributed at retirement. Profit-sharing, money purchase, and defined benefit plans are types of qualified plans.
      These are designed for self-employed persons with income consistently greater than their cost of living.
      Advantages: Much higher limits than IRA's.
      Disadvantages: All withdrawals are subject to tax.
    • SEP-IRA's
      A simplified employee pension (SEP) is an employer-sponsored plan under which an employer can make contributions to IRAs established for its employees. The term SEP IRA means an IRA that receives contributions made under a SEP. The term SEP includes a salary reduction SEP (SARSEP).
      Best for consistently profitable small businesses.
      Advantages: Allows smaller employers to make substantial retirement contributions.
      Disadvantages: Contribution rates are fixed for all employees. Al withdrawals including growth are subject to tax.
    • SIMPLE-IRA's
      A plan in which a small business with 100 or fewer employees can offer retirement benefits through employee salary reductions and employer non-elective or matching contributions (similar to those found in a 401(k) plan). It can be either a SIMPLE IRA or a SIMPLE 401(k). SIMPLE IRA plans impose few administrative burdens on employers because IRAs are owned by the employees, and the bank or financial institution receiving the funds does most of the paperwork. While each has some different features, including contribution limits and the availability of loans, required employer contributions are immediately 100 percent vested in both.
      Best for smaller employers who want to give employees flexibility and limit their own contributions.
      Advantages: Allows up to $11,500 employee deferral in 2011, with the employer matching up to 3% of employee's wages.
      Disadvantages: All withdrawals are subject to tax.
    • 403B Plans
      A 403(b) Tax-Sheltered Annuity (TSA) Plan is a retirement plan offered by public schools and certain tax-exempt organizations, such as churches. An individual’s 403(b) annuity can be obtained only under an employer’s TSA plan. Generally, these annuities are funded by elective deferrals made under salary reduction agreements and nonelective employer contributions.
      Designed for tax-exempt organizations such as schools, churches, and clergy.
      Advantages: All contributions are pre-tax for clergy. Contributions and withdrawals are not subject to Social Security tax. For non-clergy, the tax treatment is the same as for 401K plans. Special rules for churches and clergy make these plans very attractive for qualifying employers. Clergy withdrawals are deemed housing allowance to the extent used.
      Disadvantages: All withdrawals including growth are subject to tax except as noted above.
    • Tax-Deferred Variable Annuities
      An annuity is a series of payments under a contract made at regular intervals over a period of more than one full year. You can buy the contract alone or with the help of your employer. The amount you receive from a variable annuity depends upon such variables as profits earned by the pension or annuity funds, cost-of-living indexes, or earnings from a mutual fund.
      Best for those who have investment income to shelter, have a long-term horizon, can afford to lock up their investment for at least 10 years and wish more security.
      Advantages: Greater security than mutual fund or IRA investments depending on policy terms.
      Disadvantages: Significant penalties for early cancellation of contract. All capital gains are taxed at the taxpayer's highest tax rate when withdrawn.
    • Whole Life Insurance
      Whole Life Insurance covers you for as long as you live if your premiums are paid.
      Best for those who desire or need life insurance that will be in force the rest of their lives no matter what happens.
      Advantages: The accumulated value may be borrowed or cashed out. In addition, unless cancelled, there will be a death benefit. All benefits are tax-free.
      Disadvantages: It is not to be confused with a savings or retirement plan except for expenses after death.
  6. What other pension/retirement/deferred compensation plans can business owners adopt?
    The following plans are subject to complex rules and regulations:
    Defined Benefit (DB)
    Defined Contribution
    Money Purchase
    ESOP (Employee Stock Ownership Plan)
    Cash Balance
    Non-qualified Deferred Compensation
    Rabbi Trust
    Secular Trust
    Stock Options
    Split-Dollar Life Insurance

Clifford & Associates, LLC
Clifford & Yoho Advisors, LLC

4150 Belden Village St. NW
Ste. 601
Canton, OH 44718

FB LinkedIn

Steven Clifford, CFP©, EA
Nancy Eagle
Louanda Feather, EA
Cathy Pappas

.:Free Email Newsletter:.

We support
Habitat for Humanity
of Greater Stark and
Carroll Counties.
Make a Donation

Main | About | Contact | Feedback

© 2013 R. Shul | Updated 05/28/13 | Terms | Ph. 800.456.1803 | Fax 330.493.1807

Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete initial and ongoing certification requirements.