THE DIFFERENT IRS PENSION PLANS

There are a lot of pension plan or retirement plans provided by the IRS but we would take a look at few of them. We would look at the most popular ones which are the 401k plan, IRA plan and the Roth IRA plan.

ENTERPRISE PENSION PLAN (401K) 

Despite their popularity today, 401K plans were created almost by accident. It started when Congress passed the Revenue Act of 1978, which included a provision that was added to the Internal Revenue Code Section 401K that allowed employees to avoid being taxed on deferred compensation. So, we can say that the 401K plan is a deferred taxation pension plan created in 1980. The relevant provisions are in Article 401 of the National Tax Law, therefore referred to as 401K. 401K is applicable to employees of private companies. It is a supplementary pension insurance system for companies with a certain amount of capital jointly funded by employers and employees. It has become the most important retirement plan for private companies in the United States. The employer will set up a 401K account for each employee, and the employee can allocate a certain percentage of salary (about 1% to 15% of salary, not exceeding the upper limit) to the account every month. The money invested in the 401K account does not need to be taxed. Only when the employee receives the income at the specified age is it required to declare personal income tax.

ANNUAL CONTRIBUTION LIMIT – The 401K contribution limit for 2020 has been set at $19,500. This is up from the 2019 401K contribution limit of $19,000 and it is for people under the age of 50. For those older than 50 years, the limit is $26,000. This limit is adjusted for inflation each year.

PARTICIPATION -All employees of a company are allowed to participate and there are no special restrictions on income.

 

BENEFITS – delayed tax payment, exempt from account Deposit interest, dividends and investment income tax.

MINIMUM AGE LIMIT FOR WITHDRAWAL -You can withdraw it after 59.5 years old, there will be a 10% penalty for early withdrawal.

COMPULSORY WITHDRAWAL AGE – After you reach 70.5 years old, you must withdraw some of the funds every year and you can’t deposit. Otherwise, there will be fines (this purpose is mainly to stimulate consumption).

SPECIAL CONDITIONS THAT CAN BE WITHDRAWN IN ADVANCE – These include:

·  Paying huge medical bills

·  Becoming a disabled person

·  Being unemployed for 12 weeks can claim health insurance premiums

·  Account holder’s death

·  Resignation, layoff, dismissal or early retirement after the age of 55

 

You can apply for a loan to your 401K account, but the disadvantage is that you need to pay two taxes (the income returned to the 401K account is after-tax income, and you will have to pay it again when you withdraw in the future). On the other hand, interest on loans from banks is tax deductible.

The 401K account belongs to the employee. When leaving, the employee can transfer to their own IRA account, or transfer to the designated 401K plan fund company of the next company.

INDIVIDUAL PENSION PLAN (IRA)

The full name of IRA is Individual Retirement Account, which is another category of pension account other than 401K. An IRA is a tax-sheltered retirement account set up at an investment firm, bank or insurance company. IRAs can be made up of mutual funds, stocks, bonds, bank deposit accounts, and most other types of investments. Regardless of whether they have participated in other pension plans, any individual with income is eligible to open an IRA account with the financial institution that established the IRA fund. The deposited amount is tax deductible, but income tax is payable when withdrawing. The IRA account has a good transfer mechanism, and employees can transfer the 401K plan funds to the IRA account when they switch jobs or retire, to avoid unnecessary losses.  The people who are eligible to open an IRA are those individuals who have earnings from salary income or wage income. Unemployed spouses of people earning salaries and wages can also open an IRA. There are three types of IRAs. They are:

Traditional IRA

Non-deductible IRA

Roth IRA

 ANNUAL DEPOSIT LIMIT – The deposit limit in 2020 is $6,000 for those under 50 years old and $7,000 for those over 50 years old which was also the same for 2019. The limit is adjusted annually according to inflation.

PARTICIPATION QUALIFICATIONS- Those with taxable income and under 70.5years old can participate. If the spouse has no income, they can also establish a spousal IRA or joint account.

BENEFITS- They include delayed tax payment, exempt from deposit interest, dividends and investment income tax in the account.

 

MINIMUM EXTRACTION AGE LIMIT – Only 59.5 years old or above can be proposed, otherwise there will be an additional fine of 10%.

COMPULSORY WITHDRAWAL AGE- After reaching the age of 70.5, the minimum withdrawal funds must be withdrawn each year and cannot be deposited any more, otherwise a fine will be incurred.

SPECIAL CONDITIONS THAT CAN BE WITHDRAWN IN ADVANCE- These include:

·  Paying huge medical bills

·  Being a disabled person

·  Being unemployed for 12 weeks can withdraw health insurance premiums

·  Account holder deaths

·  Down payment for the first house purchase If you do not own a house for two years, you can withdraw money from IRA

·  Miscellaneous expenses for higher education.

Daily deposit deadline – IRS Notice 2020 Relief for Taxpayers extended the 2019 federal income tax filing, payment, and IRA contribution deadline from April 15 to July 15, 2020.

ROTH IRA (IRA)

A bill originated in 1997 by a senator named Roth. Similar to traditional IRAs, the biggest difference is when taxes are paid, allowing the public to make more personalized choices and arrangements based on income and employment status. Roth IRA is to pay personal income tax first when depositing (the amount of deposit is not deductible), no need to pay tax when withdrawing.

ANNUAL CONTRIBUTION LIMIT – The annual Roth IRA contribution limit is $6,000 in 2020. This was the same for 2019, up from $5,500 in 2018 (people age 50 or older can add $1,000), but income limits may reduce how much you can contribute. This limit is adjusted annually according to inflation just like for the other plans.

 

ELIGIBILITY – In general, you can contribute to a Roth IRA if you have taxable income and your modified adjusted gross income is either:

Less than $194,000 if you are married filing jointly.

Less than $132,000 if you are single, head of household or married filing separately (if you did not live with your spouse at any time during the previous year).

Less than $10,000 if you’re married filing separately and you lived with your spouse at any time during the previous year.

 

BENEFITS – Exemption from deposit interest, dividends and investment income tax in the account.

MINIMUM WITHDRAWAL AGE LIMIT – 5 years after opening and depositing, the principal in the account can be withdrawn (cannot be deposited again after withdrawal), and can be freely collected after reaching the age of 60.

COMPULSORY EXTRACTION AGE – There is no age limit.                           

SPECIAL CONDITIONS THAT CAN BE WITHDRAWN IN ADVANCE – This is also the same for both the 401k and IRA plans.

DEPOSIT DEADLINE – The IRS stipulates that you are allowed to contribute to your 2019 Roth IRA until April 15, 2020. Similarly, you are able to make contributions to your 2020 Individual Pension Plans until April 15, 2021.