IRAs, 401(k)s & Other Retirement Plans: Strategies for Taking Your Money Out

By Twila Slesnick and John C. Suttle

Save your nest egg from the IRS

About to retire? Over 723 and facing mandatory withdrawal rules? Just inherited money from a retirement plan?

Whether you have an IRA, Roth IRA, 401(k), Keogh or other retirement plan, this book will help you make sense of the rules for taking your money out. Even more important, it will show you how to avoid the stiff taxes and penalties that lurk in the fine print. It covers:

• tax strategies before and after retirement
• required distributions and how much you need to take
• penalties for taking money out early and how to avoid them
• how to divide a plan at divorce
• what happens to your retirement plan after your death, and

• different rules for taking money out of an inherited plan.

The 16th edition covers all of the latest changes, including:

•  new start age for required distributions 
• new contribution limits for 401(k)s, money purchase pension plans, ESOPs, SIMPLE IRAs, and Roth IRAs
• new exceptions to the 10% early distribution tax, and
• multiple new rules for inherited retirement plans.

• Language: English
• Publisher: NOLO
• Release date: Jun 2, 2023
• ISBN: 9781413330823

Twila Slesnick

Twila Slesnick is an Enrolled Agent who specializes in tax and investment planning for retirees and prospective retirees, and does pension plan consulting for individuals and small businesses. She has conducted numerous seminars throughout the U.S. in the areas of retirement and tax planning. Slesnick has been featured on television and radio programs across the country and in publications including Money Magazine, U.S. News & World Report, Newsweek and Consumer Reports. She is the author (with John Suttle) of IRAs, 401(k)s and Other Retirement Plans: Taking Your Money Out. Slesnick has a bachelor's, master's and Ph.D., all from the University of California, Berkeley.

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16th Edition

IRAs, 401(k)s & Other

Retirement Plans

Strategies for Taking

Your Money Out

Twila Slesnick, PhD, Enrolled Agent

& Attorney John C. Suttle, CPA

Logo: NOLO LAW for ALL

SIXTEENTH EDITION

JUNE 2023

Editor

BETH LAURENCE

Cover Design

SUSAN PUTNEY

Book Design

SUSAN PUTNEY

Proofreading

HEATHER HUTSON

Index

ACCESS POINTS INDEXING

Printing

SHERIDAN

ISSN 2377-2441 (print)

ISSN 2377-2492 (online)

ISBN 978-1-4133-3081-6 (pbk)

ISBN 978-1-4133-3082-3 (ebook)

This book covers only United States law, unless it specifically states otherwise.

Copyright © 1998, 2000, 2001, 2002, 2004, 2006, 2007, 2009, 2011, 2013, 2015, 2017, 2019, 2021, and 2023 by Twila Slesnick and John C. Suttle. All rights reserved. The NOLO trademark is registered in the U.S. Patent and Trademark Office. Printed in the U.S.A.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without prior written permission. Reproduction prohibitions do not apply to the forms contained in this product when reproduced for personal use. For information on bulk purchases or corporate premium sales, please contact [e-mail].

Please note

Accurate, plain-English legal information can help you solve many of your own legal problems. But this text is not a substitute for personalized advice from a knowledgeable lawyer. If you want the help of a trained professional—and we’ll always point out situations in which we think that’s a good idea—consult an attorney licensed to practice in your state.

Acknowledgments

Thanks to former Nolo editor Robin Leonard for her intelligent and skillful editing of the first edition—and for adding a dose of levity to the entire process. For multitudes of subsequent editions, thanks to former Nolo editor Amy DelPo for her keen eye and clear thinking. She smoothed the way for editors to come and permanently endeared herself to the authors. For later editions, the arduous task of editing a book about retirement plans has fallen to JinAh Lee, Lisa Guerin, and Beth Laurence, all of whom have proved themselves more than capable of assuming the mantle.

About the Authors

Twila Slesnick, PhD, Enrolled Agent

Twila specializes in tax and investment planning for retirees and prospective retirees. She also provides pension plan consulting to individuals and small businesses. She has conducted numerous seminars throughout the United States in the areas of retirement and tax planning. Twila has been featured on television and radio programs across the country and in publications including Money Magazine, U.S. News & World Report, The Wall Street Journal, Kiplinger’s, Newsweek, and Consumer Reports. Twila has a Bachelor’s, Master’s, and PhD, all from the University of California, Berkeley. She lives in Colorado.

John C. Suttle, CPA, Attorney

John has been practicing law since 1980. His law practice, Suttle, Goh & Barber, LLP, consists of estate and trust planning, probate administration, tax and business counseling, retirement planning under ERISA, and representing clients before the IRS and other taxing authorities. He has been a tax practitioner since 1974. John is a graduate of Stanford University (BA), University of California’s Haas School of Business (MBA), and Hastings College of the Law (JD). He lives in Atherton, California.

Table of Contents

Your Retirement Companion

1 Types of Retirement Plans

Qualified Plans

Individual Retirement Accounts

Almost-Qualified Plans

Nonqualified Plans

2 An Overview of Tax Rules

Taxation Fundamentals

General Income Tax Rules for Retirement Plans

Income Tax on Qualified Plans and Qualified Annuities

Special Income Tax Rules for Tax-Deferred Annuities

Special Income Tax Rules for IRAs

How Penalties Can Guide Planning

3 Early Distributions: Taking Your Money Out Before the Law Allows

Exceptions to the Early Distribution Tax

Calculating the Tax

Reporting the Tax

Special Rules for IRAs

4 Substantially Equal Periodic Payments

Computing Periodic Payments

Implementing and Reporting Your Decision

Modifying the Payments

5 Required Distributions: Taking Money Out When You Have To

Your RMD Age

Life Expectancy Tables

Required Distributions During Your Lifetime

Death Before Required Beginning Date

Death After Required Beginning Date

Special Rules for Tax-Deferred Annuities

Special Rules for Roth IRAs

Penalty

Reporting the Penalty

Waiver

6 Required Distributions During Your Lifetime

Required Beginning Date

Computing the Required Amount

Designating a Beneficiary

Special Rules for Annuities

Divorce or Separation

7 Distributions to Your Beneficiary If You Die Before Your Required Beginning Date

Determining the Designated Beneficiary

Distribution Methods

Designated Beneficiary

Eligible Designated Beneficiary

No Designated Beneficiary

Multiple Beneficiaries, Separate Accounts

Multiple Beneficiaries, One Account

Trust Beneficiary

Estate as Beneficiary

Annuities

Divorce or Separation

Reporting Distributions From IRAs

8 Distributions to Your Beneficiary If You Die After Your Required Beginning Date

Administrative Details

Distribution Methods

Designated Beneficiary

Eligible Designated Beneficiary

No Designated Beneficiary

Multiple Beneficiaries, Separate Accounts

Multiple Beneficiaries, One Account

Trust Beneficiary

Estate as Beneficiary

Annuities

Divorce or Separation

9 Roth IRAs

Taxation of Distributions

Early Distribution Tax

Ordering of Distributions

Required Distributions

10 Roth 401(k) Plans

Taxation of Distributions

Early Distribution Tax

Ordering of Distributions

Required Distributions

Appendixes

A IRS Forms, Notices, and Schedules

Certification for Late Rollover Contribution

Form 4972,Tax on Lump-Sum Distributions

Tax Rate Schedule for 1986

Form 5329,Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts

Form 5330, Return of Excise Taxes Related to Employee Benefit Plans

Form 5498, IRA Contribution Information

Form 8606, Nondeductible IRAs

Form 8915-E,Qualified 2020 Disaster Retirement Plan Distributions and Repayments

Form 8915-F,Qualified Disaster Retirement Plan Distributions and Repayments

Notice 2022-6

B Life Expectancy Tables for 2021 and Earlier

Table I: Single Life Expectancy

Table II: Joint Life and Last Survivor Expectancy

Table III: Uniform Lifetime Table

Table IV: Survivor Benefit Limits

C Life Expectancy Tables for 2022 and Later

Table I: Single Life Expectancy

Table II: Joint Life and Last Survivor Expectancy

Table III: Uniform Lifetime Table

Table IV: Survivor Benefit Limits

Index

Your Retirement Companion

Let’s start with the basics. There are many kinds of retirement plans and many possible sources for owning one. This book is about how to take money out of your retirement plans.

You might have a retirement plan at work, an IRA that you set up yourself, or a plan or an IRA you’ve inherited. Or you might have all three. You might still be contributing to a plan, or you may be retired. No matter what your situation, you will find information in this book to help you through the minefield of rules.

There are many reasons to take money out of a retirement plan. You might want to borrow the money for an emergency and pay it back (or not). Maybe you quit your job and you want to take your share of the company’s plan. Perhaps you’re required by law to withdraw some of your retirement funds because you’ve reached a certain age.

Whatever your situation, you probably have a lot of questions about your plan and how to take money out of it. This book can answer:

How do I know what kind of retirement plan I have? (See Chapter 1.)

Do I have to wait until I retire to get money out of my plan or my IRA? (See Chapter 3.)

Can I borrow money from my 401(k) plan to buy a house? (See Chapters 3, 4, and 5.)

What should I do with my retirement plan when I leave my company or retire? (See Chapter 2.)

When do I have to start taking money out of my IRA? (See Chapter 5.)

How do I calculate how much I have to take? (See Chapter 6.)

Can I take more than the required amount? (See Chapter 6.)

What happens to my retirement plan when I die? (See Chapters 7 and 8.)

Can my spouse roll over my IRA when I die? (See Chapters 7 and 8.)

What about my children? Can they put my IRA in their names after I die? Do they have to take all the money out of the account right away? (See Chapters 7 and 8.)

If I inherit a retirement plan, can I add my own money to it? Can I save it for my own children, if I don’t need the money? (See Chapters 7 and 8.)

Am I allowed to set up a Roth IRA? Should I? (See Chapter 9.)

Can I convert my regular IRA to a Roth IRA? Should I? (See Chapter 9.)

How is a Roth 401(k) plan different from a Roth IRA? (See Chapter 10.)

To help you answer these and other questions, we include many examples to guide you through the decision-making process and take you through calculations. You will also find sample tax forms that the IRS requires, along with instructions for how to complete them.

This book contains tables to help you calculate distributions. It also contains sample letters and worksheets you can use to communicate with the IRS or with the custodian of your IRA or retirement plan. We’ve even included some important IRS notices so you can read firsthand how the IRS thinks about certain critical issues.

The tax rules for pensions, IRAs, 401(k)s, and other types of retirement plans are notoriously complex, which can be all the more frustrating because they’re important to so many people. The good news is that help is here: This book makes the rules clear and accessible.

CHAPTER

1

Types of Retirement Plans

Qualified Plans

Profit-Sharing Plans

Stock Bonus Plans

Money Purchase Pension Plans

Employee Stock Ownership Plans (ESOPs)

Defined Benefit Plans

Target Benefit Plans

Plans for Self-Employed People (Keoghs)

Individual Retirement Accounts

Traditional Contributory IRAs

Rollover IRAs

Simplified Employee Pensions

SIMPLE IRAs

Roth IRAs

Almost-Qualified Plans

Qualified Annuity Plans

Tax-Deferred Annuities

Nonqualified Plans

Who Should Read Chapter 1

Read this chapter if you aren’t certain which types of retirement plans you have, either through your employer or as a self-employed person. Also read this chapter if you have an IRA but aren’t sure which type.

How many people have warned you that you’ll never see a penny of the hard-earned money you’ve poured into the Social Security system and that you’d better have your own retirement nest egg tucked away somewhere? Perhaps those doomsayers are overstating the case, but even if you eventually do collect Social Security, it’s likely to provide only a fraction of the income you will need during retirement.

Congress responded to this problem several decades ago by creating a variety of tax-favored plans to help working people save for retirement. One such plan is set up by you, the individual taxpayer, and is appropriately called an individual retirement account or IRA. Another, which can be established by your employer or by you if you’re self-employed, is referred to by the nondescript phrase a qualified plan. A qualified plan is one that qualifies to receive certain tax benefits as described in Section 401 of the U.S. tax code.

There are other types of retirement plans, too, which enjoy some of the same tax benefits as qualified plans but are not technically qualified because they’re defined in a different section of the tax code. Many of these other plans closely follow the qualified plan rules, however. The most common of these almost-qualified plans are tax-deferred annuities (TDAs) and qualified annuity plans. (Don’t be thrown by the name. Even though it may be called a qualified annuity plan, it’s not defined in Section 401 and, therefore, is not a qualified plan in the purest sense.) Both of these plans are defined in Section 403 of the tax code. Because many of the rules in Section 403 are similar to those in Section 401, TDAs and qualified annuity plans are often mentioned in the same breath with qualified plans.

Helpful Terms

Adjusted gross income (AGI). Total taxable income reduced by certain expenses, such as qualified plan contributions, IRA contributions, and alimony payments.

Beneficiary. The person or entity entitled to receive the benefits from an insurance policy or from trust property, such as a retirement plan or an IRA.

Deductible contribution. A contribution to a retirement plan that an employer may claim as a business expense to offset income on the employer’s tax return. You may know it as simply the employer’s contribution. In the case of an IRA, a deductible contribution is one that an individual taxpayer may use to offset income on the individual’s tax return.

Distribution. A payout of property (such as shares of stock) or cash from a retirement plan or an IRA to the participant or a beneficiary.

Earned income. Income received for providing goods or services. Earned income might be wages or salary or net profit from a business.

Eligible employees. Employees who qualify to participate in the employer’s plan because they have met the eligibility requirements (such as having worked for the employer for a specified number of years).

Nondeductible contribution. A contribution to a retirement plan or an IRA that may not be claimed as a business expense or used as an adjustment to offset taxable income on an income tax return.

Nondiscrimination rules. The provisions in the U.S. tax code that prohibit certain retirement plans from providing greater benefits to highly compensated employees than to other employees.

Participant or active participant. An employee for whom the employer makes a contribution to the employer’s retirement plan.

Tax-deductible expense. An item of expense that may be used to offset income on a tax return.

Tax deferral. The postponement of tax payments until a future year.

Vested benefit. The portion of a participant’s retirement plan accumulation that a participant may keep after leaving the employer who sponsors the plan; or the portion that goes to a participant’s beneficiary if the participant dies.

All qualified plans, TDAs, and qualified annuity plans have been sweetened with breaks for taxpayers to encourage them to save for retirement. And working people have saved, often stretching as far as they can to put money into their retirement plans. But saving is only half the equation. The government also wants you to take money out of the plan and spend it chiefly on your retirement. For that reason, the government has enacted a series of rules on how and when you can—or, sometimes, must—take money out of your retirement plan. (Taking money out is called a distribution.)

What does this mean for you? If you (or your employer on your behalf) have ever put money into a retirement plan and received tax benefits as a result, then you cannot simply take the money out whenever you want. Nor can you leave it in the plan indefinitely, hoping, for example, to pass all of the funds on to your children.

Instead, you must follow a complex set of rules for withdrawing money from the plan during your lifetime, and your beneficiaries must follow these rules after your death. These rules are called distribution rules, and if you or your beneficiaries don’t follow them, the government will impose penalties, sometimes substantial ones.

This chapter identifies and briefly describes the types of retirement plans to which these distribution rules apply. If you have a retirement plan at work or if you have established one through your own business, you should find your plan listed below. Also, if you have an IRA, you will find your particular type among those described below.

There is also an entire category of plans known as nonqualified plans to which distribution rules do not apply. Such plans are used by employers primarily to provide incentives or rewards for particular—usually upper management—employees. These plans don’t enjoy the tax benefits that IRAs and qualified plans (including TDAs and qualified annuities) do, and they consequently aren’t subject to the same distribution restrictions. Although this chapter helps you identify nonqualified plans, such plans have their own distribution rules, which fall outside the scope of this book.

Identifying your particular retirement plan probably won’t be as difficult as you think. This is because every plan fits into one of four broad categories:

qualified plan

IRA

plan that is neither an IRA nor a qualified plan, but has many of the characteristics of a qualified plan, or

plan that is neither an IRA nor a qualified plan, and does not have the characteristics of a qualified plan.

Qualified Plans

A qualified plan is a type of retirement savings plan that an employer establishes for its employees and that conforms to the requirements of Section 401 of the U.S. tax code. Why is it called qualified? Because if the plan meets all of the requirements of Section 401, then it qualifies for special tax rules, the most significant of which is that contributions the employer makes to the plan on behalf of employees are tax-deductible. Probably the best-known qualified plan is the 401(k) plan, discussed below.

The advantages to you, the employee, working for an employer with a qualified plan, are not only the opportunity to accumulate a retirement nest egg, but also to postpone paying income taxes on money contributed to the plan. Neither the contributions you make nor any of the investment returns are taxable to you until you take money out of the plan. In tax jargon, the income tax is deferred until the money is distributed and available for spending (usually during retirement).

Congress also built in some safeguards to help ensure that your plan assets are around when you finally do retire. For example, the assets must be held in trust and are generally protected from the claims of creditors.

In return for these tax benefits, the plan must comply with a number of procedural rules. First, the plan must not discriminate in favor of the company’s highly compensated employees. For example, the employer may not contribute disproportionately large amounts to the accounts of the company honchos. Also, the employer may not arbitrarily prevent employees from participating in the plan or from taking their retirement money with them when they leave the company. Finally, the plan must comply with an extremely complex set of distribution rules, which is the focus of this book.

Seven of the most common types of qualified plans are described below. Those plans are:

profit-sharing plans, which include 401(k) plans and Roth 401(k) plans

stock bonus plans

money purchase pension plans

employee stock ownership plans

defined benefit plans

target benefit plans, and

plans for self-employed people, called Keogh plans.

Profit-Sharing Plans

A profit-sharing plan is a type of qualified plan that allows employees to share in the profits of the company and to use those profits to help fund their retirement. Despite the plan’s title and description, an employer doesn’t have to make a profit in order to contribute to a profit-sharing plan. Similarly, even if the employer makes a profit, it doesn’t have to contribute to the plan. Each year, the employer has discretion over whether or not to make a contribution, regardless of profitability.

When the employer contributes money to the plan on behalf of its employees, the contributions are generally computed as a percentage of all participants’ compensation. The annual contribution to all accounts can be as little as zero or as much as 25% of the total combined compensation of all participants. For the purposes of making this calculation, the maximum compensation for any individual participant is capped at $330,000. (The $330,000 increases from time to time for inflation.) No individual participant’s account can receive more than $66,000 in a single year. (The $66,000 cap also increases from time to time for inflation.)

EXAMPLE: Joe and Martha participate in their company’s profit-sharing plan. Last year, the company contributed 25% of their respective salaries to the plan. Joe’s salary was $120,000 and Martha’s was $310,000. The company contributed $30,000 for Joe (25% × $120,000). The company’s contribution for Martha was limited to the $66,000 ceiling, however, because 25% of Martha’s salary was actually $77,500, which is above the limit.

This year, the company’s profits tumbled, so the company decided not to make any contributions to the profit-sharing plan. Thus, the company will not contribute any money to the plan on Joe or Martha’s behalf.

There is an exception to the $66,000 limit for individuals who are older than 50 and who contribute to a 401(k) plan. For those individuals, the limit is increased by $7,500.

401(k) Plans

A special type of profit-sharing plan, called a 401(k) plan, is named imaginatively after the subsection of the tax code that describes it. A traditional 401(k) plan allows you to direct some of your compensation into the plan, and you don’t have to pay income taxes on the portion of your salary you direct into the plan until you withdraw it.

The plan might or might not provide for employer contributions. Some employers make matching contributions, depositing a certain amount for each dollar a participant contributes.

EXAMPLE: Fred participates in his company’s 401(k) plan. His company has promised to contribute 25¢ for each dollar of Fred’s salary that he directs into the plan. Fred’s salary is $40,000. He directs 5% of his salary, which is $2,000, into the plan. The company matches with a $500 contribution (which is 25¢ × $2,000).

Other employers contribute a fixed percentage of compensation for each eligible employee, whether or not the employee chooses to contribute to the plan.

EXAMPLE: Marilyn’s salary for the current year is $60,000. Her company has a 401(k) plan that doesn’t match employee contributions. Instead, the company contributes a flat 3% of each eligible employee’s salary to the plan. Marilyn is saving to buy a house, so she is not currently directing any of her salary into the 401(k) plan. Nonetheless, the company will contribute $1,800 (which is 3% × $60,000) to the plan for Marilyn.

The $66,000 limit applies to 401(k) plans, meaning the combined employer and employee contributions can’t exceed $66,000 per year. (The salary deferral limit for employees is $22,500 per year in 2023, plus $7,500 if the employee is age 50 or older.)

TIP

Beginning in 2025, individuals aged 60, 61, 62, or 63 will be permitted even higher catch-up contributions. They will be able to contribute the greater of $10,000 or 150% of the regular catch-up contribution. Recall that catch-up contributions are in addition to the regular deferral amount. Once an individual reaches age 64, the regular catch-up contribution amounts will apply once again.

CAUTION

Beginning in 2024, if your compensation for the preceding calendar year was greater than $145,000, any catch-up contribution you make to your employer’s 401(k) plan must be to a Roth 401(k). If your employer has not set up a Roth 401(k), you will not be able to make the catch-up contribution.

Roth 401(k) Plans

Although so-called Roth 401(k) plans are hot right now, the shocking truth is that there is no such thing as a Roth 401(k) plan. However, employers are permitted to add to a traditional 401(k) plan a special Roth feature, called a qualified Roth contribution program. This feature allows employees to defer some of their salary into a designated Roth account instead of into the traditional 401(k) plan account.

The difference between the two types of accounts is in the tax treatment. Whereas contributions to traditional 401(k) plan accounts are tax-deductible, contributions to designated Roth accounts are not. Instead, the tax benefits for designated Roth accounts come when you take distributions, which will be tax-free as long as you meet certain requirements. (See Chapter 10 for a complete discussion of Roth 401(k) plans or designated Roth accounts.)

Stock Bonus Plans

A stock bonus plan is like a profit-sharing plan, except that the employer must pay the plan benefits to employees in the form of shares of company stock.

EXAMPLE: Frankie worked for Warp Corp. all her working life. During her employment, she participated in the company’s stock bonus plan, accumulating $90,000 by retirement. When she retired, Warp Corp. stock was worth $100 per share. When the company distributed her retirement benefits to her, it gave her 900 shares of Warp Corp. stock.

Money Purchase Pension Plans

A money purchase pension plan is similar to a profit-sharing plan in the sense that employer contributions are allocated to each participant’s individual account. The difference is that the employer’s contributions are mandatory, not discretionary. Under such a plan, the employer promises to pay a definite amount (such as 10% of compensation) into each participant’s account every year. In that sense, money purchase pension plans are less flexible for employers than are profit-sharing plans.

As with a profit-sharing plan, the maximum amount that an employer can contribute to the plan for all participants combined is 25% of the total combined compensation of all participants (although each participant’s compensation is limited to $330,000 for purposes of making this calculation).

The maximum that the employer can contribute to any given participant’s account in a year is either $66,000 or the agreed-to amount of the participant’s compensation—whichever is less. (The $330,000 and $66,000 caps increase from time to time for inflation.)

EXAMPLE: Sand Corp. has a money purchase plan that promises to contribute 25% of compensation to each eligible employee’s account. Jenna made $45,000 last year and was eligible to participate in the plan, so the company contributed $11,250 (25% × $45,000) to her account for that year. This year, the company is losing money. Nonetheless, the company is still obligated to contribute 25% of Jenna’s salary to her money purchase plan account for the current year.

Employee Stock Ownership Plans (ESOPs)

An employee stock ownership plan, or ESOP, is a type of stock bonus plan that may have some features of a money purchase pension plan. ESOPs are designed to be funded primarily or even exclusively with employer stock. An ESOP can allow cash distributions, however, as long as an employee has the right to demand that benefits be paid in employer stock.

Because an ESOP is a stock bonus plan, the employer cannot contribute more than 25% of the total compensation of all participants and no more than $66,000 into any one participant’s account.

Defined Benefit Plans

A defined benefit plan promises to pay each participant a set amount of money as an annuity beginning at retirement. The promised payment is usually based on a combination of factors, such as the employee’s final compensation and the length of time the employee worked for the company. If the employee retires early, the benefit is reduced.

EXAMPLE: Damien is a participant in his company’s defined benefit plan. The plan guarantees that if Damien works until the company’s retirement age, he will receive a retirement benefit equal to 1% of his final pay times the number of years he worked for the company. Damien will reach the company’s retirement age in 20 years. If Damien is making $50,000 when he retires in 20 years, his retirement benefit will be $10,000 per year (which is 1% × $50,000 × 20 years). If he retires early, he will receive less.

Once the retirement benefit is determined, the company must compute how much to contribute each year in order to meet that goal. The computation is not simple. In fact, it requires the services of an actuary, who uses projections of salary increases and investment returns to determine the annual contribution amount. The computation must be repeated every year to take into account variations in investment returns and other factors and then to adjust the amount of the contribution to ensure the goal will be reached.

Even though, under certain circumstances, defined benefit plans permit much higher contributions than other qualified plans, they’re used infrequently (especially by small companies) because they are so complex and expensive to administer.

Target Benefit Plans

A target benefit plan is a special type of money purchase pension plan that incorporates some of the attributes of a defined benefit plan. As with a money purchase plan, each participant in a target benefit plan has a separate account. But instead of contributing a fixed percentage of pay to every account, the employer projects a retirement benefit for each employee, as with a defined benefit plan. In fact, the contribution for the first year is computed in the same way a defined benefit plan contribution would be computed, with the help of an actuary. The difference, though, is that after the first year, the contribution formula is fixed. While a defined benefit plan guarantees a certain retirement annuity, a target benefit plan just shoots for it by estimating the required annual contribution in the employee’s first participation year and then freezing the formula. The formula might be a specific dollar amount every year or perhaps a percentage of pay.

If any of the original assumptions turn out to be wrong—for example, the investment return is less than expected—the retirement target won’t be reached. The employer is under no obligation to adjust the level of the contribution to reach the original target if there is a shortfall. Conversely, if investments do better than expected, the employee’s retirement benefit will exceed the target, and the increased amount must be paid to the employee.

EXAMPLE: Jack is 35 when he becomes eligible to participate in his company’s target benefit plan. Jack’s target retirement benefit is 60% of his final pay. Assuming Jack will receive wage increases of 5% each year and will retire at 65 after 30 years of service, Jack’s final pay is projected to be $80,000. His target retirement benefit, then, is $48,000 (60% of $80,000). In order to pay Jack $48,000 a year for the rest of his life beginning at age 65, the actuaries estimate that the company must contribute $4,523 to Jack’s account every year. The company will contribute that amount, even if Jack doesn’t receive 5% raises some years, or if other assumptions turn out to be wrong. Thus, Jack may or may not receive his targeted $48,000 during his retirement years. It might be more or it might be less.

Plans for Self-Employed People (Keoghs)

Qualified plans for self-employed individuals are often called Keogh plans, named after the author of a 1962 bill that established a separate set of rules for such plans. In the ensuing years, Keoghs have come to look very much like corporate plans. In fact, the rules governing self-employed plans are no longer segregated, but have been placed under the umbrella of the qualified plan rules for corporations. Nonetheless, the Keogh moniker lingers, a burr in the side of phonetic spellers.

If you work for yourself, you may have a Keogh plan that is a profit-sharing plan, money purchase pension plan, or defined benefit plan. If so, it will generally have to follow the same rules as its corporate counterpart, with some exceptions.

Individual Retirement Accounts

Most people are surprised to learn that individual retirement accounts, or IRAs, exist in many forms. Most common is the individual retirement account or individual retirement annuity to which any person with earnings from employment may contribute. These are called contributory IRAs. Some types of IRAs are used to receive assets distributed from other retirement plans. These are called rollover IRAs. Still others, such as SEPs and SIMPLE IRAs, are technically IRAs even though some of their rules are

Reviews for IRAs, 401(k)s & Other Retirement Plans

[reader1009-863136 · Rating: 4 out of 5 stars]

This doesn't have the latest pandemic rules for RMDs (allowing some but not all people to wait to take them in the year after they turn 72--the IRS website actually is fairly clear on the details), but it was a good reference to review all the kinds of qualified plans and the separate rules for Roth IRAs, both in terms of avoiding extra taxes when withdrawing from them, and also in terms of estate planning.

[chris177 · Rating: 4 out of 5 stars]

Each chapter can be read any time you need more information or you can read the whole book to gain a detail review of the different types of retirement plans. This is one of the things I like best about NOLO books; you don’t need to read them cover to cover to gain useful knowledge. I got this book from LibraryThing as part of their book give away.

[corgiiman · Rating: 4 out of 5 stars]

This book is chocked full of information for anyone starting a retirement plan all the way through the distribution of that plan. It answers all kinds of question and shows you how to calculation taxes, distributions etc..It is a valuablel asset for the retirement investor.

[foof2you · Rating: 4 out of 5 stars]

What I liked about this book is that each in the beginning of each chapter chapter is a section entitled "Who should read chapter __". This great since you can read what you desire and skip area that do not apply to you or your family. I found that this book reminded me of a Dummies book, without the yellow cover and funky print. I did find the contents to be helpful and informative. With headings such as, skip ahead, tips, caution, helpful terms and resources.

[rufusraider · Rating: 3 out of 5 stars]

This is a very good book describing the various retirement planning options and how they work. It is very comprehensive and covers a lot of the tax implications of the various plans. This is also the biggest drawback to the book, in that it is too comprehensive. The writing can be very technical which is required when dealing with the various nuances of the IRS tax code. Most people will not be dealing with all of the options. I would recommend you read through most of the book now to help you with long range planning, and then reread it in more detail as you approach retirement.

[wortklauberlein · Rating: 4 out of 5 stars]

A law librarian at a webinar the other day gave Nolo publications high marks. Twila Slesnick's updated guide to withdrawing your money from your retirement plans is a good example of what Nolo does well: translating complex language into words most of us can understand readily. This guide also is a lot less dry than the IRS publications. For example, it notes: "Some people are tempted to choose the path of least resistance. This is true in life generally, but especially true in the part of life that requires dealing with the IRS."Slesnick presents an overview of tax rules, information on kinds of beneficiaries, rollovers and Roth IRAs, plus handy tables for calculating the amount a person of a certain age must withdraw after age 70. Information on ways to minimize income tax on those tax-deferred funds is particularly welcome.Being of the total-avoidance school of retirement planning, I found this book a good kick-start and will refer back to it, or its successor volume, when those required minimum distributions are a reality for me. Meanwhile, I'll go back to reading Nolo's "Retire Happy."

[nathanaels_19 · Rating: 4 out of 5 stars]

This is a very thorough coverage of retirement accounts from the perspective of someone preparing for retirement or already in retirement. It explains the various retirement vehicles and how to work with them and transfer from one to another. This guide is not intended for small business owners trying to set up the system for their company. Basically, this guide is for people who want to use the vehicles which are already available to them. It is extremely well organized and easy to use as a reference book. As usual for Nolo guides, the style is very clear and easy to follow.