Question

. Prepare a matrix comparing the differences among the following:

a. IRA and Roth IRA.

b. 401(k), SEP and ESOP.

Make sure to include the following:

Who or what organizations should use each plan?

What are the limitations?

What are the unique characteristics of each plan?

Who is eligible?

What are the provisions for loans and distributions?

Answer 1

1. Differences between IRA & traditional IRA:

       

                                                IRA                                                  Roth IRA:

Nature               this is an individual retirement plan               this is also same like that of an

                            Provided by financial institutions that          traditional IRA. The biggest

                          Helps the taxpayers to purchase an annuity difference lies in how they are

                         Or an endowment contract from an life

                         Insurance company.

    Limitations               IRA’s have strict contribution limits. After       in case of roth IRA if the modified

                                       70.5 years you can’t contribute to an IRA        adjusted gross income exceeds a

                                      Account. There are also penalties if you take   certain level you cant contribute

                                      The amount before the retirement age.           & amount can be withdrawn only

                                                                                                                         If the account has been held for 5

                                                                                                                        Years & reached 59.5 years of age

Characteristics         this plan has contributions that are fully                          distributions are tax free,

                                   Tax deductible, partly deductible or not             participants must have income

                                  Deductible. Distributions must start no later      below certain limits, there is no

                                 Than april 1 for 70.5 years of age or older.          Age limit & contributions are not

                                Distributions are taxed as ordinary income.         Deductible.

Loans &                a loan cant be taken on either a traditional          investors who contribute to this

Distributions       or a roth IRA. IRA money can be used to pay       account can receive tax free

                             For higher education expenses, a distribution     distributions on retirement. The 5

                            Is allowed to pay for unreimbursed medical         year rule stipulates that 5 years

                           Expenses that exceed 7.5% of adjusted gross       since the tax year of first contrbn

                           Income                                                                          should be passed to withdraw

                                                                                                                   Earnings in account tax free.

2. Differences between 401k, SOP & ESOP

• 401(K): this is a retirement plan that is offered by the employers to its workers to invest a piece of their pay check before the taxes are taken out. This is considered to be an employer sponsored retirement plan i n America.

Limitations:

5. This is good when the market is trending over time & not suitable if the market is oscillating.
5. This is considered to be an expensive employee benefit.
5. It is difficult to maintain record of assets accumulated under the 401 k plan.
5. The complex tax implication is pre tax treatment of invested cash flows.

                             Features:

5. Many employers designate their contributions to 401(k) plans as 100% vested immediately - the employee owns them right away and if for some reason the employee changes jobs or needs to move money from that plan, the money is 100% theirs.
5. This plan provides with plenty of options to invest money covering various asset classes.
5. Options would be given to designate the contributions to a traditional or a Roth IRA.

                        

                       Eligibility:

                       The maximum age is 21 years & 1 year of service. In case of discretionary employer is 21 years of age & 2 years of service.

                      Loans & distributions:

                       There is a maximum loan amount set by law. If your 401(k) plan does allow loans, the law states that the maximum amount you can borrow will be $50,000 or 50 percent of your vested account balance, whichever is less. At the time you take a 401(k) loan you pay no taxes on the amount received. However, if you don't repay the loan on time, taxes and penalties may be due. If you leave employment while you have an outstanding 401(k) loan, your remaining loan balance is considered a distribution at that time, unless you repay it.

• SEP: an employer including a sole proprietorship, partnership, corporation & non profit organization with one or more employees can start an SEP plan.

Limitations:

5. The contribution limit is high.
5. It doesn’t allow people older than 50 to make contributions.
5. If there is an emergency, you can’t borrow from SEP plan.

                    Features:

5. This is established & funded by a business.
5. Contribution limit is 25% of compensation or 550,000 whichever is less.
5. Account earnings grow on tax deferred basis.

                   Eligibility:

                   An employee, who has reached 21 years of age, has been with the employer for 3 of the 5 years & has received $600 in compensation from the employer.

                   Provisions for loans & distributions:

                    You can’t borrow on your SEP but the SEP assets can be rolled over to another IRA account.

                   The similarity between an SEP IRA and a traditional IRA is the distribution rules. The distribution of both the IRA account and SEP IRA must be taken at some point but some distributions are elective and others will be forced. Penalties and taxes that are applied to both distributions will be dependent on the age of owner at the time of distribution as well as the tax deductions of the assets during the contribution time.

• ESOP: An employee stock ownership plan (ESOP) is an employee-owner program that provides a company's workforce with an ownership interest in the company. In an ESOP, companies provide their employees with stock ownership, often at upfront cost to the employees.

Limitations:

5. As it is governed by ERISA, high fiduciary standards must be met.
5. This is considered to be expensive for the organization.
5. In case of exit strategy by the company a careful panning from experienced advisors is required.

                   Unique features:

5. The ESOP operates through a trust set up by the company.
5. It is equity based deferred compensation plan.
5. First investment has to be made on the securities of the sponsoring employer.
5. Leveraged ESOP’s are used as a technique in corporate finance.

                     Provisions for loans & distributions:

                      The ESOP can borrow money to buy new or existing shares, with the company making cash contributions to the plan to enable it to repay the loan. Regardless of how the plan acquires stock, company contributions to the trust are tax-deductible, within certain limits. The employees can roll over their distributions in an IRA or other retirement plan or pay current tax on the distribution, with any gains accumulated over time taxed as capital gains. The income tax portion of the distributions, however, is subject to a 10% penalty if made before normal retirement age.