Chapter 7: Retirement Income and Other Income Types
Chapter Description
Upon completion of this chapter, students will be able to identify various types of retirement income. Students will be able to describe different kinds of pension plans and government benefit programs and the tax repo...
ACC MISC: Chapter 7 Lecture.pdf
Chapter 7: Retirement Income and Other Income Types
Overview
Chapter Description
Upon completion of this chapter, students will be able to identify various types of
retirement income. Students will be able to describe different kinds of pension plans
and government benefit programs and the tax reporting required when a taxpayer
receives income from any of these plans. Lastly, tax reporting requirements for these
types of income will be explained.
The following content is based on 2022 tax law for 2021 tax returns; however, discussions
of prior year tax law will be addressed as applicable.
Learning Objectives
1) Recognize retirement income, including distinguishing between pensions and
annuities.
2) Discuss specific types of pension plans, including SEP and SIMPLE plans,
traditional and ROTH IRA’s, qualified plans, and federal civil service
retirement, along with distributions from such plans which are reported on
Form 1099-R (Form CSA 1099-R for federal civil service).
3) Discuss government retirement benefit programs; specifically, Social Security
and railroad retirement and the applicable reporting forms (Forms SSA-1099,
RRB-1099, and RRB- 1099-R).
4) Summarize where to report various types of income.
Key Terms
Annuity
Cost (of a retirement plan)
Disability Income
Distribution
Early Distribution
Employee Contribution
Excess Contributions
Individual Retirement Arrangement (IRA)
Lump-Sum Distribution
Nonqualified Employee Plan
Pension Plan
Qualified Employee Annuity
Qualified Employee Plan
Railroad Retirement Tier 1
Railroad Retirement Tier 2
Rollover
Tax-Sheltered Annuity (TSA) Plan
Transfer
Withdrawal
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,Objective #1: Retirement Income – Pensions and Annuities
Upon completion of service by an individual in performing normal work duties, that
individual will enter the phase of his life that comes after work. That period will be
considered retirement. Retired individuals will need a source of income for support
after retirement. This support will often come in the form of a pension or annuity.
Pensions are regular payments made to an individual after retirement. These
payment amounts are determined by applying specific factors which are laid out in
detail by the pension plan. The plan may specify several factors which will be used to
determine the amount of these regular payments after retirement. Some examples
of factors which may be used to determine the amount of these regular payments
would be such things as age at retirement, years of service, level of compensation,
and the age considered to be full retirement (where the employee will receive the full
retirement amount specified by the plan). These are called defined benefit plans since
the benefits (amount of each payment) will be calculated based upon factors
specified in the plan.
Pension plans may be set up by several different entities. An employer may set up an
employment-based pension plan for the benefit of employees. This will be an employee
benefit which is intended to provide employees with a reliable stream of income after
they are no longer receiving a regular stream of income from employment. This type
of plan may be entirely funded by the employer, or it may be partially funded by the
employees. A shared funding arrangement between the employer and employees is
common.
Retirement income may also be provided by public pension funds (such as Social
Security or railroad retirement benefits) or by certain disability payments (these may
be provided by a pension plan for members who suffered a disability).
Annuities may provide a similar series of payments to a retiree. Annuity plans are set
up under a contract which provides for a stream of regular payments which will last
for more than one year. These payments may be for a definite, constant amount
(fixed), or they may be variable (not fixed). A life annuity will be similar to a pension
since it insures against longevity by providing a stream of guaranteed payments for
life. These annuity contracts may be purchased for the taxpayer, or by the taxpayer
through another entity such as his employer or an advisor.
A specific type of annuity, called a 403(b) plan, may be offered to employees by public
schools, colleges, universities, churches, and tax-exempt charities. The employer will
purchase annuity contracts for its participating employees. These are tax-sheltered,
voluntary employee plans. Employees contribute some of their pretax salary to a
403(b) account and the contributions and earnings will be tax-deferred until
distributions are made to the employee. Contributions by an employee to his
individual account are flexible, but total contributions per year are limited. The
private industry plan which is similar to the 403(b) is called a 401(k) plan. These are
also individual accounts set up by the employer for employees and contributions are
flexible. It should be noted that investment options are usually quite limited. Both
401(k) and 403(b) plans are defined contribution plans. In contrast to defined benefit
plans, the benefits are not specified in the pension plan. The only known factor in a
defined contribution plan is the level of contributions by each individual in the plan.
The benefits (distributions) will depend on employee elections and on the successful
investment of funds in the employee’s individual account.
Many companies who offer pension plans have moved away from defined benefit
plans over the last several years due to the complexity and expense of administering
such plans. Defined contribution plans have become much more common than
Copyright @ 2022, The Income Tax School Inc. – All Rights Page 7.2
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,defined benefit plans due to the ease of administration. In such plans, only the
contributions are specified. An account is set up for each employee to receive the
contributions and nothing else is required except periodic account statements sent to
each participant.
Copyright @ 2022, The Income Tax School Inc. – All Rights Page
Reserved 7.3
, Review Question 1
Bill works for Goodbye Corp. The company maintains a 401(k) plan for its
employees. After a year of employment, the company partially matches employee
contributions. Bill plans to begin taking distributions from his plan upon retirement.
Since he is 10 years away from retirement, he wants to know what amount of
benefits he will receive from his plan at retirement. How can he get this
information?
a) He can ask his plan administrator to estimate his benefits based on the
benefits defined in the plan.
b) Since his benefits are not defined by the plan, he can only project based on
assumptions the amount that will be available at retirement.
c) He can contact the plan administrator for the minimum and maximum benefit
specified in the plan.
d) He can apply the fixed rate of return specified in the plan to his contributions
Objective #2: Specific Types of Pension Plans
SEP (Simplified Employee Pension)
SEP plans allow an employer to make contributions to employees’ pension accounts.
SEP plans are attractive to employers for a variety of reasons, including:
Administrative benefits – SEP-IRAs typically have lower administrative costs
and less paperwork than traditional IRAs.
Flexibility – Employers are not required to make contributions every year.
Tax Deductibility - Employer contributions are tax deductible.
Employer Credits – Small employers may be eligible for certain tax credits
related to startup costs. See “Practice Note” below.
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