Book 5 (Retirement) Flashcards
First thought when you see a potential 3-stepper question
(Education or Retirement)
END mode - BEG mode - END or BEG mode
Why does personal inflation vary from the actual real rate of inflation?
Due to personal inflow/outflow factors
- In pre-retirement years, salary might not keep up w/ inflation
- Post-retirement medical insurance costs have been growing at higher percentages than goods
Common causes for underestimating retirement period
1) Individual might need to retire early, therefore, extending the retirement period
2) If married, the average number of years until the 2nd spouse’s death is generally longer than what the joint life expectancy table shows.
To compensate for underestimating the retirement period, a FP should add how many years to estimated life expectancy?
5-10 years
Main income sources to support client’s retirement needs
- Reverse mortgage on family home
- Current retirement savings
- Social Security benefits
- Equity from sale of home if client rents rather than owns
- Current investments
- Future savings
- Downsizing
Explain pension maximizing
A strategy where the retiree chooses the highest pension payout option (single life annuity) instead of taking a reduced pension payout (Joint & Survivor annuity)
RMDs:
——- withdrawals from ——- retirement accounts once the account holder reaches a certain age. These withdrawals are subject to ——- ——- ——
Mandatory withdrawals from tax-deferred retirement accounts once the account holder reaches a certain age. These withdrawals are subject to ordinary income tax
List of accounts that must take RMDs
- Traditional IRA
- SEP IRA
- SIMPLE IRA
- 401k & 403b plans (unless still working)
- 457 plans
- Inherited IRAs (Traditional / Roth)
- Roth IRAs (not inherited) do not require RMDs
Therefore, it is possible to have two separate RMD dates (401k still working & another account)
Is it possible to have Disability Insurance & Social Security Disability Insurance?
Yes
- Disability Insurance (private polICY) provides quicker and more flexible benefits
- SSDI is harder to qualify for and is based on work history
Who carries out the admin duties of the Qualified Plan System? What functions do they help administer?
The IRS
- Supervise creation of new plans and* audit existing*
- Interpret tax consquences & plan designs
Who governs non-tax aspects of retirement plans?
ERISA
(Employee Retirement Income Security Act)
What are the responsibilites of the Department of Labor (DOL)?
Regulatory responsibilties through the Office of Pension & Wealthfare Benefits Plans:
- Reporting & Disclosures
- Defines prohbited transactions
- Issues communication to explain laws
What is the PBGC and what do they do?
Pension Benefit Guaranty Corporation
- Federal corporation to insure plan participants against loss of benefits due to termination of plan
Note: only insures DB plans & cash balance plans
When you see “tax-deferred”, instantly think…
1) Avoid tax now, pay tax later
2) Reduces current taxable income
3) RMDs will force withdrawals, and therefore, taxes
What are ERISA requirements for all Qualified Plans?
- Coverage
- Participation
- Vesting
- Reporting & Disclosures
- Fiduciary Requirements
- Spousal Protection
- Anti-discrimination
Opposite of a tax-deferred account?
Taxable Account
or
Tax-Exempt Account
What are the key facts about 401(k)s?
It is a provision within an employer-sponsored plan (usually Profit-Sharing, Stock Bonus, or DB(k)/Cash Balance)
- It is NOT a standalone plan (It is a feature of a qualified plan that allows for salary deferrals
- All 401(k)s are ERISA qualified
- You can have different types of 401(k)s added:
1) Traditional
2) Roth
3) Safe Harbor
4) SIMPLE
5) Solo
“Fully Insured” means what?
= 40 credits of coverage
“40 quarters of work”
“10 years of work”
“Currently Insured” means what?
= 6 credits of coverage
“6 quarters of work”
“1.5 years of work”
Who is not covered by Social Security
- RR workers
- Students working for a college/club
- Child (under 18) working for parents’ unincorporated business (Sole Prop or P-Ship)
- Ministers (if they opt out)
- Teachers
Social Security
Worker Eligibility
Retired, fully insured, Age 62+
OR
Disabled at least 12 months or expected to be
Social Security
Spouse / Dependent Eligibility
Fully insured worker RETIRED:
Spouse:
62+ OR w/ child under 16 OR w/ child 16+ and disabled
Fully insured worker DIED:
Spouse:
60+ OR w/ child under 16 OR w/ child 16+ w/ disability
Dependent:
Under 19 & student OR 18+ w/ disability
Social Security
What if you are a divorced spouse?
Must have ALL…
- Been married for at least 10yrs
- Divorced at least 2yrs
- No remarry!
- Age 62+
Spousal Benefit amount of SS
50% of the worker’s PIA
(primary insurance amount)
Describe PIA and how it is generally calculated
It is monthly amount you will receive at your FRA
FRA = age 67 or 66 (if born before 1960)
