Bridging the Income Gap: Identifying other sources of retirement income

Question 1

IRA contribution limits

Answer 1

(1) Single wage earner: $5,500 or 100% of compensation, (2) Married couple, both working: a total of $11,000, with each contributing the maximum amount for single wage earners. (3) Married couple, both working, over 50: a total of $13,000; each may contribute max plus $1,000. (4) Married couple, one spouse working: $5,500 each; nonworking spouse is referred to as a spousal IRA. (5) a divorced individual, age 56, not working but receiving alimony: less of $6,500 or 100% of compensation. (alimony is considered compensation)

Question 2

Active Participant Status Retirement Plans

Answer 2

(1) Qualified pension, profit sharing, or stock bonus plans, (2) Qualified annuity plans under 403b, (3) Simple Employee Pension, (4) SIMPLE IRA, and (5) Government plans (not including SS, Railroad, or 457)

Question 3

Criteria for Active Status: Defined Benefit Plan

Answer 3

(1) An individual is an active participant if the individual is eligible under plan provisions, even if (2) the individual elected not to participate, (3) the employer failed to make mandatory contributions, and/or (4) failed to perform the minimum service required.

Question 4

Criteria for Active Status: Profit sharing, 401k, or stock bonus plan

Answer 4

(1) An individual is an active participant if the individual’s account received an employer contribution, an employee contribution, and/or a forfeiture allocation.

Question 5

Criteria for Active Status: Money purchase plan or target plan

Answer 5

(1) An individual is an active participant if the individual’s account received a contribution or forfeiture allocation, (2) regardless of whether the individual was employed at any time during the taxable year.

Question 6

Earnings affect on active participant status

Answer 6

(1) An individual is not an active participant if only earnings (no contribution or forfeitures) are allocated to his or her account.

Question 7

Income not considered earned

Answer 7

(1) Unemployment compensation, (2) Passive income, (3) Deferred compensation, (4) Pension and annuity payments, (5) Social Security, (6) Worker’s compensation, and (7) Capital Gains

Question 8

Tax consequences of excess contributions to IRA

Answer 8

(1) The individual is liable for a nondeductible excise tax of 6% on the excess amount. (2) If the excess contribution, and the net income attributable to the excess contribution, is withdrawn before April 15, or the applicable extension, it will be treated as if was never contributed.

Question 9

Three types of investments not permitted with IRA funds

Answer 9

(1) Collectibles (exception: certain state or U.S. coins), (2) Life insurance contracts, and (3) loans to “disqualified persons”; these are prohibited transactions.

Question 10

Tax consequences of investing IRA funds in nonpermitted investments

Answer 10

(1) Collectibles: any amount invested in collectibles is deemed distributed and subject to tax and the early withdrawal penalty. (2) Life insurance: may be deemed a distribution or prohibited transaction. (3) Loan: a prohibited transaction which may result in loss of IRA status and taxation on the entire account (plus early withdrawal penalty if applicable.

Question 11

Required beginning date for distributions

Answer 11

(1) IRA owners and more than 5% owners of business with qualified plans must begin distributions by April 1 of the year following the year the individual attains 70 1/2. (2) For quaified plans, 403(b) plans, and 457 plans distribution is the later of the year following 70.5 or the year of retirement.

Question 12

Uniform Table

Answer 12

(1) A table of ages with divisors corresponding to life expectancies used to calculate required minimum distributions.

Question 13

RMDs with multiple IRAs

Answer 13

(1) Each account must meet the minimum distribution requirements separately; (2) alternatively, the total required minimum distribution may be taken from any one or more of the accounts. (3) Penalty on insufficient distribution is 50% on the amount of the shortfall (which may be waived where reasonable error is made and remedial steps are taken)

Question 14

Exceptions to 10% Early Withdrawal Penalty

Answer 14

(1) Death or disability, (2) Medical expenses in excess of 10% (7.5% if over 65) of AGI, (3) Qualified higher education expenses, (4) First-time homebuyer expenses up to $10,000, (5) Medical insurance premiums while unemployed, (6) Qualified reservist distribution, or (7) A series of substantially equal periodic payments.

Question 15

Substantially equal and periodic payments for IRAs

Answer 15

(1) Distribution must continue for at least 5 years, or until 59.5, whichever is longer. (2) Methods available are : RMD method, Fixed amoritzation method, or fixed annuitization method. (3) Only the RMD method can have payment vary.

Question 16

Roth IRAs

Answer 16

(1) Phaseout for Single filers is $114,000 to $129,000 and $181,000-$191,000 for joint filers. (2) Income is the only criteria used. (3) For a Roth IRA distribution to be considered qualified: account must be open for at least 5 years, and the distribution is made after attaining 59.5, death, or disability, or for a 1st time home buyer up to $10,000. (4) Hardship exceptions still exist

Question 17

Requirements an Employer must meet to establish a SIMPLE IRA

Answer 17

(1) The employer must not contribute to or accrue benefits under any qualified retirement plan for services provided during the year (or in any year after the qualified salary reduction arrangement takes effect); and (2) The employer must have 100 or fewer employees earning at least $5,000

Question 18

SIMPLE IRA contributions

Answer 18

(1) Employer: the employer is required to match employee contributions up to a maximum of 3% of employee compensation, or contribute a flat 2% for every eligible employee. (2) An employer using the 3% matching may make lower contributions in 2 of the 5 years, but contributions cannot be less than 1%. (3) Employee: employee can contribute elective deferrals up to a maximum of $12,500 of annual compensation. Employees at least 50 get a $3,000 catch up.

Question 19

Two-year rule

Answer 19

(1) A participant who takes a distribution within 2 year of joining is assessed a 25% penalty tax. (2) That 2 year period begins on the date the employee first participated in the plan. (3) Penalty does not apply if over age 59.5. (4) Distributions not subject to the 10% penalty are not subject to the 25% penalty. (5) Rollovers during this 2 year period can only be made to other SIMPLEs.

Question 20

SEP-IRA

Answer 20

(1) Any tax-exempt or for-profit businesses may establish as SEP, (2) Maximum contribution if 25% of participating annual compensation or $53,000, (3) The higher annual contribution limit of the SEP-IRA sets it apart. (4) Employees 21 and over earning at least $600 in the current year and performed services in the preceding 3 out of 5 years must participate. (5) Allow post-year funding up until when the business file’s its tax return. (6) No catch-up

Question 21

SIMPLE vs. SEP

Answer 21

(1) a SIMPLE gives employees the opportunity to contribute their own deferred salary to a plan. (2) An employee may defer up to $12,500 in current compensation. (3) $3,000 catch-up. (4) Employer contributions are purely discretionary in a SEP, with a SIMPLE, employers must make either matching or non-elective contributions. (5) SIMPLE maximizes contributions for less compensated employees while SEPs provide greater contributions with higher incomes, up to $53,000 (6) SEP is great for an employer with many young, seasonal employees.

Question 22

5 principles of taxation for cash value life insurance policies

Answer 22

(1) Increases in cash value generally accumulate tax-free or tax-deferred. (2) Amount of cash surrender value exceeding net premium paid is subject to ordinary income, (3) Some policies pay dividends, which are not taxable, but interest on dividends is. (4) Loans taken against cash value (except for modified endowment) are not taxed (5) Death benefits generally pass to the beneficiary tax free.

Question 23

Modified Endowment Contract

Answer 23

(1) A contract meeting the requirements for classification as life insurance but that fails the 7-pay test. (2) Distribution (or loans in the case of modified endowment) are taxed under the LIFO (interest first) rule (3) The death benefit remains excludible from income.

Question 24

Uses of Home Equity for Retirement Funding

Answer 24

(1) Downsize: may be able to avoid a mortgage and generate excess cash. may reduce utilities, property tax, insurance, etc. (2) Refinance: lower your monthly payment and be able to “cash out” of some equity. (3) Reverse Mortgage: will receive cash in the form of a monthly payment, lump sum, or line of credit, not required to be repaid until death or sale of home. Though fees associated with reverse mortages can be high.

Question 25

Reverse Mortgages Qualifications

Answer 25

(1) Must be 62, (2) Own home outright, or (3) carry a mortgage small enough to be paid off by proceeds. (4) There are no income or credit checks. (5) The excess of sale proceeds go to heir, though a shortcoming in sale price is still considered to satisfy the loan. (6) Payments from reverse mortgages can affect eligibility for government benefits like medicaid. (7) Should be seen as a last resort.

Question 26

Ordering rules for Roth distributions

Answer 26

(1) Return of contributions, (2) Return of conversion amount, (3) Return of earnings.

Question 27

Roth 401K

Answer 27

(1) These have their own 5-year clock, and (2) RMDs must start by 70.5

Question 28

SIMPLE IRA employer matching contribution

Answer 28

(1) The normal $265,000 limit on compensation does not apply to 3% SIMPLE employer matching contributions, but it does apply to 2%. (2) Forfeitures cannot be used to reduce employer contributions.

Question 29

SIMPLE dates to establish

Answer 29

(1) Employers may establish a SIMPLE IRA plan between January 1 and October 1. (2) Penalties are assessed against employers who fail to give adequate notifiction.

Question 30

Longevity Annuity

Answer 30

(1) Allow owners to convert a lump sump into a pension-like stream of incomes. (2) RMD start at 85. (3) No more than 25% of retirement money with a $125,000 overall cap.

Question 31

Annuity Withdrawals

Answer 31

(1) Withdrawals from a nonqualified annuity come first from earnings/gains. (2) Distributions are fully taxable as ordinary income until all of the gains have been withdrawn. (3) Surrender charge period typically lasts 4-9 years. (4) The most important feature of annuities is that they provide lifetime income