CFP Retirement Flashcards
1
Q
Who is not covered by Social Security?
A
Railroad employees (though covered by medicare) including if spouse is covered by railroad plan, then spouse is not covered
Child under 18 employed by parent in unincorporated business
Tribal councils (native american)
Ministers, religious orders, if they claim exemption
2
Q
Social security eligibility age
A
62 if disabled and fully insured
65 if not disabled
67 is FRA (for people born after 1960)
3
Q
Social security reduction (PIA)
A
Primary Insurance Amount
reduced by 1/180 for every month before age 67
PIA - [ (months early / 180) * PIA)
PERMANENT reduction
Max 36 mos early for formula
Add’l decrease if > 36 mos
4
Q
Social security reduction if still working
A
Before age 67/FRA, 1:2 reduction over $22,300
After age 67/FRA keep all benefits
IF Turning 67 / FRA in 2024 or current year
1:3 reduction over $59,520
DOLLAR AMOUNTS ARE ON TAX TABLES, JUST NEED TO KNOW THE 1:2 AND 1:3
TEMPORARY reduction vs PIA permanent
Does not affect taxation determination
5
Q
Social security taxation
(Includes retirement, survivor, and disability)
A
Provisional AGI =
AGI
+ tax exempt interest (BE CAREFUL TO LOOK FOR MUNI INTEREST)
+ 50% of Soc Sec (ONLY 1/2)
50% taxable if
single > 25K
MFJ > 32K
85% taxable if
single > 34K
MFJ > 44K
Does not matter whether employed or not
6
Q
Age at which spouse of retired/disabled worker qualifies for social security
A
62
OR
if caring for a child under age 16
@50% of spouse’s benefit
7
Q
Age at which SURVIVING spouse qualifies for social security
OR
surviving divorced spouse
A
60
own benefits or 100% of spouse benefits
Decreased if under FRA
8
Q
Age at which DIVORCED spouse is eligible for spouse’s social security
A
62 - but PIA reduction to age 67
married 10 years
divorced 2 years
50% benefit
9
Q
Children/Dependent eligibility for social security
A
Child of deceased, disabled, or retired
Child < 19 and full time elementary or secondary student
Child >= 18 and disabled before age 22
Note: Child age rule for SPOUSE eligibility for deceased worker is child in care under 16
10
Q
Changing social security application
A
File & Suspend is never the answer
Not allowed to change, but WITHDRAWAL is allowed within 12 months of application (one time mulligan)
11
Q
Who is eligible for soc sec $255 death benefit?
A
Spouse living in same household or a dependent child
not both
12
Q
Tandem plan
A
usually a wrong answer
13
Q
DB/DC Salary cap
A
$345K
14
Q
DB/DC Max contributions
A
DC: $69K (+$7500 if age 50)
DB: Stuff it like a PIG
15
Q
IRA key factors
SIMPLE, SEP, SARSEP
A
No loans
No life insurance
Immediate vesting
May not be creditor protected
59 1/2 not 55 for no 10% penalty
Must take RMDs at 73 (even if not owner)
16
Q
Maximum annual benefit for DB plan
A
LESSER of
$275,000
or
Avg of three highest earning consecutive years
(only first $345K of comp taken into consideration)
17
Q
Unit benefit formula
A
aka % of earnings per year of service
most common DB formula
factors service & salary
18
Q
Cash balance plan
A
Promise is to deliver a specific cash balance, not a guaranteed annual benefit
Guaranteed contribution level and rate of return
Appropriate when a company can no longer afford benefit guarantee of DB plan
19
Q
PBGC
A
Pension Benefit Guarantee Corp
applies to both DB plans and cash balance plans
NOT DC plans
quasi-governmental
access to federal resources but government is not liable for its obligations
20
Q
Money purchase
Contributions
Addition limits
Deduction limits
A
DC Pension plan
Contribution is FIXED at a flat % of each employees comp up to $345K
Maximum annual addition $69K or 100% of salary (whichever is less)
ER can deduct up to 25% of overall payroll
21
Q
Forfeitures
A
Only affect DC plan participants - reallocated to participants or applied to employer contributions
DB and cash balance forfeitures MUST be used to reduce employer contributions
22
Q
Annual additions
A
EE contributions / deferrals
+ ER contributions
+ Forfeitures
23
Q
32 year old asks which factor will least affect ability to retire at age 60. Participant in profit-sharing plan.
Age
investment risk tolerance
Future inflation
Plan’s assumed investment return
A
Profit sharing plans do not have an assumed investment return
24
Q
Target benefit plan
A
DC Pension plan
Generally benefits older employees
Seeks ADEQUATE (Target) but not guaranteed benefits to older employees
Actuary determines INITIAL contrib level with fixed mandatory contrib’s
No ANNUAL actuarial determination
Final balance will vary based on investment performance
Employee assumes investment risk
25
When is profit sharing plan appropriate?
Variable profits
wants a qualified plan with incentive feature to motivate EE's to help company make a profit
Employees are young, well paid and have time to accumulate savings
26
ER Deduction to profit-sharing plan max
25% of all ELIGIBLE participants comp including elective deferral amounts
(up to $345k each)
Individual participants may receive > 25% but aggregate cannot exceed 25%
27
CODA
cash or deferral arrangement
401k
28
Deferral vs contribution limits
Deferral 23k
Employee contribution can be 30.5K with catch up at age 50
Overall contribution 69K or 25% of comp
29
Are 401k deferrals subject to FICA / FUTA?
YES
deferred federal taxes but still have to pay FICA/FUTA
30
Catch up contribution
7500 is a contribution NOT part of the deferral
Catch up's are OUTSIDE of section 415 limits
31
Mandatory vs flexible employer contributions
ALL PENSION plans are mandatory ER contributions (DB, Cash balance, Money purchase, Target benefit)
Profit Sharing plans are flexible but substantial and recurring
(Profit sharing, Stock bonus)
32
Who has investment risk for various retirement plans?
EE has risk for all DC plans
ER has risk for DB plans
33
Which plans allow for employee elective deferrals?
Think 4 plans:
401k - 23k
403b - 23k
457- 23k
SIMPLE - 16K
34
Total stack of potential plan contributions
EE deferral
ER match
Forfeitures
Company contributions
AND
7500 catchup if > 50
35
Cross testing
Means you can discriminate on age
"age weighted"
more $ to rich old people
36
Which plans allow double dip deferrals?
457
government incentive
can do 23K + 23K
37
401k limits across multiple employers
EE can only defer 23K across multiple employers
But ER can contribute to each up to max of $69K
Max $69K is PER EMPLOYER unless related ownership
same industry does not matter
38
Which retirement plans allow LOANS?
Qualified plans, if permitted
Includes 403b/TSA
NOT: IRA, SEP, SIMPLE, Roth
39
When is retirement plan loan interest deductible?
If NON-KEY person and for PRIMARY residence and secured by residence
40
Which plans allow hardship withdrawal and what are terms/conditions? Which funds can be distributed?
Profit sharing 401K or Stock Bonus
"Immediate and heavy" need and only source available
Ordinary income tax + 10% penalty
Considered safe harbor for purchase of PRIMARY residence
401k or 403b
CANNOT come from profit sharing plan without 401k provisions
Distributable amount is EE elective deferrals + vested profit sharing contributions
41
When is the FIRST home a distribution exception?
IRA distribution pre-59 1/2
Up to $10K
Different than exception for PRIMARY residence
401k Hardship withdrawal
or
Interest deduction on 401k loan
42
Solo 401k / Uni 401k
vs
Keogh rule limits
Solo 401K: $69k PLUS catch up $7500
Traditional plans and SEPS limit to Keogh rules which is 25% up to $69K (no catch up)
43
Who can participate in Solo 401k/Uni 401k?
You
you and spouse
2 partners
44
Profit sharing vs Stock bonus/ESOP
Stock bonus and ESOP are variations of profit sharing plan
accounts stated in shares of employer stock
distributed in shares of employer stock
when appropriate?
ER wants to broader ownership of stock
allowed fro S corp
ESOP is considered ONE shareholder regardless of # of employees
45
NUA
Net unrealized appreciation
"tax break"
Applies to ESOPs or any other qualified plan including any stock in a money purchase, profit sharing or 401k plan
NUA = difference between between ER cost basis and market value at lump-sum distribution to EE
NUA: Not subject to tax until EE sells the stock, and always LTCG
Additional gain (Distribution date to sale date) can be STCG or LTCG
Original contribution: Taxable at distribution as ordinary income (phantom)
Early withdrawal penalty 10% if pre-59 or not 55 and separation from service
If a 72t distribution instead of full, NUA is lost. ALL the company funds must be distributed in one taxable year to qualify ("lump sum") for NUA.
NUA will be lost if employer stock is transferred into an IRA
46
Are distributions from an S corp stock or cash?
Cash normally because of 100 person S corp rule
subject to 20% withholding? Yes if cash, No if ESOP distribution
47
HR-10
Keogh plan
for UNincorporated business orgs (sole prop/partnership)
48
Keogh
Just means qualified retirement plan for self-employed (sole prop or partnership - not S corp owner, not corporation) with special contribution limits for owner employees
can be DB, money purchase, or profit sharing
No calculations for DB plans
49
SEP contribution amounts for Employee vs Self-Employed (Keogh SEP)
For self-employed:
15% plan: 12.12%
25% plan: 18.59%
"MAX" plan: 18.59%
THIS TAKES INTO ACCOUNT REMOVING 1/2 SE TAXES
IF 1/2 SE tax already taken out, it is
% / (1+%)
.15 / 1.15 = 13%
.25 / 1.25 = 20%
Times net profits/Net schedule C income (for owner)
This only works under $168,600
if additional employee, 15 or 25% times salary
For not self-employed SEP (w-2 owner) > up to 25%
50
Who can have a SIMPLE plan?
sole props, tax exempt orgs, government entities with fewer than 100 ee's
cannot maintain any OTHER qualified plan at same time
Matching contributions are MANDATORY
51
SIMPLE limits
$16k for employee (subject to FICA/FUTA) - fully vested (no forfeitures)
catch up is $3500
Employers can match up to 3% of EE contribution
Matching is MANDATORY
OR 2% regardless of deferral
Alternate contributions allowed
NO salary cap of $345
52
SIMPLE withdrawal penalty
10% early penalty increased to 25% in first 2 years of participation
53
SIMPLE vs 401k SIMPLE
SIMPLE 401k has $345k limit * 3% = max contribution $10,350
regular SIMPLE has no cap of 345
SIMPLE also has a special match election
Employer may elect a 1% match in no more than 2 years of 5 year period
Not allowed under SIMPLE 401k
SIMPLE 401k is ERISA so exempt from creditors
54
SEP
Simplified Employee Pension
NO EE contributions, ER only (no catch up contribs)
Does not have to be recurring/substantial
contributions:
25% of comp (up to 345) or$69K for owner/W-2
or
for self-employed like a Keogh 12.12 or 18.59%
(To take into account removal of 1/2 SE Taxes)
100% vested
55
When to do a SEP?
Alternative to qualified profit sharing that is easier and less expensive to install
56
Robert owns RD inc. Earns $200k a year. Company offers 25% SEP. What is max they can contribute?
$37,180
$50K
$69K
25% of salary for owner = $50k
he is not self-employed
57
SEP participation rules
special eligibility
Must cover all EE's who are at least 21 and who have worked for ER 3 /5 years.
Part time counts.
No contrib required for comp less than $750/year.
For ER with many short-term EE's this is an advantage
For ER with many returning, part-time EE's this can be big disadvantage
58
Beneficiary on Pension plans
Controlled by spouse
59
SARSEP
established pre-1997
$23K plus catch up
deferrals subject to FICA/FUTA
immediate vest
May have up to 25 EE's and 50% of EE's must defer
Early withdrawal does not require financial hardship like 401k
treated same as IRA early withdrawal: ordinary income + 10% penalty
60
TDA plan
Tax deferred annuity (TDA)
aka
Tax sheltered annuity (TSA)
aka
403(b)
61
TSA plan
Tax deferred annuity (TDA)
aka
Tax sheltered annuity (TSA)
aka
403(b)
62
403b
Tax deferred annuity (TDA)
aka
Tax sheltered annuity (TSA)
aka
403(b)
63
Who can establish 403b?
501(c)(3) orgs tax-exempt
churches, hospitals, private schools, colleges
and
public school systems
64
403b characteristics
EE deferrals + ER matching
Deferrals subject to FICA/FUTA
If ER contributions then ERISA rules, ACP testing and joint/survivor rules
also note: 403(b) has additional catch up contrib ($7500)
65
Which retirement plans can/cannot integrate with social security?
NOT:
SIMPLE IRA or 401k SIMPLE
ESOP
401k with no match or company contribution
Yes:
Target benefit pension
money purchase
profit sharing and 401k
stock bonus
SEP
Defined benefit
66
What is retirement plan social security integration?
Allows highly comped employees to max company contributions and minimize the NHCE contributions
without plan integration, ER contributes higher % of comp for lower paid EE's
Two methods, offset and excess. Focus on excess method:
Integration level: Level of comp above which excess contrib is made. May not exceed Soc Sec taxable wage base.
Base benefit %
Excess benefit % above integration level
DB PLAN Permitted disparity: Lesser of base benefit % or 26.25%
DC PLAN Permitted disparity: Lesser of base benefit % or 5.7%
Example:
base 30% + permitted disparity 26.25 = excess 56.25%
or
base 20% + permitted disparity 20% = excess 40%
67
DB plan maximum permitted disparity for social security integration
Additional 26.25% on top of base % applied to salary in excess of integration level
68
DC plan maximum permitted disparity for social security integration
Additional 5.7% on top of base % applied to salary in excess of integration level
69
Who is considered fiduciary of retirement plan?
Officers, administrators, and advisors
ex: 2 doctors, advice from stockbroker, CFP, plan administrator
70
Max additions by plan type
DB: n/a - max payout is $275k annual or average of top 3 years salary
DC plans and 403b plans: $69K or 100% of comp under $345K
Keogh: 15% plan: 12.12% or 25% plan: 18.59%) * Sched C income
SEP: $69K or 25% of comp under $345K
71
Qualified plan eligibility
Age and Service: min age 21 and 1 yr service. Other service provision: 2 year service but immediately vested. Year of service = 1000 hours in 12 months or 500 hours over 3 years.
72
Money purchase vs Target beneft
Both DC Pension
Both 25% employer deduction of all eligible participants compensation
Both fixed contributions
Both stable cash flow
Target benefit favors older employees
73
Qualified plan ratio percentage test / average benefits test
Coverage: Ratio % test - must cover NHCEs at 70% of HCEs. If failed, then avg benefits for NHCEs must be 70% of HCEs. (HCE coverage % * 70%=NHCE coverage req)
in other words, if a plan covers 100% of HCEs, then up to 30% of the NHCE's can be excluded
74
Key employee
Affects VESTING
kEy = vEsting
>5% owner (and family attribution rules)
Officer AND comp > $220K*
or
>1% owner and comp > $155K*
Doubtful need to know these but know the 5% rule for HCs and Key
75
HCE Highly Compensated Employee
Affects ADP/ACP test and ratio/benefit test
hIghly comp'd = dIscrimination
> 5% owner (AND family attribution rules)
anyone > $155K in prior year
76
Family attribution rules for Key / HCE
An individual may be deemed to be a > 5% owner bc of relationship to actual >5% owner.
other EMPLOYEES who are spouse, child, grandparent are deemed to be >5% owner
NOT siblings
77
Top heavy plan
60% of aggregate accrued benefit or account balance allocated to KEY employees
Affects Vesting schedule
Determine KEY EE's > Determine % going to KEY EE's >> Determine vesting schedule
78
Vesting schedule for Top Heavy DB plans
3 year cliff
2-6 graded (0, 20, 40, 60, 80, 100)
100% 2 yr eligibility
EE deferrals always 100% vested
79
Vesting schedule for DC plans
3 year cliff
2-6 graded (0, 20, 40, 60, 80, 100)
100% 2 yr eligibility
EE deferrals always 100% vested
80
Vesting schedule for NON Top Heavy DB plans
5 year cliff
3-7 year graded
100% with 2 year eligibility
EE deferrals always 100% vested
81
Top heavy contribution rules
TOP HEAVY plan must provide minimum benefits for Non Key EEs
DB - benefit must be min 2% of compensation (B is 2nd letter)
DC - min 3% contribution (C is 3rd letter)
NOTE: Profit sharing plans not subject to minimums but substantial and recurring
82
ADP / ACP
actual deferral percentage
actual contribution percentage
The IRS requires 401(k) plans to undergo Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests annually if they don't meet the safe harbor provision.
non discrimination testing
Elective deferrals subject to ADP test
Employer matching and profit sharing subject to ACP test
Both tests compare the rate of HCE vs NHCE
NHCE Deferral > HCE Deferral
1% (x2) 2%
2% (x2) 4%
3% (+2) 5%
4% (+2) 6%
5% (+2) 7%
(Not more than 200% of the NHCE rate and not more than 2 pts > NHCE rate)
If ADP >= 8% then not more than 125%
83
Section 404
Deduction limits
ER deduction for retirement plan: Max 25% of all participants eligible comp
Certain indiv plan participants can exceed 25 as long as total contributions do not exceed 25%
84
Cross-tested plan
aka New comparability plan
Age-weighted DC approach
Contribution % for one category of participants is greater than the % for other categories
Designed to provide MAX benefits to HCEs and MIN to NHCEs but still satisfy non-discrimination
85
Multiple plan rules
Elective deferrals must always be AGGREGATED if >1 employer
401k / 403b / SIMPLE / SARSEP - $23K plus catch up $7500
SIMPLE and another SIMPLE - $16K plus catch up $3500
457's are NOT aggregated - they are non-qual deferred comp programs
86
Multiple plan rules with RELATED employers
"Common control" rules
If considered a RELATED employer then the max contributions may be aggregated
Governs max contributions and non-discrimination testing
Common control rules:
Parent- subsidiary: parent owns at least 80%
Brother - sister: Five or fewer owners of 2+ entities own 80% or more of each
Affiliated service group: Service org and professional org
Employee leasing
If related then plan docs for one company MAY apply to other
87
Life insurance in retirement plans
Must be "incidental" by meeting one of the tests:
1. DC plans use "percentage" limits
aggregate premiums paid must be less than the following of the plan cost contributions for that participant:
whole / ordinary life: 50%
universal: 25%
term: 25%
think -> whole = term + universal
2. DB plans typically factor the "100 times" limit
death benefit must be no more than 100 times the expected monthly plan benefit
88
412(e)3 plan
or 412(i)
DB plan fully funded by life insurance and/or fixed annuities
(100 times rule) benefit
89
UBTI
Unrelated business taxable income
(Qualified Retirement Plan)
If UBTI exceeds $1,000, the qualified plan’s UBTI is subject to income tax in the current year. Income from a LIMITED PARTNERSHIP (except real estate) or dividends from a margined account are considered UBTI income.
Real estate can trigger UBTI if debt is used to purchase the property.
Example: Equipment leasing program (typically LP's)
Not UBTI:
ETFs, Bonds, Dividends from S corp stock, Annuities, Apartment complex using 80% debt financing
AVOID IT!
90
Qualified plan rollovers
Ok to any type of plan except
457 NON GOVT only to 457 IF NON-GOVT
not hardship distributions or RMDs
Considered rollover if done within 60 days
only for QUALIFIED PLANS. IRA's can only do one 60-day per year.
Can only rollover to SIMPLE if established for 2 years
SIMPLE to SIMPLE only in 1st two years then other qual plans and IRAs
IRA pretax > Qual plan if permitted
IRA after tax XXXX to Qual plan not permitted
91
Direct distribution tax withholding
Mandatory 20%
Unless RMD or substantially equal payment
Direct rollover / transfer
92
IRA 60-day rule
can only do 60 day rollover once PER YEAR per taxpayer
93
For which type of plans is QDRO a penalty exception?
Qualified plans + TSA 403b
Not IRA or Roth IRA
"Q" equals QUALIFIED
94
For which type of plans is Federal disaster a penalty exception?
Qualified plans and IRA
NOT ROTH
95
For which type of plans is medical premiums while unemployed a penalty exception?
IRA and Roth IRA
Not qualified plans
96
For which type of plans is home purchase a penalty exception? What type of home?
FIRST HOME
only up to $10K
IRA or Roth IRA only
Not qualified plan
97
Which type of plans allow hardship withdrawals?
Qualified plans - profit sharing and stock bonus
401K
subject to income tax and often the 10% penalty
exceptions:
prevent eviction
funeral exp
damage to principal res.
purchase of PRINCIPAL res.
medex
higher ed expense in next 12 mos
98
For which type of plans is higher education a penalty exception?
IRA / Roth IRA
Must be QUALIFIED higher ed expense
NOT 401K - only via a hardship withdrawal
99
72t distribution
substantially equal periodic payments
from single IRA account
cannot change without penalty until the greater of 5 years or 59 1/2 except one time change
from the annuity or amortization method to the RMD method
If fail to follow through
10% penalty recapture on payments recd before 59.5
Plus interest
100
Failure to take RMD penalty
25% tax
or 10% if taken by end of 2nd year
101
Which plans/accounts do not have RMDs?
Roth IRA
Roth 401k
Roth 403b
Roth 457b
102
NRA for defined benefit plans
normal retirement age
65
103
RMD age
by april 1st after turning 73
by next 12/31 after turning 73
could mean 2 in year 1 if first one is deferred
not recommended due to possibility of higher tax bracket and higher medicare premium
104
RMD exception
DB/DC plan where still working and NOT 5% owner
105
RMD amount
based on Uniform Lifetime Table
life expectancy table - divide balance by the distribution period #
IF beneficiary is spouse that is 10 years younger, JOINT life expectancy table is used
106
Retirement contribution timing
For SEP, Employer has until due date of business tax return, INCL extensions, to establish and contribute
Contributions to non-business IRAs must be by April 15, no extensions
107
When are QCD's allowed? How much?
IRA > Charity
Age 70 1/2
Up to $105K annually can be excluded from taxable income and satisfy RMDs
No charitable donation
108
Qualified plan loans
Limit is lesser of 50% vested value or 50K
Special rule for small accounts $10K
5 year payback unless principal residence or leave of absence < 1 year
Interest deduction
KEY employee - NEVER
Non key - if principal residence
109
QJSA
Qualified Joint and Survivor Annuity
How benefits from PENSION plan are distributed if a married employee unless waived and consent by spouse
Not true for DIVORCED spouse
110
QPSA
Qualified PRE-retirement Survivor Annuity
How benefits from PENSION plan are distributed if a married employee dies before retirement
unless spouse waived right
111
QDRO
Qualified Domestic Relations Order
QUALIFIED plans
cannot override plan provisions such as providing benefits at age 55
112
IRA contribution limits/requirements
$7000
MUST have earned income. DO NOT ASSUME AGI # is earned income.
wages, salaries, tips, plus alimony and separate maintenance payments
NOT deferred comp
NOT S corp dist (K1 unearned)
+ 1000 catchup if 50 in taxable year
113
Active participant rules for IRA deductibility
Aside from AGI limits
anyone who has compensation can contribute to IRA but deductibility depends on AGI and ACTIVE participation status
NOT ACTIVE: deductible
ACTIVE: not deductible, may be for Spouse
Includes all qualified plans, SIMPLE, SEP, TSA - NOT 457
Includes any annual additions including forfeitures
114
Roth IRA eligibility
Earned income but below AGI limits
NO AGE restrictions
NO restrictions based on active participation rules
$7000 plus $1k catchup at 50
115
Roth conversion restrictions
None - no comp or $ restrictions to do a conversion
116
Roth withdrawal order
Contributions - always tax free
Conversion amounts
Earnings
117
Roth conversion withdrawal
No income tax on the converted amount
Short cut: 5 years OR 59 1/2 - no penalty
(or other special purpose exception)
Potential penalty on early withdrawal before 59 1/2:
If held 5 years > No penalty
If NOT held 5 years > Penalty unless Special Purpose exception
118
Roth earnings withdrawal
Income tax UNLESS: 5 YEARS AND 59 1/2, death, disability, 1st home $10k
Short cut:
5 Years AND 59 1/2 - no Penalty
(or other special purpose exception)
119
Roth distribution rules
No "RMDs"
but at death:
1. distributed within 5 years of owners death (tax free), OR
2. WITH NAMED BENE, within 10 years of the year following owners death (tax free)
3. Sole Spouse as BENE - can delay until 73 or treat as own Roth
120
Roth 401k / 403b / 457b
NO INCOME RESTRICTIONS
starting 2024, RMD provisions eliminated
Employer match can go into Roth or traditional 401k (pre tax) accounts
121
Which plans are protected from creditors?
ERISA plans / Qualified plans (DB/DC)
Other SIMPLE/SEPT vary by state law
122
Unfunded AKA informal funding
(Deferred comp plan)
Assets are owned by company and subject to creditors of the company
Separate from general operating accounts
No tax deductions until EE is taxed when they have constructive receipt
123
Forms of deferred comp
Salary reduction - 457 for example - funded by EE
Salary continuation - funded by ER contributions
124
Pure deferred comp arrangement
Salary reduction plan
125
Rabbi trust
NQDC
Employer cannot access it but creditors can
Used for protection from M&A or change of company ownership
Unfunded/Informally funded
Company can deduct when comp is actually paid
EE subject to FICA when comp is actually paid
Trust does not need to be funded
Assets are subject to creditors
Guaranteed comp in a merger etc unless company goes bankrupt
"trap door" only one who can access funds are creditors
126
Substantial risk of forfeiture exception
(re deferred comp plans)
If a close relative of corporate officers
Forfeitures are unlikely for an owner and family members
Tax is deferred if risk of forfeiture
Taxable now if not
127
NSO
Right to purchase shares at given time and price
No taxation as long as a substantial risk of forfeitures exists
128
ISO
only first $100K of ISOs vesting in one calendar year can get the favorable ISO treatment
Excess treated as NSO
ISOs are NOT deferred comp
Company does not get a tax deduction for it at any time
129
ISO vs NSO
taxation at date of exercise
ISOs are not subject to regular tax when exercised, NSOs are
ISOs also have AMT implications
130
ISO/NSO taxation
Options granted: No tax
Vesting: NSO (none)
ISO holding period rules
EGGS - 1 E / 1 year from exercise to sale, 2 G / 2 years from grant to sale, else it becomes NSO
Exercise:
NSO: market price - exercise price = ordinary income
ISO: no regular tax but bargain element is AMT add back
Holding Period:
NSO: 1+ year for LTCG
ISO: 1+ year from exercise date and 2+ years from grant
Sale:
NSO: Basis is now price from exercise date, excess is a capital gain
ISO: Basis is exercise price, excess is cap gain
131
Sale of ISOs in same year as exercise
(VERY IMPORTANT)
Bargain element is taxable comp subject to FICA/FUTA
if sold within 12 months but in the FOLLOWING calendar year, bargain element is ordinary income (no FICA/FUTA)
132
Can ISOs be gifted?
Gifting ISOs generally results in undesirable tax consequences
Gifting before exercise disqualifies and makes it an NSO
GiftER charged with income on the sale by GiftEE
sale price - exercise price
Exception if someone dies before exercise it keeps ISO status
133
Section 457 plan
technically a deferred comp plan
it IS subject to creditors
governed by Section 457 of IRS code
May not be allowed for "rank and file" employees
134
Which plans allow catch-up contributions?
How much?
Age 50
401k, 403b, 457, SARSEP: $7500
>> 457 only available if GOVT employer
SIMPLE: $3500
Trad IRA, Roth IRA: $1k
135
SEP vs SIMPLE
SIMPLE - up to 100 employees
EE deferrals allowed
Mandatory match up to 3%, or 2% for non deferral EE's
Max: $16K
Vested immediately
No other qualified plans
SEP - NO EE deferrals
Max: $69K or 25% of comp (Unless self-employed)
Vested immediately
136
Maximum contribution to a defined benefit plan is?
$275K
$345K
$69K
None of the above
None, no max, just actuarial determination
137
Which is not true about top heavy plans?
A. it provides more than 60% of aggregate benefits or balances to key employees
B. For DC plans, ER contributions during top heavy year must be at least 3% of compensation
C. If DB plan is top heavy it must provide more rapid vesting
D. If plan fails to correct top heavy status for 3 yeears in a row, DOL can terminate plan
D
it will continue to be qualified and subject to the rules
not terminated
138
Distribution rules for Spouse or Non-spouse beneficiary of 401k or IRA
Spouse:
Rollover to your own IRA
Non Spouse:
Withdraw over 10 years
Secure act eliminated the "stretch" IRA
Roth IRAs only have a RMD requirement once the original Roth IRA owner dies and the Roth IRA passes to the beneficiary(ies).
139
Employer contributions for Pension vs Profit Sharing
All Pension plans have mandatory ER contributions
(DB, Cash Bal, Target Benefit, Money Purchase)
All Profit Sharing have substantial & recurring requirements
(Profit sharing & Stock bonus/ESOP)
140
Which plans do not have forfeitures?
Those that are immediately vested
SEP, SIMPLE, SARSEP
141
Roth conversion limits
None
IRS wants tax $
Conversion does not satisfy RMD
142
Death of Roth owner
- Dist in 5 years if no beneficiary
- Dist in 10 yrs if designated beneficiary
- Surviving spouse:
Roll to own Roth -no dist reqd
Hold to orig owner age 73
143
Roth recharacterization
tax-reportable process that allows an IRA account holder to change the designation of a contribution from a traditional IRA to a Roth IRA, or vice versa. Recharacterizations can be used to undo a conversion, or to switch the type of IRA after making a contribution.
recharacterize if accidental contributions when exceeding AGI limits
only "corrective" recharacterizations
144
Pension plan distribution options
Life annuity
Joint & Survivor Annuity
Life annuity with guaranteed payments
Annuity certain: # of months
QJSA
QOSA - optional (2nd joint)
QPSA - pre retirement
145
Required Begin Date
RBD
4/1 after age 73 for IRA, SEP, SARSEP, SIMPLE
Qual Plans, 457, 403b:
Not 5% owners and still working can delay to 4/1 after retirement
5% owners (can continue to contribute) - 4/1 after age 73
Retired participants - 4/1 after 73
146
Secular trust
Funded trust for deferred comp
creditor protection but taxable
147
RSU taxation
At vest: Ordinary income based on grant
At sale: Capital gain (sale price - grant price)
