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CFP > CFP Retirement > Flashcards

CFP Retirement Flashcards

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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

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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)

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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

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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

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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

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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

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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

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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

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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

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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)

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11
Q

Who is eligible for soc sec $255 death benefit?

A

Spouse living in same household or a dependent child
not both

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12
Q

Tandem plan

A

usually a wrong answer

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13
Q

DB/DC Salary cap

A

$345K

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14
Q

DB/DC Max contributions

A

DC: $69K (+$7500 if age 50)
DB: Stuff it like a PIG

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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)

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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)

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17
Q

Unit benefit formula

A

aka % of earnings per year of service
most common DB formula
factors service & salary

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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

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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

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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

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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

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22
Q

Annual additions

A

EE contributions / deferrals
+ ER contributions
+ Forfeitures

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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

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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

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25
Q

When is profit sharing plan appropriate?

A

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

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26
Q

ER Deduction to profit-sharing plan max

A

25% of all ELIGIBLE participants comp including elective deferral amounts
(up to $345k each)
Individual participants may receive > 25% but aggregate cannot exceed 25%

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27
Q

CODA

A

cash or deferral arrangement
401k

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28
Q

Deferral vs contribution limits

A

Deferral 23k
Employee contribution can be 30.5K with catch up at age 50
Overall contribution 69K or 25% of comp

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29
Q

Are 401k deferrals subject to FICA / FUTA?

A

YES
deferred federal taxes but still have to pay FICA/FUTA

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30
Q

Catch up contribution

A

7500 is a contribution NOT part of the deferral

Catch up’s are OUTSIDE of section 415 limits

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31
Q

Mandatory vs flexible employer contributions

A

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)

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32
Q

Who has investment risk for various retirement plans?

A

EE has risk for all DC plans
ER has risk for DB plans

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33
Q

Which plans allow for employee elective deferrals?

A

Think 4 plans:
401k - 23k
403b - 23k
457- 23k
SIMPLE - 16K

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34
Q

Total stack of potential plan contributions

A

EE deferral
ER match
Forfeitures
Company contributions
AND
7500 catchup if > 50

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35
Q

Cross testing

A

Means you can discriminate on age
“age weighted”
more $ to rich old people

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36
Q

Which plans allow double dip deferrals?

A

457
government incentive
can do 23K + 23K

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37
Q

401k limits across multiple employers

A

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

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38
Q

Which retirement plans allow LOANS?

A

Qualified plans, if permitted
Includes 403b/TSA

NOT: IRA, SEP, SIMPLE, Roth

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39
Q

When is retirement plan loan interest deductible?

A

If NON-KEY person and for PRIMARY residence and secured by residence

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40
Q

Which plans allow hardship withdrawal and what are terms/conditions? Which funds can be distributed?

A

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

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41
Q

When is the FIRST home a distribution exception?

A

IRA distribution pre-59 1/2
Up to $10K

Different than exception for PRIMARY residence
401k Hardship withdrawal
or
Interest deduction on 401k loan

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42
Q

Solo 401k / Uni 401k
vs
Keogh rule limits

A

Solo 401K: $69k PLUS catch up $7500

Traditional plans and SEPS limit to Keogh rules which is 25% up to $69K (no catch up)

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43
Q

Who can participate in Solo 401k/Uni 401k?

A

You
you and spouse
2 partners

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44
Q

Profit sharing vs Stock bonus/ESOP

A

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

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45
Q

NUA
Net unrealized appreciation

“tax break”

A

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

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46
Q

Are distributions from an S corp stock or cash?

A

Cash normally because of 100 person S corp rule
subject to 20% withholding? Yes if cash, No if ESOP distribution

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47
Q

HR-10

A

Keogh plan
for UNincorporated business orgs (sole prop/partnership)

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48
Q

Keogh

A

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

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49
Q

SEP contribution amounts for Employee vs Self-Employed (Keogh SEP)

A

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%

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50
Q

Who can have a SIMPLE plan?

A

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

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51
Q

SIMPLE limits

A

$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

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52
Q

SIMPLE withdrawal penalty

A

10% early penalty increased to 25% in first 2 years of participation

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53
Q

SIMPLE vs 401k SIMPLE

A

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

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54
Q

SEP

A

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

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55
Q

When to do a SEP?

A

Alternative to qualified profit sharing that is easier and less expensive to install

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56
Q

Robert owns RD inc. Earns $200k a year. Company offers 25% SEP. What is max they can contribute?
$37,180
$50K
$69K

A

25% of salary for owner = $50k
he is not self-employed

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57
Q

SEP participation rules
special eligibility

A

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

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58
Q

Beneficiary on Pension plans

A

Controlled by spouse

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59
Q

SARSEP

A

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
Q

TDA plan

A

Tax deferred annuity (TDA)
aka
Tax sheltered annuity (TSA)
aka
403(b)

61
Q

TSA plan

A

Tax deferred annuity (TDA)
aka
Tax sheltered annuity (TSA)
aka
403(b)

62
Q

403b

A

Tax deferred annuity (TDA)
aka
Tax sheltered annuity (TSA)
aka
403(b)

63
Q

Who can establish 403b?

A

501(c)(3) orgs tax-exempt
churches, hospitals, private schools, colleges
and
public school systems

64
Q

403b characteristics

A

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
Q

Which retirement plans can/cannot integrate with social security?

A

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
Q

What is retirement plan social security integration?

A

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
Q

DB plan maximum permitted disparity for social security integration

A

Additional 26.25% on top of base % applied to salary in excess of integration level

68
Q

DC plan maximum permitted disparity for social security integration

A

Additional 5.7% on top of base % applied to salary in excess of integration level

69
Q

Who is considered fiduciary of retirement plan?

A

Officers, administrators, and advisors

ex: 2 doctors, advice from stockbroker, CFP, plan administrator

70
Q

Max additions by plan type

A

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
Q

Qualified plan eligibility

A

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
Q

Money purchase vs Target beneft

A

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
Q

Qualified plan ratio percentage test / average benefits test

A

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
Q

Key employee

A

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
Q

HCE Highly Compensated Employee

A

Affects ADP/ACP test and ratio/benefit test
hIghly comp’d = dIscrimination

> 5% owner (AND family attribution rules)
anyone > $155K in prior year

76
Q

Family attribution rules for Key / HCE

A

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
Q

Top heavy plan

A

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&raquo_space; Determine vesting schedule

78
Q

Vesting schedule for Top Heavy DB plans

A

3 year cliff
2-6 graded (0, 20, 40, 60, 80, 100)
100% 2 yr eligibility

EE deferrals always 100% vested

79
Q

Vesting schedule for DC plans

A

3 year cliff
2-6 graded (0, 20, 40, 60, 80, 100)
100% 2 yr eligibility

EE deferrals always 100% vested

80
Q

Vesting schedule for NON Top Heavy DB plans

A

5 year cliff
3-7 year graded
100% with 2 year eligibility

EE deferrals always 100% vested

81
Q

Top heavy contribution rules

A

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
Q

ADP / ACP

A

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
Q

Section 404

A

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
Q

Cross-tested plan
aka New comparability plan
Age-weighted DC approach

A

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
Q

Multiple plan rules

A

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
Q

Multiple plan rules with RELATED employers

“Common control” rules

A

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
Q

Life insurance in retirement plans

A

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
Q

412(e)3 plan
or 412(i)

A

DB plan fully funded by life insurance and/or fixed annuities
(100 times rule) benefit

89
Q

UBTI
Unrelated business taxable income
(Qualified Retirement Plan)

A

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
Q

Qualified plan rollovers

A

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
Q

Direct distribution tax withholding

A

Mandatory 20%
Unless RMD or substantially equal payment
Direct rollover / transfer

92
Q

IRA 60-day rule

A

can only do 60 day rollover once PER YEAR per taxpayer

93
Q

For which type of plans is QDRO a penalty exception?

A

Qualified plans + TSA 403b
Not IRA or Roth IRA

“Q” equals QUALIFIED

94
Q

For which type of plans is Federal disaster a penalty exception?

A

Qualified plans and IRA
NOT ROTH

95
Q

For which type of plans is medical premiums while unemployed a penalty exception?

A

IRA and Roth IRA
Not qualified plans

96
Q

For which type of plans is home purchase a penalty exception? What type of home?

A

FIRST HOME
only up to $10K
IRA or Roth IRA only
Not qualified plan

97
Q

Which type of plans allow hardship withdrawals?

A

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
Q

For which type of plans is higher education a penalty exception?

A

IRA / Roth IRA
Must be QUALIFIED higher ed expense
NOT 401K - only via a hardship withdrawal

99
Q

72t distribution

A

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
Q

Failure to take RMD penalty

A

25% tax
or 10% if taken by end of 2nd year

101
Q

Which plans/accounts do not have RMDs?

A

Roth IRA
Roth 401k
Roth 403b
Roth 457b

102
Q

NRA for defined benefit plans

A

normal retirement age
65

103
Q

RMD age

A

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
Q

RMD exception

A

DB/DC plan where still working and NOT 5% owner

105
Q

RMD amount

A

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
Q

Retirement contribution timing

A

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
Q

When are QCD’s allowed? How much?

A

IRA > Charity
Age 70 1/2
Up to $105K annually can be excluded from taxable income and satisfy RMDs
No charitable donation

108
Q

Qualified plan loans

A

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
Q

QJSA

A

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
Q

QPSA

A

Qualified PRE-retirement Survivor Annuity
How benefits from PENSION plan are distributed if a married employee dies before retirement
unless spouse waived right

111
Q

QDRO

A

Qualified Domestic Relations Order
QUALIFIED plans
cannot override plan provisions such as providing benefits at age 55

112
Q

IRA contribution limits/requirements

A

$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
Q

Active participant rules for IRA deductibility

A

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
Q

Roth IRA eligibility

A

Earned income but below AGI limits

NO AGE restrictions
NO restrictions based on active participation rules

$7000 plus $1k catchup at 50

115
Q

Roth conversion restrictions

A

None - no comp or $ restrictions to do a conversion

116
Q

Roth withdrawal order

A

Contributions - always tax free
Conversion amounts
Earnings

117
Q

Roth conversion withdrawal

A

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
Q

Roth earnings withdrawal

A

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
Q

Roth distribution rules

A

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
Q

Roth 401k / 403b / 457b

A

NO INCOME RESTRICTIONS
starting 2024, RMD provisions eliminated
Employer match can go into Roth or traditional 401k (pre tax) accounts

121
Q

Which plans are protected from creditors?

A

ERISA plans / Qualified plans (DB/DC)

Other SIMPLE/SEPT vary by state law

122
Q

Unfunded AKA informal funding
(Deferred comp plan)

A

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
Q

Forms of deferred comp

A

Salary reduction - 457 for example - funded by EE
Salary continuation - funded by ER contributions

124
Q

Pure deferred comp arrangement

A

Salary reduction plan

125
Q

Rabbi trust

A

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
Q

Substantial risk of forfeiture exception
(re deferred comp plans)

A

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
Q

NSO

A

Right to purchase shares at given time and price
No taxation as long as a substantial risk of forfeitures exists

128
Q

ISO

A

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
Q

ISO vs NSO

A

taxation at date of exercise
ISOs are not subject to regular tax when exercised, NSOs are

ISOs also have AMT implications

130
Q

ISO/NSO taxation

A

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
Q

Sale of ISOs in same year as exercise
(VERY IMPORTANT)

A

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
Q

Can ISOs be gifted?

A

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
Q

Section 457 plan

A

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
Q

Which plans allow catch-up contributions?
How much?

A

Age 50

401k, 403b, 457, SARSEP: $7500
» 457 only available if GOVT employer
SIMPLE: $3500
Trad IRA, Roth IRA: $1k

135
Q

SEP vs SIMPLE

A

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
Q

Maximum contribution to a defined benefit plan is?
$275K
$345K
$69K
None of the above

A

None, no max, just actuarial determination

137
Q

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

A

D
it will continue to be qualified and subject to the rules
not terminated

138
Q

Distribution rules for Spouse or Non-spouse beneficiary of 401k or IRA

A

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
Q

Employer contributions for Pension vs Profit Sharing

A

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
Q

Which plans do not have forfeitures?

A

Those that are immediately vested
SEP, SIMPLE, SARSEP

141
Q

Roth conversion limits

A

None
IRS wants tax $
Conversion does not satisfy RMD

142
Q

Death of Roth owner

A
  • 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
Q

Roth recharacterization

A

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
Q

Pension plan distribution options

A

Life annuity
Joint & Survivor Annuity
Life annuity with guaranteed payments
Annuity certain: # of months

QJSA
QOSA - optional (2nd joint)
QPSA - pre retirement

145
Q

Required Begin Date
RBD

A

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
Q

Secular trust

A

Funded trust for deferred comp
creditor protection but taxable

147
Q

RSU taxation

A

At vest: Ordinary income based on grant
At sale: Capital gain (sale price - grant price)

CFP (7 decks)

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