CFP - Retirement Flashcards
Roadmap - Withdrawal of converted Roth assets
REMEMBER - Only Roth IRAs and spouse inherited Roth IRAs are the only IRAs not subject to RMD rules
-inherited Roth by anyone else could be subject to RMD rules
Roadmap - Withdrawal of earnings from converted or contributory Roth
E. Client’s total contributions to date are $42,500 and his Roth IRA has a balance of $62,500. Now client needs $52,500 as a down payment to get a very attractive mortgage rate for first home. If he withdraws $52,500 what will be his tax situation?
Ex. The $52,500 will be income tax free and no 10% early withdrawal penalty would apply.
Roadmap - RMD
Roadmap - Types of retirement plans
Different DC Plan Provisions
Money Purchase - No salary deferral, no company match, YES company plan and can have forfeitures
Target Benefit - No salary deferral, no company match, YES company plan and can have forfeitures, favors older employees
Profit Sharing - No salary deferral, no company match, YES company plan and can have forfeitures, flexible
401(k) - Yes salary deferral, no company match, NO company plan and can have forfeitures ONLY on match
Profit sharing 401(k) - YES to everything
Language - Plan contributions, deferrals, additions
Ex.
-Company contribution limit 25% of salary and catch up is a contribution
-Employee deferral limited to $23,000
-Total annual additions limit $69,000
SIMPLE Features
No $345k salary cap + up to 3% dollar-for-dollar match, employees can’t maintain any other plans, and 25% (instead of 10%) early withdrawal penalty for distributions within first 2 years of participation.
Offered by employer with 100 or less employees.
SIMPLE 401k - Salary cap of $345k so max employer matching contribution is 3% X $345k = $10,350
SIMPLE (plus ESOP) = no integration w/ Social Security, immediate vesting
SIMPLE IRA has a special match provision, SIMPLE 401k does not
SEP Features
No salary deferral, so no catch up - $69k limit regardless of age
REMEMBER - 18.59% for 25% and 12.12% for 15% is only for self-employed SEP, not incorporated
SEPs subject to participation rules and must cover all employees at least 21 who worked 3/5 preceding years, counting part-time employment assuming comp was > $750/yr.
-EX. Lots of part-time or seasonal recurring employees, DON’T choose a SEP. Lots or short-term, nonrecurring employees, this is an ADVANTAGE.
SEP = Easy to install, immediate vesting
TSA/TDA/403b Features
When employers contribute, plan’s subject to ERISA, ACP testing, joint/survivor rules.
403b, extra $3k catch up for folks who worked for the non-profit for 15 years
DB Features
MUST have consistently good earnings
ERISA Plans vs. Retirement Plans (SIMPLE/SEP)
Ratio percentage test + Average benefit test
Ex. If 70% of HCEs are covered…..
The plan must cover a % of non-highly compensated employees (NHCE) that is at least 70% of the percentage of highly compensated employees (HCE) covered
REMEMBER - Both tests use same 70% rules
Ex. If 70% of HCEs are covered, 70% X 70% = 49% NHCEs must be covered.
Attribution rules for related people to highly compensated employees (HCEs) + key employees
Attributed people who are therefore, also highly compensated employees (HCEs) are spouses, children, grandchildren and parents, but NOT siblings
Top-heavy plan rules
A plan is top-heavy, if more than 60% of its aggregate, accrued benefits, or account balance are allocated to key employees
Top-heavy plans must provide minimum benefits or contributions for non-key employees
-DB - Benefit must be at least 2% of compensation
-DC - Min employer contribution must be no less than 3%
REMEMBER - B is the second letter in the alphabet C is the third.
Actual deferral percentage test and actual contribution percentage
Ex.
-NHCE deferral is 2% so HCE is ?
-NHCE deferral is 4% so HCE is ?
401(k) and some 403bs elective referrals are subject to nondiscrimination testing as such.
Calc
0-2% is X 2
2-8% is + 2
Ex.
-NHCE deferral is 2% so HCE is 4%
-NHCE deferral is 4% so HCE is 6%
If the plan is safe harbor, you don’t have to worry about nondiscrimination testing
Qualified plan loans (including TSA/403b)
Total loan can’t exceed the lesser of 50% of the participants vested plan balance or $50,000
-Special rule allows participants with small accounts to borrow up to $10,000 disregarding percentage limitation
Social Security plan integration
Can be integrated with Social Security – defined benefit, cash balance, money purchase, target benefit, profit sharing, stock bonus, and SEP
Can be integrated with Social Security on the match only – Safe Harbor 401(k) and 401(k) match only (difficult without profit sharing contribution)
Cannot be integrated with Social Security – ESOP, SIMPLE, SIMPLE 401k
Substantially equal, periodic payments - IRC section 72t
Section 72t substantially equal payments, are subject to recapture provision if:
-Payments must be longer than five years and after the person turns 59 1/2. Both rules aren’t met, recapture applies to the payments received before 59 1/2 with a 10% penalty.
-One-time election allows you to switch from annuity or amortization method to RMD method
Don’t choose 72t if client only needs a one time payment; they are not appropriate for this. It’s better to pay a penalty tax than commencing a 72t
Nonqualified deferred compensation
May discriminate, exempt from ERISA requirements. No tax deduction for contribution and employee tax funds. Earnings are sometimes taxable to the employer (life insurance + annuity)
Salary reduction plans = better for employer
Salary continuation plans = better for employee
Unfunded, deferred compensation is informal funding, because assets are owned by the company and subject to its creditors (separate from the employers general obligation accounts, though)
Life insurance often taken out on the employee by the company to fund the deferred compensation arrangement and employee has no right or interest in life insurance.
Taxation of formally versus informally funded plans is often determined by:
-Free transferability of employees interest
-Presence of substantial risk of forfeiture at the time of contribution made by the employer
ISO and NSOs taxation
Only first $100k of ISOs granted to employee that vest in 1 calendar year get special ISO treatment.
ISOs if disqualifying disposition:
-Exercise and sale happen in the same calendar year = Taxable compensation subject to FICA/FUTA + corporation that issued ISO receives tax deduction because the option is now treated as COMPENSATION
-Exercise and sale happen in the same year BUT different calendar years = Ord. income NOT subject to FICA/FUTA
-IF ISO DISQUALIFIED, since the bargaining element represents compensation to the option holder, this creates a corresponding deduction for the issuing corporation
Gift of ISOs is a disqualifying disposition; if inheritance happens due to death, not a disqualifying disposition
AMT paid is added to the basis of ISOs
Social Security
1. Reduced benefits
2. Survivor + spousal + dependent benefits
3. SS disability
4. Credits to be fully insured
- Reduced bene calc = PIA – [ (number of months before FRA / 180) X PIA ]
- Survivor = Spouse 62 or over, dependent under 16, child who’s disabled. Surviving spouse of deceased insured worker qualified for payments once over 60. Divorced spouse must be married to working for at least 10 years and not remarry
- Dependent benefits = Qualifies for payments if under 18 (19 if still in HS) and/or over 18 but has disability that began before age 22
- Under 65 and disabled for 12 months (or disability = death); 5 month waiting period
- 40 and 4 credits can be earned per year
** If one spouse predeceases the other, the survivor will be entitled to the greater of his/her benefits or 100% of d deceased benefits
412(e)(3) / 412(i) plan
412(e)(3) plan is a defined benefit pension plan w/ benefits guaranteed by insurance contracts + only allowed to invest funds in annuity contracts and permanent life insurance.
-aka fully insured defined benefit plans.
NUA
Ex. Client age 56 retired three years ago. The client had distributed the entire 401(k) and kind to a taxable brokerage. The 401(k) consisted of $500,000 of company stock with $100,000 basis if the clients marginal tax rate is 35% what is the income tax liability of this transaction?
- What is the tax liability when stock is sold in the future?
- If the client dies before taking the lump sum and triggering NUA, what are the beneficiaries options?
$45,000 – the client pays ordinary income tax on basis +10% penalty ON BASIS because the client retired before 55. The basis is used because this is a transfer of NUA
- $100,000 is the basis and NUA is always long-term. $500,000 - $100,000 = $400,000 taxed at LTCG
- Beneficiaries could elect NUA and have 20% withhold on the basis. Beneficiaries are eligible to elect NUA tax treatment on the deceased employee securities provided they take a lump sum distribution of the deceased employees account balance the NUA tax treatment is lost on shares rolled over to an IRA and there is no 10% penalty if a death occurs
Harry Potter bought a $25,000 single premium deferred annuity 30 years ago at age 30. Now approaching retirement, he is trying to decide if he should take the cash value ($110,000) as a lump sum or annuitize the policy over a 20-year single life expectancy of $725 per month. When he enters his retirement years his tax bracket will drop to 12% and he is concerned about income. What would you recommend if he feels he can invest the lump sum and achieve a 6% after-tax return?
He should annuitize the contract.
Well, if he takes a lump sum Answer A, he will pay 12% on $85,000 ($110,000 - 25,000 basis) or $10,200. ($110,000 -10,200) x 6% = $5,988/year
$725 x (1 - 12.00%) = $638.00
$638.00 x 12 = $7,656/year
Answer C has a higher net of tax payout. Answer B is wrong. He is over 59½ so there is no 10% penalty. Answer D is wrong as the payments continue after 20 years, but are 100% taxable.
Tommy Todd died this year. He was an employee of a large company. The company owned a group life policy covering him for $50,000 and the company also had a company benefit of paying a $5,000 death benefit outright. If both death benefits were paid to Tommy’s wife, how much would be subject to income tax?
$5,000
REMEMBER - First $50k = Tax-free benefit
Add. $5k death benefit paid the company used to be tax-free (a De Minimis fringe benefit) but is now taxable.
GHI is a C corporation with two non-related shareholders. GHI has a profit sharing plan, but the benefit of the plan to the two shareholders is inadequate for their retirement needs. Which of addition/option would maximize retirement benefits to the shareholders and why?
Adopt a non-qualified deferred comp plan that covers the shareholders; exempt from ERISA and could help meet the retirement needs for the executives
