Final Flashcards
Tax implications of selling a home
if you own and have been living in the home for 2/5 years, the capital gain you receive from selling the home if it is under $250k(single), $500k(married) will not be capital gain taxed
Retirement Income Sources
-Social Security
-Private and Company Sponsored Retirement Plans
-Personal Retirement Plan
-Personal Savings
-Continued Employment
Wage Replacement Ratio(WRR)
Estimate of the percentage of an individuals income earned prior to retirement needed during retirement
Top Down WRR
Income and expenses vary over time
-figure out current % deductions(SS, Taxes, Savings) that will stop at retirement age
WRR = 100% - x%
Bottom Up WRR
For people closer to retirement
-Figure out every detail
Retirement Needs Analysis/Annuity Method
1) determine funding amount in today’s dollars
2) inflate the needs
3) determine funding needs at retirement
4) determine annual savings required amount
To reduce estimate risk:
1) Sensitivity Analysis
2) Monte Carlo
Social Security Overview:
-Enacted in 1935
-90% of workers are covered
-Designed to replace 40% of the wage of average worker
-increased benefit for delayed retirement
-decreased benefit for early retirement
-fully insured with 40 quarters of coverage
What age does full retirement begin?
-If they were born 1960- present = age 67
-8% added benefit for every additional year
-(-30%) if you start retirement at age 62
Provisional income formula
AGI + tax exempt interest + (1/2) social security benefit
Retirement Planning Risk(7)
- Longevity Risk
- Market Risk
- Inflation Risk
- Excess Cash Withdrawal
- Sequence of return
- Health and LTC risk
- Frailty Risk
Systematic Withdrawls
-withdrawing a predetermined amount and reallocating portfolio to continue with the growth
-4% safe withdrawal rate
Retirement Earnings Limitation Test
social security benefits are reduced for early retirees who have earnings from continued employment
Medicare Part A and Part B
Part A = Hospitality Insurance
-covers hospital coverage
Part B = Medical Insurance
-covers physician/surgeon fee
Other tax advantage retirement plans (non qualified 401(a))
-SEP
-SIMPLE
-403(b)
Tax advantage plan attributes
1) employer deduction at time of contribution
2) income is not taxed at the trust level
3) employees pay tax on distributions
4) distributions can generally be rolled to other tax deferred accounts
General Requirements of all tax advantaged plans
1) broad participation by rank/file
2) vesting -what does the employee need to do
3) employee communication
4) non discrimination
5) prefunded
6) plan document
Defined benefit plan
provides a fixed predetermined benefit that has an uncertain cost to the employer
Defined contribution plan
predetermined cost to the employer, and provides a variable benefit to the employee
ERISA(Employee Retirement Income Security Act)
-Enacted in 1974
-Protects workers rights to receive retirement benefits
-Change tax laws so companies can only get tax benefits if their plans meet basic standards
-Rules and responsibilities governed by DOL and IRS
-Govt. backed insurance program for pension workers
What are the Regulatory Agencies?
1) IRS
2) DOL
3) PBGC
3 Types of IRAs:
1) Traditional
2) Roth
3) SEP
Traditional IRA
-Deferred tax
Roth IRA
-Invested on tax deducted money
- qualifying distribution is tax free
-only contribute if income is below a certain level
-keep contributing forever
-after 5 years you can withdraw w/out penalty or tax
-no RMD
SEP
-provided by employer
-greater funding limit
IRA contributions
-has to be earned income
-$7,000 total contribution max
-contribution requirement:
1) all cash
2) through APR 15 of next year
Active Participant Status
-automatically considered active unless excluded
-if you contribute any of your salary to a plan
Distributions from IRAs
-Distributions prior to 59.5
*taxed @ ordinary income and 10% tax penalty
-Distributions after 59.5
*taxed @ ordinary income
-RMD at age 73
*25% tax penalty
Investment Prohibitions
-Life insurance
-certain collectibles
Simplified Employee Pension (SEP)
-small business retirement plans
-tax deferred growth of contributions
-not a qualified plan
-employer funded only
