Module 7

Question 1

In-Service Withdrawals - Profit Sharing & 401k Plans

Answer 1

IRS guidelines generally permit 401(k) and other profit sharing plans to offer in-service withdrawals. In-service means you are still working for the employer sponsoring the plan. It is important to note that the plan document must specifically allow this type of in-service withdrawal. If a profit sharing plan provides for in-service withdrawals, generally, no special emergency or hardship conditions are required.

Question 2

In-Service Withdrawals - Pension Plans

Answer 2

Defined benefit, cash balance, money purchase, or target plans generally can make distributions only upon death, disability, separation from service, or after the attainment of age 62.

Question 3

Hardship Withdrawals

Answer 3

In-service withdrawals are generally available from 401(k) plans due to a participant’s (or their spouse, dependent, or beneficiary) hardship or unforeseeable financial emergency. A 401(k) plan participant who demonstrates (1) “an immediate and heavy financial need” and (2) lack of other “reasonably available” resources may qualify for a hardship withdrawal.

Question 4

Calculate the Maximum Allowed Hardship Withdrawal

Answer 4

Formula: ($ for Need ÷ (1.0 – Total Tax Rate) = Maximum Hardship Available

Question 5

Requirements for a Hardship Withdrawal

Answer 5

A participant’s need must not be capable of being relieved from other resources reasonably available to him, such as:
1.) Through reimbursement or compensation by insurance or otherwise
2.) By liquidation of the participant’s assets
3.) By cessation of elective contributions or participant contributions under the plan
4.) By other distributions or loans from nonqualified or qualified plans maintained by the employer or by any other employer, or by borrowing from commercial sources on reasonable commercial terms in an amount sufficient to satisfy the need

Question 6

QLPO

Answer 6

Qualified Plan Loan Offset

Question 7

Distributable Event

Answer 7

Means the person has valid access to the retirement plan money. With a distributable event, the law allows money to be moved to another retirement account or IRA.

Question 8

Deemed Distribution

Answer 8

The participant was not allowed to take the money from the plan while still being employed there. A deemed distribution is not eligible to be rolled into another retirement plan or IRA. Thus, the defaulted amount is subject to income tax and the 10% early withdrawal penalty in the year of the default.

Question 9

Three Types of Rollovers

Answer 9

1.) Conduit IRA
2.) Direct Rollover
3.) Indirect Rollover

Question 10

Conduit IRA

Answer 10

The conduit IRA acts as a way station between qualified plans

Question 11

Direct Rollover

Answer 11

A direct rollover is an eligible rollover distribution paid directly to an eligible retirement plan for the benefit of the distributee (i.e., the distribution is made in the form of a direct transfer from a retirement plan to an IRA or other eligible retirement plan).

Question 12

Indirect Rollover

Answer 12

The client takes a distribution from a qualified plan, SEP, TSA, IRA, or governmental 457 plan and within 60 days rolls it over to an IRA, the qualified plan, SEP, TSA, or governmental 457 plan of a new employer.

Question 13

Disadvantages of an Indirect Rollover

Answer 13

1.) The opportunity to roll the funds into a new employer’s qualified plan is eliminated
2.) 20% of the gross amount of the distribution will be withheld for taxes

Question 14

Early Withdrawal Penalty Exceptions – All Plans

Answer 14

1.) Death
2.) Disability
3.) Medical expenses above 7.5% of AGI
4.) Up to $5,000 per parent per event for birth or adoption

Question 15

Early Withdrawal Penalty Exceptions – IRA Only

Answer 15

1.) Qualifying education expenses
2.) First-time home purchase up to $10,000
3.) Health insurance premiums while unemployed

Question 16

Early Withdrawal Penalty Exceptions – All Except IRA

Answer 16

1.) Separation from service after age 55
2.) Qualified Domestic Relations Order (QDRO)

Question 17

Three Options for Calculating Substantially Equal Periodic Payments (SEPP)

Answer 17

1.) Annuitized over their life expectancy
2.) Amortized over their life expectancy
3.) RMD on current account balance

Question 18

Distributions from qualified plans, 403(b) plans, and 457 plans must begin by April 1 of the year following the later of:

Answer 18

1.) The year the participant attains age 73
2.) he year in which the participant retires (if not a 5% or more owner)

Question 19

Tax Treatment of Stock Distributions

Answer 19

Stock distributions trigger a tax event for a terminated plan participant. Frequently, the distributed shares will have increased in value since the employer contributed them to the participant’s individual account. This increase is known as net unrealized appreciation, or NUA.

Question 20

Qualified Optional Survivor Annuity (QOSA)

Answer 20

A QOSA is an annuity for the life of the participant with a survivor annuity for the life of the spouse, which is equal to either:
1.) 75%, if the survivor portion of the annuity provided under the QJSA is less than 75%
2.) 50%, if the survivor portion of the annuity provided under the QJSA is 75% or more

Question 21

Qualified Joint and Survivor Annuity (QJSA)

Answer 21

Continues to pay benefits as long as either the retiree or spouse continues to live. In effect, it is a life annuity that considers two lives. The QJSA must be actuarially equivalent to a single life annuity over the life of the participant and at least 50%, but not more than 100%, of the annuity payable during the joint lives of the participant and spouse.

Question 22

Qualified Preretirement Survivor Annuity (QPSA)

Answer 22

If the participant dies after attaining the earliest retirement age, it is assumed that he retired the day prior to his death with a QJSA beginning on the date of death. If the participant dies before attaining the earliest retirement age, it is assumed that:
1.) They separated from service on the date of death.
2.) Then they survived to the earliest retirement date possible.
3.) On that day they elected early retirement and took an immediate QJSA.
4.) And then they died the next day.

Question 23

Plans Required to Offer Annuities

Answer 23

Defined contribution plans that are subject to Section 412 minimum funding standards—i.e., money purchase or target plans—are required to provide both a QJSA and a QPSA.

Question 24

Beneficiary

Answer 24

Allows the person or entity to receive the assets after the death.

Question 25

Designated Beneficiary

Answer 25

The maximum stretch for these designated beneficiaries will always be the 10-year rule.

Question 26

Eligible Designated Beneficiary

Answer 26

Certain types of beneficiaries do have the ability to stretch an employer retirement account or IRA (at least partly based on their ages) for longer than the 10-year rule. These people are categorized as eligible designated beneficiaries (EDB).

Question 27

Types of Eligible Designated Beneficiary

Answer 27

1.) Surviving spouse
2.) Non-surviving spouse

Question 28

Non-Surviving Spouse Eligible Designated Beneficiary

Answer 28

1.) A beneficiary who is not more than 10 years younger than the decedent owner, or
2.) A disabled person, or
3.) A chronically ill person, or
4.) The decedent’s minor child

Question 29

Questions for Determining RMD Requirements for a Beneficiary

Answer 29

The first question when determining the RMD rules for the beneficiary of an IRA or employer retirement account is “when did the person die relative to their required beginning date (RBD)?” The second question is “what type of beneficiary will receive the retirement assets?”

Question 30

Options for Beneficiary if Participant Dies Before RMDs

Answer 30

Spouse Beneficiary - Treat as their own IRA
Non-Spouse Eligible Beneficiary - Move money to an Inherited IRA and use their age for RMD calculation
Designated Beneficiary - Simple 10-year rule

Question 31

Options for Beneficiary if Participant Dies After RMDs Begin

Answer 31

Spousal Beneficiary - RMD for year of death must be taken, then can treat as their own IRA
Non-Spouse Eligible Designated Beneficiary:
If an individual other than a spouse is the sole IRA eligible designated beneficiary, the required distribution period is the longer of:
1.) Their fixed-term or unrecalculated actuarial life expectancy (using the Single Life Table for the beneficiary) and then reducing by one each year
2.) The deceased IRA owner’s remaining unrecalculated actuarial life expectancy (fixed term/reduced by one year method using the Single Life Table).
Designated Beneficiary - Complicated 10-year rule

Question 32

Complicated 10-Year Rule

Answer 32

The Complicated 10-Year Rule is really three rules.
Year 0 (Year of Death) - Owner’s original RMD must be taken
Year 1 - Use beneficiary’s age to find factor in Table I
Years 2-9 - Subtract 1 from previous year’s factor
Year 10 - Account must be empty by the end of the year

Question 33

Qualified Domestic Relations Order (QDRO)

Answer 33

A QDRO is a legal judgment mandating the distribution, segregation, or attachment of one person’s property (the participant) for the benefit of another (the alternate payee).

Question 34

Sequence of Returns Risk

Answer 34

The order in which investment returns occur. Sequence of returns risk can greatly impact the retiree’s ability to attain short-term and long-term goals, and has been an area of great interest to the investment community.

Question 35

Monte Carlo Analysis

Answer 35

A computer model that runs many random iterations meant to model the different paths one’s invested assets could take. Some paths reflect favorable market conditions, some project higher inflation, and some factor in a market downturn. The outcome shows the probability of meeting one’s specified goal.

Question 36

Bengen’s Theory - 4% Rule

Answer 36

Using historical data and a 50/50 stock/bond allocation, Bengen argued that if the initial withdrawal rate is set at 4% of savings, and the dollar amount of subsequent withdrawals increases with inflation, just about all well-constructed portfolios will be able to last throughout retirement (for at least for 30 years).

Question 37

Bucket Strategy

Answer 37

This strategy is meant to mitigate the sequence of returns risk by creating a bucket of cash or money market instruments for immediate cash flow needs while also maintaining a diversified portfolio of more volatile assets with higher potential returns for future needs. It recognizes that clients face different risks as they move through retirement.

Question 38

Three Bucket Approach

Answer 38

Segments a portfolio based on specific times when the money will be needed in retirement. The first bucket is comprised of short-term, low-yielding, liquid investments that can be used to cover near term income needs (one to five years’ worth of living expenses). The second bucket is structured to cover income needs that will occur in five to fifteen years. It includes a diversified stock portfolio and core bonds designed for moderate growth. Bucket 2 should act a hedge against inflation and as a “backup” to Bucket 1, should it be exhausted. Bucket 3 can be used later in life or for legacy purposes. Due to the long-term time horizon here, this bucket will be primarily invested in equities as well as higher-risk bonds/bond funds.

Question 39

Floor-and-Upside Strategy

Answer 39

Focused on safety over growth potential. It locks in a secure stream of retirement income before investing any remaining retirement assets in a riskier portfolio. A so-called “income floor” is a level of income below which an individual will not fall. It is a fixed amount that is typically enough to cover one’s fixed expenses.

Question 40

Qualified Longevity Annuity Contract (QLAC)

Answer 40

QLACs are deferred annuities where the lifetime annuity payments do not begin until a later date, usually age 85. QLACs provide a cost-effective way for retirees to trade a portion of their savings for protection against the risk of outliving their assets. These annuities are effectively a pure, contractually guaranteed transfer of risk strategy. They solve the issue of longevity risk for individuals by transferring it to an insurance company, which is better equipped to manage it.

Question 41

Accessing Retirement Assets in a Specific Order

Answer 41

1.) First, taxable accounts (taxable savings accounts). Although the individual will need to sell investments and pay capital gains tax on any appreciation, if they held the investment for longer than a year, they will be taxed at long-term capital gains rates, which are significantly less than ordinary income tax rates. Also, using their taxable assets first allows their tax-advantaged accounts to continue growing tax deferred.
2.) Next, they should withdraw from tax-deferred accounts (IRA, annuity, qualified retirement plan).
3.) Finally, they should withdraw from tax-exempt retirement accounts, such as a Roth IRA or Roth 401(k). Qualified withdrawals from Roth accounts won’t be taxed, which makes them valuable later in retirement. Additionally, Roth accounts can be useful in estate planning because beneficiaries won’t owe income tax on distributions.

Question 42

Rising Equity Glidepath

Answer 42

“The asset allocation path that results from spending down fixed income assets in the early years and letting equity exposure rise over time.”

Question 43

In-service withdrawals prior to age 59½ are not permitted from which type of plans?

Answer 43

In-service withdrawals at any age may be permitted from profit sharing plans (including ESOPs and stock bonus plans), assuming certain other requirements are met. In-service withdrawals prior to age 59½ are not permitted from any pension plan, including cash balance plans.

Question 44

When is the designated beneficiary officially determined?

Answer 44

The designated beneficiary is determined on September 30 of the year following the participant’s death.