Module 8: Retirement Plan Selection for Employer-Sponsors and Needs Analysis Flashcards
Main Factors to Consider when Determining the Type of Retirement Plan to Be Adopted
- OWNERS retirement savings need
- The Owner’s Current Age
- The Owner’s Attitude towards investment risk
- The current financial condition of the business
Which plans only allow 10% of their assets to be company securities?
Defined benefit plan cash balance plan target benefit plan money purchase plan SEP SARSEP plan
What are some of the fiduciary duties in determining retirement account assets?
- the selection of the investments
- the evaluation of the fee structure
6 Primary Characteristics of any investment vehicle that need to be considered in assessing the asset’s potential suitability as a retirement plan asset
- capital preservation (stability of value)
- ability to preserve the future purchasing power
- liquidity
- investments tax advantages
- diversification properties
- marketability
Unrelated Business Taxable Income
the gross income derived from any unrelated trade or business regularly carried on by the retirement plan, less any deductions directly connected with carrying on this trade or business.
Items excluded from UBTI
- dividends, interest, royalties
- Rents from rental real estate owned by the trust
- all gains or losses from the disposition of property, with certain exceptions
- the liquidity of the investments
- certain amounts received from controlled entities and foreign corporations
Advantages of purchasing life insurance in a QUALIFIED plan
- it can satisfy the need for additional life insurance protection for the owner of a small business,
- it can generate an immediate income tax deduction for the payment of the life insurance premiums.
What is the “incidental benefit” rule?
It limits the amount of life insurance that is allowed under law. It calls for two tests to be taken
What are the two tests for the incidental benefit rules?
- percentage test
- 100 times test
What is the percentage test?
the aggregate contributions paid for a life insurance policy owned by the plan on the lives of the plan participants may not exceed a certain percentage of the employer contributions to the plan as follows:
- for the purchase of a whole life policy, no more than 50% of the employer contributions to the plan may be used.
- for the purchase of any other life insurance policy, like term or universal life, no more than 25% of the employer contributions to the plan may be used.
The 100 times test
the life insurance limitation is based on a ratio of the death benefit paid by the policy to the expected monthly benefit of the employee payable by the plan. The death benefit payable from the life insurance policy cannot exceed 100 times the expected monthly benefit for the employee participant.
What is the pure protection cost?
This must be included on the participants income, if their qualified plan owns life insurance.
Calculated by: the difference between the policy face amount and the policy cash value.
How is the taxation of an insured death benefit received by a beneficiary of a qualified plan participant calculation?
- the total of all Table 2001 costs (or, if lower, the insurance cost to the qualified plan) may be recovered tax free
- the pure insurance element of the plan death benefit is income tax free to the participant’s beneficiaries
- the remained of the distribution is taxable as a qualified plan distribution
Qualified Longevity Annuity Contract (QLAC’s)
Allow participants to allocate the lesser of 25% or $135,000 in their account to purchase a deferred annuity from which payments begin at an older age. Will not be considered in the calculation of RMD at age 72
Three Primary Assumptions in any retirement needs analysis:
- anticipated rate of inflation
- projected rate of annual investment return
- clients age at retirement and life expectancy
Two-Step Calculation for determining the lump-sum capital needed in a retirement needs assessment
- inflate the projected first year retirement income needed to future dollars at the time of retirement
- Calculate the total retirement fund needed (lump-sum capital amount) to meet the projected income demands. Calculate the present value of an annuity due using an inflation-adjusted rate of return
Wage Replacement Ratio (WRR)
Retirement needs tend to be 60-80% of preretirement income to maintain the individuals preretirement lifestyle.
Capital Needs Analysis
This is the process of analyzing the accumulation of sufficient resources for retirement.
Bridge Employment
This is a job that helps ease the transition to retirement. When a client is not ready to completely retire, feels safer having additional income, or must make up a shortfall in retirement assets, these bridge jobs may be the answer.
