Other Tax-Advantage Plans (Lesson 4) Flashcards
Is a 403(b) plan a qualified plan
- No it is a tax advantage plan
What is the contribution limit for Traditional and Roth IRAs? Catch up?
- $6000
- Catchup (Over Age 50): $1000
What are the contribution limits for SEPs? Catchup?
- 25% of compensation or $58,000
- No catchup
What is the contribution limit for SARSEP? Catchup?
- $19,500
- $6500
Is there a contribution phaseout for the below?
IRA
Roth IRA
SEP
SARSEP
- Roth IRA is the only one with a contribution phaseout (Phaseout amounts provided on provided tax tables)
What is the deduction phaseout for a IRA
- If no Qualified employer plan: No limits
- If MFJ with one participant with a QP it is the Roth IRA contribution limit amounts
SEP IRAs are provided to employees with
- >$600 in Compensation
Are tax advantage plans protected by ERISA
no
Are loans permitted from tax advantage plans
- Only a 403(b) plan
Are distributions from tax advantage plans eligible for NUA
No
What is an IRA annuity
- usually held by an insurance company as a custodian
What is earned income for a IRA
- Any type of compensation where the individual has performed some level of service for an employer or is considered self employed
- Includes alimony (Pre 12/31/18)
What is a spousal IRA
- an IRA for a spouse who has no earned income and can be established provided the other spouse has sufficient earned income
What are the types of earned income for a IRA
- W-2 Income
- Schedule C income
- K-1 income from an LLC
- K-1 income from a partnership where the partner is a material participant
- Alimony (Pre 12/31/18)
What is not earned income
- Rental income
- Pension/annuity income
- Deferred compensation
- Unemployment benefits
- Social Security benefits
- Workers compensation
Is there a age restriction of contributing earned income to a IRA account
- Secure Act removed the restriction use to be 70 1/2
What happens if you contribute to much to IRA acount
- Subject to a 6% excise tax and is charged each year that the excess contribution remains in the IRA
When can a contribution be made to a IRA or Roth IRA
- by the date of the individual federal income tax return without extensions
An active participant is an employee who has benefited under which plans
- Qualified plan
- annuity plan
- tax sheltered annuity (403b)
- certain government plans
- SEPS
- SIMPLEs
Is a forfeiture allocation considered active participation in the plan
- Yes
What happens if a nondeductible IRA contribution is made
- the individual has an adjusted basis in the IRA
- withdrawals from the IRA will consist partially of account earnings that have not been subject to income tax and partially of return of adjusted basis
What is the Savers Credit
- nonrefundable credit
- is to encourage low income and middle income taxpayers to establish and maintain savings for retirement
- credit amount is equal to the applicable percentage times the amount of qualified retirement savings contributions made by an eligible individual in the tax year
What is the formula for a withdrawal from IRA that has nondeductible distributions in it
- Ratio of AB = (AB before withdrawal/ FMV of account at withdrawal)
Are early withdrawals because of higher education expenses an exception for the 10% penalty
- Yes only IRAs not qualified plans
Are early withdrawals because of health insurance premium by unemployed an exception for the 10% penalty
- Yes only IRAs not qualified plans
Are early withdrawals for first time home purchase an exception for the 10% penalty
- Yes only IRAs not qualified plans
What is the maximum annual premium for an IRA annuity
$6,000
What are the differences between a Roth IRA and IRA
- No deductible contributions for Roth
- RMDs only are required after death for a Roth IRA
Can a recharacterization be used to unwind a Roth conversion
- No cannot be used to unwind a Roth conversion but can be used with respect to other contributions
What is a qualified distribution for a Roth IRA
Must meet both of the following tests:
- Distribution must be made 5 years after the regular contribution (Begins January 1st of the year the contribution is for)
- Distribution must satisfy one of the following four requirements
1 - Made on or after the date on which the owner attains the age of 59 1/2
2 - made to a beneficiary or estate of the owner on or after the date of owners death
3 - disability of owners
4 - First time home purchase up to $10,000 (must not have owned a home for 2 years)
Is the five year holding period not required any more if the owner of the Roth IRA dies
- no the new beneficiary still has to wait till the end of the original 5 year period
What is the ordering rule for a nonqualified distribution from a Roth IRA
- First: From regular contributions
- Second: From conversion contributions
- Last: From earnings
Does a 10% early withdrawal penalty apply to the below for a
Roth IRA:
Contributions
Conversions Earnings
- Contributions: No
- Conversions: Yes if within five years of conversion or qualifies for one of the exceptions
- Earnings: Yes unless it qualifies for one of the exceptions
What investments are not allowed in an IRA
- Collectibles
- Life insurance
What is the exception for holding collectibles in an IRA
- gold, silver, platinum or palladium bullion are permitted
What is a qualified charitable distribution from an IRA
- QCD can be excluded from gross income and the exclusion may not exceed $100,000 per tax payer per year
How many indirect rollovers and direct rollovers can a participant perform in a year
- Indirect = one per year
- Direct = unlimited per year
How much of an IRA is protected from bankruptcy
- aggregated value of the assets from a IRA or Roth IRA is protected up to $1 million
- Amounts that are held in a rollover IRA are subject to the $1 million cap
What happens when an individual commits a prohibited transaction in their IRA
- the account will cease to be an IRA as of the first day of the current taxable year
- entire balance will be subject to ordinary income and will also be subject to the 10% penalty
What is a prohibited transaction for a IRA account
- Selling, exchanging, or leasing of any property to an IRA
- Lending money to an IRA
- Receiving unreasonable compensation for managing an IRA
- Pledging an IRA as security for a loan
- Borrowing money from an IRA or
- Buying property for personal use (present or future) with IRA funds
If an individual is required to transfer some or all of the assets to their traditional IRA to a spouse or former spouse what are the two commonly used methods to make the transfer
- instruct the custodian to simply change the name on the account to the name of the spouse or former spouse or
- Direct the trustee of their IRA to transfer the funds directly to the trustee of the other spouses IRA
What are the contribution limits for a SEP
- 25% of compensation or $58,000
What are the eligibility requirements for a SEP plan
- Attainment of age 21 or older
- performance of services for 3 of the last 5 years and
- received compensation of at least $600 during the year
When does a SEP plan have to be established by
- the due date of the federal income tax return including extensions of the entity
What are the three basic steps the employer must complete to establish a SEP
- formal written agreement to provide benefits to all eligible employees
- all eligible employees must be given notice of the SEP
- SEP IRA must be set up for each eligible employees
Are contributions to a SEP required
- no employer contributions are discretionary
- if a contribution is made the contribution must be equal for all employees
Can a SEP IRA be integrated with social security
- yes permitted disparity
What is the vesting schedule that is available for a SEP plan
- No vesting schedule
- Immediately vested
Is there a Catch up contribution amount for a SEP plan
- No catchup amount
What plan replaced a SARSEP plan
- SIMPLE Plans
What is the ADP test for a SARSEP
- the amount deferred each year by each eligible highly compensated employee as a percentage of pay cannot be more than 125% of the ADP of all nonhighly compensated employees eligible to participate
- ADP = Elective employee deferral/ Employees compensation
What is the annual deferral amount for a SARSEP? Catch up?
- $19,500
- Catchup: $6,500
What is the annual deferral amount for a SIMPLE Plan? Catch up?
- $13,500
- Catch up: $3,000
What is the total combined employee and employer contributions that can be made to a SARSEP plan?
- cannot exceed the lesser of 25% of the employees compensation or $58,000 for 2021
What is the SIMPLE contribution limit? Catchup?
$13,500
Catchup: $3,000
To establish a SARSEP an employer have to meet the following provisions
- at least 50% of the employees eligible to participate must choose to defer a portion of their salary
- employer cannot have more than 25 eligible employees
- must meet the SARSEP ADP test
Who does a SIMPLE provide incentives to
- provides incentives to small employers (100 or fewer) to adopt a retirement plans for employees with less administrative costs and fewer setup procedures than qualified plans
What type of employer is a section 403b plan (TSA or TDA) available to
- to certain nonprofit organizations and to employees of public education systems
What do section 457 plans resemble
- deferred compensation plans that allow certain employees of state and local governments and of nongovernmental tax exempt entitles the ability to defer compensation free from current income taxation
Which employee deferrals to a plan are not combined with SARSEPs, 401k, SIMPLE, or 403b for purposes of overall contribution limits
- 457 plans are not combined with these plans
Why are SIMPLE plans attractive to employers
- they are not required to meet all of the nondiscrimination rules applicable to qualified retirement plans and the burden of annual filing requirements
Are employee and employer deferrals to a SIMPLE plan subject to income tax and payroll tax
- Employee Deferrals: not subject to income tax but are subject to payroll tax
- Employer Deferrals: not subject to income tax or payroll tax
What type of funding vehicle does a simple IRA use
- IRA account
What is the deferral limit for a SIMPLE IRA? Catchup?
- $13,500 (Salary deferrals)
- $3,000 (age 50 or over)
What do SIMPLE IRAs require the employer to do
- either match the employee contributions of those that participate or
- provide non elective contributions to all employees who are eligible
Are plan loans permitted in a SIMPLE IRA and SIMPLE 401(k)
- permitted in a SIMPLE 401k not a SIMPLE IRA
Are SIMPLE 401(k)s subject to nondiscrimination requirements or top heavy restrictions
- no if it meets certain contribution and other requirements
Who can establish a SIMPLE plan
- can only be established for companies who employ 100 or fewer employees who earn at lest $5,000 of compensation form the employer for the preceding calendar year
Who is eligible to participate in a SIMPLE plan
- employees who earned at least $5,000 in compensation from the employer during any two preceding calendar years and who are reasonable expected to earn at least $5,000 in compensation during the current calendar year
Which type of entities can establish a SIMPLE plan
- C Corporation
- S Corporation
- LLC
- Partnership
- Proprietorship
- Government Entities
What is the grace period for an employer with a SIMPLE plan
- two year grace period to an employer who qualified under the 100 employee limitation but now exceeds it
Can an employer establish another plan when they have a SIMPLE plan
- No other plans are permitted
Cannot establish if any of the below:
- employer contributes to a defined contribution plan for its employees during the year
- employees accrue a benefit from a defined benefit plan during the year or
- the employer contributes to a SEP or 403b during the year
How are plan balances vested for a SIMPLE plan
- all contributions on behalf of employees and the related earnings are fully and immediately vested and cannot be forfeited by the employee
Who can contribute to a SIMPLE IRA plan
- employee elective deferral contributions, and the required employer matching contributions or non elective contributions
What is the general required match for a SIMPLE IRA
- dollar for dollar match up to 3% of compensation of the employee
When can an employer elect to reduce the 3% match for a year for a SIMPLE IRA
- limited is reduced by no less than 1%
- limit is not reduced for more than two years out of the five year period that ends with the year for which the election is effective and
- employees are notified of the reduced limit when a reasonable period of time before the 60 day election period for a salary reduction agreement
If the non elective deferral amount is chosen what is the amount that must be contributed
- employer non elective contribution must be 2% of each eligible employees compensation (up to the covered compensation limit of $290,000)
What is the contribution limit for a SIMPLE 401k
- $13,500 (Salary deferrals)
- $3,000 (age 50 or over)
How must employers contribute to SIMPLE 401k plan
- must make either a dollar for dollar matching contribution up to 3% of the employees compensation or
- a non elective contribution of 2% of each eligible employees compensation to the plan
Is there any flexibility with employer contributions to a SIMPLE 401k plan
- no flexibility like a SIMPLE IRA
Do SIMPLE 401ks have to comply with the ADP, ACP, and top heavy tests
- no because they are essentially safe harbor plans
Are contributions to a SIMPLE plans tax deductible for the employer
yes
Does a SIMPLE 401k have any lump sum provisons
no
How is the early withdrawal penalty different with SIMPLE plans
- if withdrawn in the first two years the penalty increases from 10% to 25%
After the first two years of SIMPLE plan where can the plan be rolled over too
- traditional IRA, qualified plan, 403b or TSA, or a 457 plan
(Simple IRA/Simple 401k)
Must be established by what date
SIMPLE IRA: October 1 of the year the plan starts
SIMPLE 401k: October 1 of the year the plan starts
(Simple IRA/Simple 401k)
Annual testing requirement
SIMPLE IRA: None if meet contribution requirements
SIMPLE 401k: None if meet contribution requirements
(Simple IRA/Simple 401k)
Vesting
SIMPLE IRA: All contributions are fully vested
SIMPLE 401k: All contributions are fully vested
(Simple IRA/Simple 401k)
Employer required contributions
SIMPLE IRA:
- dollar for dollar match up to 3% of pay or
- a 2% non elective contribution (up to covered comp) for each eligible employee
SIMPLE 401k:
- dollar for dollar match up to 3% of pay or
- a 2% non elective contribution (up to covered comp) for each eligible employee
- cannot be reduced to as low as 1% for no more than 2 out of 5 years including the year of election
(Simple IRA/Simple 401k)
Loans Permitted
SIMPLE IRA: No
SIMPLE 401k: Yes, same as regular 401k
(Simple IRA/Simple 401k)
In Service Withdrawals
SIMPLE IRA:
- permitted but possible 10% penalty if under age 59 1/2
- if withdrawn within the first 2 years of participation penalty increases to 25%
SIMPLE 401k:
- Permitted but possible 10% penalty if under age 59 1/2
Which entities are eligible to participate in a 403b or Tax sheltered annuities (TSAs)
- available to certain nonprofit organizations or to employees of public education systems
What is a 403b plan
- is a retirement plan for certain employees of public schools, certain ministers, and employees of various tax exempt organizations
- NOT a qualified plan
Is a 403b plan a qualified plan
No
What are the two basic types of 403b plans
- salary reduction plan which only accepts employee deferrals and
- an employer funded plan which accepts employee and employer contributions
When is a 403b plan not subject to ERISA rules
- Employee participation is voluntary
- there are no employer contributions
- employers involvement is limited in scope and
- sponsored by a government or religious institutions
Who is eligible to participate in a 403b plan
- may require a maximum waiting period of two years and the attainment of age 21
- however, if immediate vesting is not offered the waiting period can be no longer than 1 year and attainment of age 21
What type of contributions are permissible but not required for a 403b plan
- Employee elective deferrals
- non elective contributions
- after tax contributions and
- any combination of the above
What is the maximum elective deferral for a 403b plan
$19,500
What is the catch up provisions for a 403b plan
- Age 50 catch up provision
- 15 year rule exception
What is the age 50 catch up provision for 403b plans
- the lesser of $6500 or includable compensation subtracted by other elective deferrals for the year
What is the 15 year rule catch up provision for 403b plans
- employee must’ve worked for the same employer for 15 years (not consecutive)
- limit is increased by the lesser of
- $3,000
- $15,000 reduced by increases to the general limit that were allowed in previous years or
- $5,000 times the number of years of service for the organization by the employee subtracted from the total elective deferrals made by the employer on behalf of the employee for earlier years
What is the maximum elective deferral for a 403b plan if the employee meets the 15 year rule and the 50 and over catch up
- $29,000 ($19,500 deferral plus $3,000 from the 15 year rule plus $6,500 for the 50 and over)
What is the annual additions limit for 403b plans and what does it include
- applies to all contributions which is comprised of elective deferrals, non elective deferrals, and after tax contributions
- lesser of $58,000 or 100% of the employees covered compensation
How can funds be invested in a 403b plan
- can only be invested in either insurance annuity contracts or mutual funds
Are loans allowed from a 403b plan
- are allowed and are subject to the same limitations and requirements applicable to loans from qualified retirement plans
When can a distribution be made from a 403b plan
- employee turns age 59 1/2
- employee is separated from service
- employee dies
- employee becomes disabled
- birth or legal adoption (up to $5,000 within 12 months of event) or
- for salary reduction contributions, the employee endures a severe hardship
Which plans can a 403b be rolled over into
- qualified plan
- traditional IRA
- another 403b plan
Are 403b plans subject to RMD requirements
- Yes same minimum distribution requirements that are applicable to IRAs
How are distributions from a 403b plan taxed
- taxed at ordinary rates unless it is a return of the employee participants return of adjusted basis
Is a QJSA required for a 403b plan
- if ERISA applies to the plan then the QJSA requirements will generally apply
Does a 403b plan have to pass the ACP/ADP test
- Yes a 403b plan must pass the ACP/ADP only test if it is an ERISA plan
What vesting schedule does a 403b plan use
- employee is 100% vested at all times for contributions and earnings
Does ERISA protect governmental or church TSA 403b plans
No
When does a 403b plan need to be established
- by the end of the year
Do employee elective deferrals into a 457 plan count against deferrals into a 401k or 403b
- no because it is a deferred compensation plan not a retirement plan
What is a 457 plan
- allows employees of state and local governments and employees of tax exempt nongovernmental entities to save tax deferred compensation for retirement
Are 457 plans qualified plans
- no they are not
Are 457 plans subject to nondiscrimination, minimum participation, funding, and vesting standards
- no because they are not qualified plans
What are the three types of 457 plans
- eligible governmental plans
- eligible tax exempt plans
- ineligible plans
What is the main distinction between eligible 457b plans and ineligible 457f plans
- ineligible plans provide for greater deferral of funds (Top hat plans)
Who can establish a 457b plan
- state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state, and any other organization other than a governmental until that is exempt from tax
Are churches and qualified church controlled organizations eligible employers for a 457b plan
- not considered eligible employers
What is a public 457b plan
- a 457b plan that is sponsored by governmental employers
What is a private 457b plan
- 457b plan for tax exempt employers
Who are private 457b plans offered to
- only to HC employees or top management because funds in the plan are not placed in trust
- plan is unfunded and remains vulnerable to employers creditors
Who can an employer make eligible for a public 457b
- employer does not have to make public 457b plans available to all employees but can selectively choose which employees may participate in the plan
What is the limit employees are able to contribute to a 457b plan
- employees are able to contribute up to the lesser of the following amounts
- employee elective deferrals of $19,500 or
- up to 100% of includable compensation but this amount must be less than the employee elective deferral limit
What are the two catchup provisions for a 457b plan
- Age 50 catch up contribution for governmental 457b plan
- Special final 3 year additional catch up provision
What is the 457b age 50 catch up provision
- Employees age 50 or over may contribute an additional $6,500 above the limit of $19,500
- only for eligible public 457b plans
- not available for private 457b plans
What is the special final 3 year additional catch up provision
- applies to both public and private 457b plans
- 3 years prior to normal retirement age an employee may contribute an additional amount equal to the elective deferral limit which for 2021 is $19,500
- if employee has adequate compensation that could defer $19,500 under a regular deferral and $19,500 as a catch up amount for a total of $39,000
- Final 3 year is further limited to prior unused maximum deferral amounts
- Employer is not required to offer the final 3 year catch up provision
- cannot be used simultaneously with the 50 or older catch up provision
How much can an employer defer into a 457b plan
- Employer can make matching contributions or non elective deferrals
- the $19,500 limit includes both employer and employee contributions which is different that 401k or 403b plans
How are distributions from a 457b plan treated
- must be included in ordinary income
- distinct advantage is that the age 59 1/2 withdrawal rule does not apply at separation of service
- No 10% early withdrawal penalty from 457 plans except for distributions attributable to rollovers from another type of qualified plan or IRA
When must distributions begin from a 457b plan
- must begin by age 72 or 70 1/2 if before 12/31/19
Are loans permitted from a 457b plan
- loans may be permitted from public 457 plans
What are Section 457f plans
- ineligible plans which are also called top hat plans
- only HC employees or top management may participate in a 457f plan
Are amounts in a 457f plan safe from forfeiture
- no the amounts in the plan are subject to a substantial risk of forfeiture which is why contributions are tax deferred
What are the disadvantages of a 457b plan
- if the participant terminates employment before the stated payment period the participant may forfeit all of the 457f plan funds
- participant may be taxed on the value of the plan once the funds vest in the plan or are no longer subject to substantial risk of forfeiture
Is the below plans eligible or ineligible
Public 457b plan
Private 457b plan
457f plan
Public 457b plan: Eligible
Private 457b plan: Eligible
457f plan: Ineligible
Are the below assets in plan protected by a trust
Public 457b plan
Private 457b plan
457f plan
Public 457b plan:
- Protected in trust
Private 457b plan:
- Not protected by trust
- Available to employers creditors
457f plan:
- Not protected by trust
- Available to employers creditors
What is the effective deferral contribution limit for the below plans
Public 457b plan
Private 457b plan
457f plan
Public 457b plan: $19,500
Private 457b plan: $19,500
457f plan: No Limit
Are the contributions for a Private 457b plan pretax
- Yes
Are the contributions for a 457f plan pretax
- Yes
Does a private 457b plan have an age 50 and over catch up
- no but there is a 3 year catch up provision for $19,500
Which plan can a public 457b plan be rolled over into
- to a 401k, 403b, 457b or IRA plan
Which plan can a Private 457b plan be rolled into
- not permitted unless rolled into another 457b plan
Which plans can a 457f plan be rolled into
- cannot be rolled over
Who selects the investments and bears the investment risk in a 457 plan
- Employee bears the investment risk and selects the investments
