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Retirement Savings and Income Planning > Other Tax-Advantaged Retirement Plans > Flashcards

Other Tax-Advantaged Retirement Plans Flashcards

1
Q

Which retirement plans are not considered qualified?

A
  • 403b
  • 457
  • SIMPLE IRAs
  • IRAs (roth included)
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2
Q

Main differences between nonqualified and qualifeid plans

A
  • Do not have vesting requirements (so immediately vested)
    • 403b plans sometimes have vesting requirements
  • Loan are not permitted
    • 403b plans do permit it
  • No ERISA protection
    • 403b plans sometimes have this
  • Not as much protection from bankruptcy and creditors
  • Do not have prefential disrubiton options (10-year forward averaging, pre1974 capital gains, NUA)
  • Annual reporting is less intensive
    • Although 403b plan may have to file 5500 if they are structured that way
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3
Q

What are the four different IRAs?

A
  • Roth
  • Traditional
  • SEP (employer-sponsored)
  • SIMPLE (employer-sponsored)
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4
Q

Traditional IRA deductibility factors

A
  • Active participant at employer (or if spouse is)
  • Income level
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5
Q

IRA investment options

A
  • Can have self-directed assets (unique assets such as real estate, property, private loans, etc)
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6
Q

IRA contribution max

A
  • Lesser of earned income or max amount in tables
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7
Q

Traditional/Roth IRA contribuitons - other notes

A
  • Catch-up contribution starting at age 50
  • No age limit anymore to contribute
  • Contributions in excess of limits - 6% penalty on amount over limit
    • assessed EVERY YEAR until you pull it out
  • Contributions must be made in cash
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8
Q

What is earned income?

A
  • W2, SE income, K-1 partnership income, alimony (if before 1/1/2019)
  • DOES NOT INCLUDE:
    • Workers comp
    • SS benefits
    • Unemployment
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9
Q

Spousal IRA

A
  • For those who do not have earned income or not alot of earned income but are MARRIED, they can still contribute to an IRA
    • Other spouse must have sufficient earned income (at least the amount to be contributed for both)
  • Deduction for spouse with less income:
    • Annual contribution limit - spouse’s deduction with more income
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10
Q

Jake makes 50k and Joyce makes 2k in earned income

How much can they contribute to their IRAs?

A
  • They can contribute 12k (because Jake makes enough, so this allows more contribution to the spousal IRA)
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11
Q

Traditional IRA contributions deductibility

A
  • Will be phase outs for someone who is an active particpant or if spouse is an active participant and are married
    • If one spouse is active, then income thresholds are higher
    • if both spouses are active, income thresholds are lower
  • NEVER phased out if neither person is an active participant
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12
Q

Nondeuctible Contribtuions and Distributions from Traditional IRAs

A
  • Nondeductible contributions will be increasing your basis in the IRA
  • Which means when you take a distribution from the IRA, only the earnings part will be taxable
  • Distribution ratio (similar to annuity)
    • = total adjusted basis before withdrawal / FMV of IRA at time of withdrawal
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13
Q

Penalty-free distributions from IRA

A
  • Death, disability
  • Substanitally equal periodic payments
  • Higher education expenses
  • First-time homebuyer
  • Health insurance premiums for someone who is unemployed
  • Medical expenses in excess of 10% AGI
  • SECURE ACT up to 5k for adopted child/born child (within one year)
  • Up to 100k for COVID year
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14
Q

IRA - Qualified Charitable Distribuiton

A
  • Can exclude up to $100,000 PER YEAR from income
  • No more max age limit
  • Exclusion is REDUCED by the excess of:
    • Total amount of IRA deductions allowed to the taxpyaer for all tax years ending on or after the date the taxpayer attains age 70.5
    • The total amount of reductions for all tax years preceding current tax year
  • Not reported as income OR as charitable deduction
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15
Q

RMDs for IRA (traditional)

A
  • Must begin by April 1st of the year following the year the owner of the IRA turns 72
    • Was suspended in 2020
  • If you don’t take initial RMD by April first of following year, must take TWO RMD distribuitons in that year (by December 31st)
    • Only available grace period for FIRST RMD
  • RMD penalty - 50%
  • RMDs must continue every year
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16
Q

ROTH IRA Conversion - 5-year rule

A
  • For every conversion from traditional IRA to Roth IRA, must hold for FIVE YEARS before withdrawing
    • Unlike a regular Roth IRA
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17
Q

Roth - Recharacterizations

A
  • Conversions cannot be recharacterized anymore
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18
Q

When does 5-year holding period being for Roth IRAs?

A
  • Beings January 1st of the year when a contribution was made to any Roth IRA (or for any conversions to Roth)
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19
Q

Nonqualfied distribuitons from Roth IRAs

A
  • Distributed in the following order:
    • Regular contributions
    • Converted contributions
    • Earnings
  • 10% penalty does NOT apply to regular contributions NEVER
  • Also does NOT apply to converted contributions (as long as five-year holding period has been met)
  • Only earnings and converted contributions within 5 years are PENALIZED
  • Nonqualified earnings
    • Always taxed whether within or outside 5-year period for NONQUALIFIED distribution
    • If distribution is qualified:
      • Will still be taxed on earnings inside 5-years
      • Not taxed on earnings outside 5-years
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20
Q

Investments within IRAs - Not allowed

A
  • Life Insurance
  • Collectibes
  • Allowed:
    • gold, silver, platinum
21
Q

What happens if prohibited investment is held within IRA?

A
  • Will be deemed as a taxable distribution on date of purchase
22
Q

IRAs - Prohibited transactions

A
  • Prohibited for owner or beneficiary to engage in
    • Selling, exchanging, leasing property to an IRA
    • Lending money to an IRA
    • Receiving unreasonable compensation for manging IRA
    • Pledging money from IRA as security for loan
    • Borrowing money from IRA
    • Buying property for personal use with IRA funds
  • ENTIRE BALANCE of IRA will be deemed as distribution, and penalties and tax
  • Will cease to be an IRA on FIRST DAY of current taxable year
23
Q

SEP IRA advantages

A
  • Easy to establish
  • No filing requirements
  • Low-cost
24
Q

SEP IRA Participation Eligiblity

A
  • Must be age 21
  • Must have worked for employer 3 out of last 5 years
  • Minimum compensation of $650
  • Good for employers with YOUNG employees or HIGH turnover
  • This does INCLUDE part-time employees
25
Q

SEP IRA - How to establish

A
  • Formal written plan
  • Notify all eligble employees
  • Set up SEP IRA for all eligible employees
  • Can be established as late as tax return filing deadline (including extension)
    • This makes it good for late tax planning as well as employer contributions that can extend beyond tax year
26
Q

SEP IRA - Contributions

A
  • Limited to lesser of:
    • 25% of compensation OR
    • Defined benefit max limit in tax tables
  • Only EMPLOYERS make contribution, employees do NOT
  • Contributions are DISCRETIONARY (they don’t have to make them)
    • But if employer does make contribution, must be MADE TO ALL EMPLOYEES
  • Funding formula is nondisrimintatory, and may be integrated with Social Security
  • For self-employed individuals, limit is converted to 20% of NET self-employment income
  • Each employee receives her own SEP IRA and can pick their own custodian
27
Q

SEP IRA - Vesting and Withdrawls

A
  • Vesting
    • Immediately vested (employer contributions)
  • Withdrawals
    • Can withdraw at any time without a need for proving hardship or anything
    • Remember 10% penalty still applies if under 59.5
28
Q

SARSEP

A
  • Salary Reduction SEP IRA
  • No longer valid (SIMPLE replaced it) but some still exist
  • Allows employees to DEFER salary and the elective deferral limit is the 401k limit
  • Must pass ADP test (HCE cannot defer more than 1.25 x NHCE deferrals)
  • Were only for employers with less than 25 employees
29
Q

SIMPLE IRA and SIMPLE 401k Advantages

A
  • Do NOT need to meet nondiscriminatino testing that apply to qualified plans
  • And also ALLOWS for employee elective deferrals
30
Q

SIMPLE IRA Contribuitons

A
  • ALL contributoins are immediately vested (employer and employee)
  • Consists of employer and employee contributions
  • Employees can contribute up to lesser of:
    • Their earned income OR
    • Annual limit in elective deferrals
  • Has catch-up provision
  • Employer must EITHER:
    • 2% nonelective employer contribuiton (for all eligible employees)
    • 3% matching employer contribution (100% match up to 3% elective deferrals)
      • There is a reduction allowed for matching contribuiton, IF all the following are met:
        • Contribution is no less than 1%
        • Contribuiton is reduced for no more than 2 out of last 5 years
        • Employees are notified before elective period happens
        • NOT available with SIMPLE 401k
  • No CAP on employer matching contribuiton to employee (meaning no covered compensation cap for this purpose)
    • There is caps on all other plans (even SIMPLE 401k)
31
Q

SIMPLE 401K

A
  • Uses 401k as funding vehicle instead of IRA
  • Plan loans are permitted
  • It is a qualified plan
    • Although it is NOT subject to top-heavy or discrimination testing
  • More admin expenses than SIMPLE IRA
32
Q

SIMPLE Plans - Establishing

A
  • Must have fewer than 100 employees
    • Once employer crosses 100 employee threshold, they have a two-year grace period and then they lose eligibility
    • When determining number of employees, only those who earn more than $5,000 in the PREVIOUS year are considered
  • Must be established by October 1 of the year the plan starts
  • Can be established by almost all entities
  • Not allowed if employer contributes to defined contribution plan during the year or if employees are covered under defined benefit plan, SEP IRA or 403b
    • Basically cannot have any other retirement plan while having SIMPLE plans.
33
Q

SIMPLE Plans - Vesting

A
  • ALL contribuitons are immediately vested
34
Q

SIMPLE Plans - Eligiblity

A
  • Employees who earned at least $5,000 in compensation in the previous year and expected to earn at least that amount in the current year
  • Based on calendar year
  • No age requirement
35
Q

SIMPLE 401k - Contribuitons

A
  • Same as SIMPLE IRA, except there is NO flexibility in matching contributions
  • Can allow for catch-up provisions, but not required
  • Not subject to disrimination testing
36
Q

SIMIPLE plans - Taxation

A
  • Employer receives tax deduction for EMPLOYEE and EMPLOYER contribuitons to the plan
    • Employer contribuitons are also not subject to payroll tax
  • Distribuiton within first TWO YEARS
    • Must be contributed to another SIMPLE PLAN, otherwise:
      • 25% penalty in first two years, 10% thereafter
      • Also applies to rollovers to another tax-deferred plan (the 25% penalty)
37
Q

What is a 403b plan

A
  • Also known as TSA (tax-sheltered annuity)
  • Nonqualified
  • Only for qualified nonprofits and puclic educaitonal
38
Q

403b plans Catch-up rule

A
  • Has two catch-up provisions for employee elective deferrals:
    • The regular one when they reach age 50
    • If employee has been employed with SAME organization for 15 years:
      • Another increase in elective deferrals by $3,000 max
39
Q

Employer Contributions - 403b

A
  • Cannot exceed LESSER of:
    • 100% of covered compensation OR
    • Contribution limit for defined contribution plans
  • Total contributions include:
    • elective deferrals
    • nonelective contributions
    • after-tax contributions
40
Q

403b eligilbity

A
  • Can be either:
    • Two year waiting period and age 21 (immediate vesting)
    • One year waiting period and age 26 (only for educational)
    • One year waiting and age 21 (if there is no immediate vesting)
41
Q

When can 403 b plan not be considered for ERISA?

A
  • ALL of the following must be true:
    • No employer contributions
    • Plan sponsor is government or regligious institiuion
    • Employee has sole rights under plan
    • Employee participation is voluntary
    • Employer’s involvmeent is limited
42
Q

403b allowed investments

A

ONLY MUTUAL FUNDS AND ANNUITIES

NO STOCKS/INDIVDIUAL SECURITIES

43
Q

What is a 457 plans?

A
  • A nonqualified deferred compensation plan for local/state governments
    • Not considered a retirement plan
  • Three types
    • 457b public plans (government)
    • 457b private plans (tax-exempt)
    • 457 ineligible top hat plans
44
Q

457 Plans - Eligibility

A
  • Churches are EXCLUDED
  • No corporations may particpate, only employees and indepdent contracctors
45
Q

457 ERISA Requirements

A
  • A Trust must hold assets/income for exclusive benefit of participants
  • Employer does not have to make public 457 plans available to all employees and can be selective with the employees who participate
  • Limits private 457 plans to the exclusive benefit of HCE or top management
46
Q

457 Plan Catch-Up

A
  • Age 50 regular catch-up
    • Only available for PUBLIC 457 plans (government)
  • Final three year catch up
    • Three years prior to normal retirement age, an employee may contribute an additional amount equal to the elective deferral limit
      • Not when employee “wishes” to retire
      • Means max contribution in final three years would be TWICE the annual deferral limit shown in tables
    • Employers are not required to offer this and NOT available at all for private 457f plans
  • CANNOT USE TWO CATCH UPS SIMULTENAOUSLY LIKE 403b plans
47
Q

Other 457 Contribuiton Rules

A
  • Employer contribuitons are NOT required
  • Contribuiton limit INCLUDES employee and employer contribuitons (employer contributions counts toward the employee elective deferral limit)
  • Contribuitons DO NOT aggregate with OTHER retirement plan contribuitons… HUGE BENEFIT
48
Q

457 Distributions

A
  • Public 457 plans are NOt subject to 10% penalty before 59.5
  • Private 457 plans STILL HAVE 10% penalty
  • Public can be rolled over into another tax-deferred retirement account
  • Private MUST be rolled over into another 457b
49
Q

457f Ineligible Plans

A

457(f) plans are sometimes called top-hat plans since only highly compensated employees or top executives can participate.

The funds deferred into the plan are subject to substantial risk of forfeiture. This means that the employer’s creditors could access the plan if needed.

Once the funds in a 457(f) plan are no longer at risk of forfeiture (loss), the funds in the plan become taxable.

457(f) plans generally have a stated payment period. If an employee leaves the employer prior to that period, he or she may forfeit the funds in the plan.

The standard “substantial risk of forfeiture” is an important concept in nonqualified deferred compensation planning. In the 457(f) plan, employees could be at a substantial risk of forfeiture. Two examples of such risks are listed next.

The employee is simply a general creditor if the entity becomes insolvent.

Vesting

Many employers require either certain performance elements or time within the organization before paying the nonqualified deferred compensation benefits to employees.

There are no contribution limits to 457(f) plans. Because of this, this type of plan works best for employees with very high compensation. These employees can defer the amount they wish, and payments from the plan will start at some point in the future.

Retirement Savings and Income Planning (11 decks)

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