Post Review Flashcards
Medicare- must PAY or DONATE the first X Units.
You must either pay the provider costs for the first 3 units of blood you get in a calendar year, or you or someone else can donate the blood.
Max age for COBRA?
26 years kicked off plan. Life event = +36 Months for Cobra coverage. = 29 Years
Cash value and death benefit of VUL and UL
VUL (3 Letters) = you get both CV AND (3 letters) DB
UL (2 Letters) = you get CV OR (2 Letters) DB
Life insurance and creditor protection
ALL cash value in a life insurance creditor protected
If you don’t need life insurance never buy…
permanent policy, whole life, VUL, VL etc
1035 Rules
Life to Life (ok)
Life to Annuity (ok)
Annuity to Annuity (ok)
Annuity to Life (No way)
MT: Lindsay Lohan went to LA for AA, not AL
Owner of an S Corp get
TAX FREE BENEFITS
IRS wants to tax
Either the front end - when you pay or the back end - when you receive.
MT: Hug and a Slug ( you are getting hit on one side)
no double taxation
Viatical Settlement
terminal illness (2 years or less life expectancy) = tax free to owner (person) above the basis the viatical company pays tax on anything on their basis (what they paid the person)
Life Settlement
you are old and cash out early. this is taxable - life settlement = LTCG
Non Forfeiture Options
when you want to STOP paying premiums
C - cash
E - extended term/paid up term
P - paid up reduced amount
MT: I Can’t Even Pay (amount)
Settlement for Life Insurance
Bene option when the insured is dead
C - cash (check)
R - refund
I - Interest Only (hold my $ and company invests)
S - Specified Period Income
P - Period certain and life
P - Pure life/ Single Life
(review book I-31)
Dividend Options
when you are continuing to pay premium as planned
participating whole life
C - cash
R - reduce premiums
A - accumulated with interest
P - paid up additions
O - one year term (5th dividend)
Provisions
C - Conversion (exchange term for permeant type plan WITHOUT evidence of insurability
R - reinstatement (reinsure)
A - APL Provision (automatic premium loans)
I - Incontestability (after 2 years validity cannot be questions except in fraud cases
G - Grace Period ( # of days allowed for premium in default)
S - Suicide Clause (within 2 years you get return of premium no DB)
(Review I-29)
Exam Tip on life insurance
For exam purposes ALL term policies are convertible
How to set up insurance on Exam
write down….
Owner:
Insured:
Beneficiary:
MECs Can’t Flex (lifo)
Remember MECs aren’t flexible (no income)
Whole (5) Life insurance is…
FORCE (5)d Savings
Exam loves Whole Life
If you are down to 2 pick WHOLE LIFE as the answer
GST Tax (EP 42)
Direct Skip: Donor/Estate pays GST
Taxable Termination: GST paid by Trustee
Taxable Distribution: GST paid by transferee
Estate Planning where you don’t need income…
House = QPRT
Equipment = Gift leaseback
Non-service Business = Gift Shares
Maintain Control or Split Income = FLP, Family Limited Partnership
Estate Planning - Income
CRAT or CRUT
Estate Planning - Inflation Hedge
Flexible payments CRUT
U is open to you can add to it
Estate Planning - Charitable Lead Annuity Trust
Charity gets the LEAD (income) think Jackie O Trust
What’s a CRAT
Charitable Remainder Annuity Trust
Charity gets the Remainder
CRATS
Any ten 5% kicks out out on the front end (lead income) 10% principal to the charity (at the end)
Memory for CR v CL
5% - Private foundation, CRAT, CRUT
CR = cash received (donor)
CL = cash leaves (to the charity)
A v C Trust
C = 2nd marriage (what you do after 2nd letter of alphabet/2nd marriage)
C Trust does not get unlimited control over Corpus
A = 1st letter of alphabet / 1st marriage
C Trust
C trust is for Sven Example
C Trust controlled by first to die spouse
A Trust
“A” (marital) trust is for person ABOVE the ground ALIVE
B Trust
B trust funded by person BELOW the ground
*funded with exemption amount “credit shelter” trust - you are “sheltering” the credit amount ($12.92M)
C Trust (QTIP) Trust
LAME:
L - lifetime for spouse
A - annual income for spouse
M - mandatory distribution to spouse
E - exclusively for spouse
In what order do you found ABC trust?
Fund B trust 1st then allocate between “A” trust and “C” trust
General Power of Appointment
outright ownership
Gifts of Future Interest or Present Interest
Gifts of FUTURE INTEREST are NOT eligible for annual exclusion
Only gifts of PRESENT INTEREST ARE eligible for annual exclusion
Inheritance v Gift
Inheritance: dead person gives property to a living person
Gift: living person gives property to living person
Buy Sell - how many individual policies are needed?
x(x-1)
x= owner
Bene needs $ to buy out dead owner
example:
Policy 1:
Owner: Brett
Insured: John
Bene: Brett
Policy 2:
Owner: John
Insured: Brett
Bene: John
Use entity for lots of owners
Non-MEC v MEC
non-MECpolicy: withdrawals (to basis) and loans are not subject to income tax
MEC: Policy withdrawals and even loans above basis is tax.
Under 59.5 YO those withdrawals and loans are subject to 10% penalty.
Grandfathered MEC
(Review I-33)
G10 - $150K or lower
guarenteed insurability option
- no need to prove insurability
if you have to prove insurability $1 or more = MEC
to avoid a MEC buy a new policy! when proving insurability
- if it increased by more than $150,000 you can lose grandfathered status
- if you have to prove insurability it can be MEC
MECs Modified Endowment Contract
ONE A MEC ALWAYS A MEC!
LIFO think MECS make LIFE harder
7 pay test
if the age isn’t listed assume under 59.5 (10% penalty)
Transfer for Value (&exceptions)
If an interest in a life insurance policy is transferred for valuable consideration (not a gift) the proceeds in excess of the consideration paid for the policy, combined with any premiums paid by owners ARE TAXABLE AS ORDINARY INCOME
exceptions
I - Insured
C - Corporation
D - Divorce
P - Partnership
MT: ICDP ( I see dead people)
I can buy my policy
the Company I work for can buy my policy
my Spouse can buy my policy in Divorce
my business Partner can buy my policy
Review (I 37)
What Types of Accounts have NO STEP UP
Annuities
pre-tax IRAs
(tax shelters because there is no basis)
Life Insurance Table 1 Pro Tip
MULTIPLY by 12! Table 1 is a MONTHLY cost and you will need an annual number for exam
Guaranteed Renewable
this means you can renew but the premiums/policy can still change
What numbers to use for a 1031
Use only 3 numbers:
1. FMV
2. Adjusted Basis of property given up
3. BOOT (anything not qualified or like-kind)
NO BOOT NO GAIN
Boot = recognized gain
Sale of Residences (Section 121)
Single $250K
MFJ: $500K
If you live in a home less than 2 years exceptions are available for unforeseen circumstance which include - marriage, moving for a job
They like to test moving make sure it’s MORE THAN 50 miles (for work)
179 Deduction
Election to expense up to $1,160,000 for qualifying property.
Tangible personal property 1245 computers, autos, light trucks, office equipment (not computer)
CANNOT CREATE A LOSS
Section 1244 Qualified Small Business Stock
loss of $100K a year joint, $50K otherwise
1244 + $3K capital loss allowed
*this applies to 1st million dollars of stock issued
Net Operation Loss
(T - 14)
A NOL may NOT be carried back but CAN be carried forward
Adoption Tax Credit
ALL COSTS are eligible, the credit can be claimed in the year the adoption is finalized.
-adoption fees
-court costs
-attorney fees
-cost to adopt foreign child
Child and dependent care Tax Credit: expenses until age 13
$3,000 for 1 kid
$6,000 for 2+
use 20% available expenses on the exam
Family credit/other dependent Tax Credit:
$500
Child tax Credit
Under 17, son, daughter, stepchild, foster child
Phased out for $400K, MAGI MFJ
Phased out for single at $200K
up to $1600 is a REFUNDABLE tax credit. $2000 p Kid
FICA on Earned Income above $160,200
1.45% FICA (SS + Medicare)
Below $160K is 6.2%
Self employment tax
income X 0.1413
Kiddie Tax on both earned income and unearned income
greater of $1250 unearned OR earned income plus $400 (never more than the standard deduction)
Personal and Dependency Exemptions
Suspended post 2017
Salaried employee cannot deduct unreimbursed meal exepenses
Employer should be reimbursing in full
Home office deduction
only available for self employed individuals.
CANNOT CREATE A LOSS
For taxes…
MUST be a FEDERALY DECLARED NAMED disaster
loss is reduced by $100 floor only loss in excess of 10% AGI is deductible.
Margin Interest…
no investment income =
no deduction of margin interest
Extra standard deduction per spouse over 65
$27,700
+$1500 (S 1 65+)
+$1500 (S 2 65+)
_________________
$30,700
Estimated Payments
110% of PRIOR year OR 90% of this year
Standard Deviation σ
68% of all returns fall within 1 σ
95% within 2 σ
How to find Mean and STD σ of a stock when annual returns are given
Mean = gold x (7)
σ (STD) = Gold Sx (8)
ex.
1. 8 Σ+
2. 12 Σ+
3. 0 Σ+
Coefficent of Variation (CV)
STD σ / AVG
Highest is most risky
ex.
1. avg 5.75% and std σ 7.59%
2. avg 7% and std σ 10.52
- 7.59%/5.75%=132%
- 10.52/7%=150%
Standard Deviation σ of Portfolio Shortcut
Correlation = 1 (perfectly correlated)
Correlation = 0.0 to 1.0 proportion of
Correlation Negative = -1 move opposite of each other
shortcut add risks and divide by 2. Then use above to decide closest #
*high correlation high #, low correlation low #
PRO TIP on MECs
for the exam all single premium policies are MECs
Concept: Private Placement are great for?
Roth IRA (need to be self directed)
What’s the unearned income kiddie standard deduction?
$1,250
T5
Deductions
State, local sales tax (SALT)
Real Estate tax
ALL CAPPED AT $10K DEDUCTION
NO Investment Income means
you can’t write off margin interest
Kiddie Tax Concept (T10)
1st $1250 (no tax)
next $1250 (10%)
remaining unearned income taxes and mom and dads bracket! ex. 24%
PRO TIP on INCOME
Watch for unearned vs earned income
Only REFUNDABLE tax credits can..
generate income to you. (Pays you even if you don’t owe any money)
What situations are not included in adoption credit?
Surrogate
Parenting Arrangement
OR
Adopting Spouses Child
What’s a tax credit?
You get $ back even if you didn’t owe. (Can generate income)
Credit for Child and Dependent Care to 13
$3K for 1 dependent
$6K for 2 dependents
(use 20% of allowable expense)
Child Tax Credit
$2K per Child
Under age 17
Up to $1600 per child refundable tax credit
phased out over $400K MFJ/$200K Single
Basis in a Partnership
Cash/Direct Loans/Bank Loans
ALL count towards basis! (you can take loses up to basis)
Unlimited liability
Income Tax 17
S Corp Basis
Basis = Cash + Direct Loans
NOT bank loans
this is why owner should take loan in own name and THEN loan to business
Net Operating Loss
you carryforward(verb) the NOL* (noun)
1250
27 1/2 Year: Residential Rental Property
39 Year: Nonresidential real property
1245
5 Year: Computer, Autos, Trucks
7 Year: Office furniture and equipment (except computers)
Highest Cap Gains Rates
20% starts in 35-37% Bracket
What’s the collectible tax rate
28%
Netting Gains and Losses
Net LT + LT
Net ST + ST
_____________
Net Together
(whichever has a balance you do ST or LT accordingly)
$3,000 losses can be applied and rest can be carryforward
How to do a 1031 no matter how many #s are given
- FMV of property received
- Adjusted basis of property given up
- BOOT (non like kind)
No Boot = Recognized Gain $0
Boot = Recognized Gain
T.23
1031 Memory Trick
Swap (1031) til you drop (full step up at death)
AMT Add Back Items (T27)
- incentive stock option bargain element
- property, state and city income taxes
-Home equity indebtedness isn’t allowed (add back) UNLESS for home improvement.
AMT Preference Items (T27)
- excess Intangible drilling cost
-
Private activity muni bond
-Oil and Gas PERCENTAGE DEPLETION (not cost depletion)
-Depreciation (ACRS/MACRS) but NOT straight line
Section 121
$500K MFJ/ $250K Single exclusion on primary residence
must live there 2 out of the 5 years
EXCEPTION: if living less than 2 years and moves MORE than 50 MILES for job/ health/ marriage (unforeseen reasons) you can get partial exclusion on sale of primary residence.
Active Participation
Gains pass through
Losses sometimes do
Limited Partners are ALWAYS
PASSIVE INCOME (silent investors)
Active participants in Real Estate
can take a $25,000 loss.
*Phased out for tax payers AGI between $100K-$150K on 2 for 1 basis
What is Phantom Income?
Insurance
Tax
Retirement
Investments
Insurance:
-any type of lapse with a loan
-section 162 life and disability (A 162 Executive Bonus plan allows a business to provide life and/or disability income insurance to key executives using tax deductible dollars)
Tax:
- K-1 from family limited partnership or limited partnership
-Recapture
Retirement:
-ESOP Distribution (basis only)
-Secular Trust
Investments:
-Zero/Strip Income
-TIPS
-Declared but not paid dividends and Capital Gains
T34/T35
Oil & Gas working interest are exempt from?
Exempt from PAL rules.
*If limited partner you generally don’t have immediate right to take loss.
At dissolution take loss.
T34
Low Income Housing Programs
Deduction up to $25,000 NO phaseout.
Ex. Calculate your tax to determine max
if 37% tax bracket multiply $25,000 x 37% = $9,250 credit
T34
Rules about renting your own vacation home
Normally a business means your PERSONAL use cannot exceed the longer of
1. 14 days
OR
2. 10% of the rental use
T33
How many hours of continuing ed do you need for CFP annually?
30 Hours
2 hours of CFP Board approved Ethics CE and 28 hours of CE covering 1 or more of CFP Board’s Principal Topics.
Rental of your Principal Residence (NOT normally a business)
Fewer than 15 days you don’t pay any tax on income
NO loss deduction for damage
Payee v Payor
PayeE: ReciEving Spouse
PayOR: pay OR go to jail, pay or your kids hate you etc.
Public Charity: 50% Organizations
- churches, schools, hospitals,
-all organizations for charitable, religious, educational, literacy, or prevention of cruelty to children or animals
Private Charity: 30% Organizations
-war veterans, fraternal orders, private foundations
Donated Property (Capital Gains) T38:
- when using FMV(3) individual can deduct 30% AGI
-when using BASIS(5), individual can deduct 50% AGI
Social Security Coverage and Not Covered
Covered
-nearly every American worker is covered under OASDI
NOT COVERED:
- railroad employees
-child under 18 employed by a parent unincorporated business
-religious, minister (if they claim exemption)
-tribal council
Charitable Contribution Deduction
CASH 60% (DOLLAR 6) of AGI
Carryforward for up to 5 more years or death if sooner
How is use unrelated gifts considered?
You can only use basis
SS Benefit by Age
YOUNGER than FRA
- reduce $1 from your benefits for each $2 you earn over $21,240
FRA and OVER FULL BENEFIT
-year you turn FRA deduct $1 from every $3 you earn above $56,520 until the month you reach FRA
R3
SS Dependent
-surviving dependent
Unmarried child of deceased insured work qualifies for SS if:
- under 19 and full time elementary or secondary school student
OR IS
-age 18 or older but has a disability which began before age 22
SS Widowers Benefits
Spouse of a retired or disabled worked he/she:
-age 62 or over
-child in care UNDER 16 OR age 16 and over if disabled
Divorce = married 10 years or more
Surviving Spouse: Qualifies for SS if caring for a child UNDER 16 or disabled before 22
R-2
Defined Benefit Pension Plan (DB)
Guarantees specific amount of income
-only 1st $330,000 counted
ex.
y1 $90K
y2 $110K
y3 $140K
___________
$330K
MAX BENEFIT 100% of average comp so $330K/3Y= $110K
What to know about SARSEPs
NO new SARSEP Plans!
Only NEW employees can be added to a SARSEP Plan established before 1/1/1997
When does your spouse decided your beneficiary?
When it’s a pension plan
R-5
What percentage of SS is taxed?
85% taxed above $44K & hits AGI
What type of income is added to AGI when determining taxation of SS Benefits?
MUNI bond interest
tax exempt interest is added to AGI to get MAGI
Defined Benefit Plan
Stuff like a pig!
More than $66K but favors based on age.
Older = More $
Younger = Less $ (not as good for them)
Practice Tip: When the owner retires expect them to shut this down
What’s a CODA?
CODA is a 401K
stands for
Cash or Deferral Arrangement
Profit Sharing Plan
-NO assumed return in a PSP
-set contributions
-max $66K
-discretionary in the since that if there is NO profit NOTHING to share
-company $ only
R.10
Defined Benefit Plan
- NO Max
-STUFF IT LIKE A PIG
DBP (1st letters all fat like a pig, you can make a pig nose out of each one)
Section 415 Limit
$66,000
Section 415 of the Internal Revenue Code (“Code”) provides for dollar limitations on benefits and contributions under qualified retirement plans.
Deferrals vs. Contributions
Deferrals come from employee
Contributions come from Company (C and C)
What’s the catch up contribution for 50+?
$7,500
this is a Catch Up Contribution NOT a deferral so it is not matched
if it were matched it would be discrimination in favor of 50+ so catch ups aren’t matched
Max an employer can deduct a maximum of _____ of participants compensation?
25%
any employer may contribute and deduct up to a maximum of 25% in addition to elective deferral
R-11
What’s a SARSEP?
A Salary Reduction SEP
-can’t do anymore
-only grandfathered in when new hire to an existing plan
-no new SARSEPs allowed
What’s a SEP?
Simplified Employee Pension
no salary deferrals
Simple IRA
Contribute up to $15,500
Catch Up (50+) + $3,500
$ for $ up to 3%
NO Salary Cap of $330,000 but the most you can make is $516,667
25% Penalty for premature distribution 1st 2 years
MT: simples are not simple
R-15
Keogh Contributions
Owners Only
Qualified Plan for Sole Prop/Partnership OR Self Employed SEP
Max Salary: $160,200
15% plan 12.12% x profit
ex $50,000 x 12.12 = $6,060
25% plan 18.59% x profit
ex $50,000 x 18.59 = $9,295
MAX is 25%
MT:
Owner (5) Keogh (5)
Keogh Math
- Year 18.59 for the Max (25%)
- 12 out of 12 for low 12.12 (15%)
Lump Sum v Pension (conceptual)
Ask lots of questions!
NO pension if either spouse has poor health
Lump Sum = lack of outside assets
NUA Concept
sell higher basis less taxes
then NUA
-lower basis you pay ordinary income on less
-cost basis only
R-12
NUA
employer stock only
- pay ordinary income on Basis
-NUA always LTCG NO matter when employer stock is sold
55 or older no 10% penalty
EXAMPLE:
Cost Basis: $20,000
FMV: $200,000
___________________
NUA: $180,000
R13
If you move from your Plan to an IRA what happens to NUA?
You loose the opportunity to use NUA FOREVER!
- stock is taxable
-remainder to IRA
55 v 59.5
The exam likes to conflate 10% exception and penalty for IRAs and Plans they are different!
2 separate set of rules
Plans = 55
IRA(3)s=59.5 (3)
to avoid penalty
Types of Annual Additions
Deferrals = workers $
Contributions = Company $
Forfeitures = Company $ forfeited by employees who left early
Only 4 Plans allow for salary deferrals (workers $ to go in), what are they?
- 401(k)
-403(b)
-457
-SIMPLE
ALL OTHERS ARE COMPANY MONEY ONLY!!
Where is the only place you can make a hardship withdrawl?
401(k) only
*Many 401(k) plans allow you to withdraw money before you actually retire to pay for certain events that cause you a financial hardship. For example, some 401(k) plans may allow a hardship distribution to pay for your, your spouse’s, your dependents’ or your primary plan beneficiary’s:
- medical expenses,
-funeral expenses, or
-tuition and related educational expenses.
Consequences :
-You must pay income tax on any previously untaxed money you receive as a hardship distribution.
-You may also have to pay an additional 10% tax, UNLESS you’re age 59½ or older or qualify for another exception
-You may not be able to contribute to your account for six months after the hardship distribution.*
What’s a forfeiture?
An Employee leaves without being fully vested in a 401K. $ goes into a forfeiture fund.
Ex. what would happen if I left RBC since my match vests over 5 years
Roth withdrawl Rules
cOnverted is 59.5 Or 5 years
eArnings is 59.5 And 5 years
(note your contributions are always tax free - think you already paid tax once you don’t pay double tax as a person)
Roth withdrawn within the 1st 5 years and Roth owners is under 59.5?
10% Penalty
MT: The IRS is gentle on you the first time…
1st Home (IRA)
1st RMD
TEST TIP
If the test does NOT say they are in a plan DO NOT assume they are
same with
If the test does NOT say they are over 59.5 DO NOT assume they are
Tax Reminder
AGI is NOT the same as EARNED income
What must you have to have an IRA?
to have an IRA you must have EARNED INCOME
MT: King IRAs body guard is Earnie Income
R36
QDROS affect ______ plan only.
For exam only
QDROS affect QUALIFED Plan Only
employer-sponsored retirement plans that satisfy requirements in the Internal Revenue Code for receiving tax-deferred treatment
It does NOT affect IRA
SEP may be established when?
After Employers fiscal year end.
Employer has until due date of business tax return (including extension) to ESTABLISH and CONTRIBUTE to SEP for Year.
R35
Practice Tip: When do you take Inherited Roth RMD?
Wait on Roth RMD to 9 Years and 364 days then you get all tax deferred growth. Then move it to taxable and the IRS can get their taxes from there. Never roll it out early. It grows tax free.
What is a QCD? What does it do?
Qualified Charitable Distribution
Age 70.5 up to $100K of RMD per year. No tax to public charity and fulfills RMD requirement.
keep an eye on age!
EXAM TIP
When the exam says IRA they mean Traditional IRA unless they say ROTH IRA.
Always assume Traditional.
What’s the basis of an IRA?
NO BASIS, ALL taxable.
Remember you never paid taxes on this income so you have to at distribution (it’s a hug and a slug)
Non Spouse Beneficiary IRA is to be emptied by when?
Must be emptied by 10th year FOLLOWING the year of death.
If over 73 must take RMD for year if they hadn’t
Spousal Beneficiary of an IRA - RMD Concepts
Younger Surviving Spouse: can delay RMDs by rolling it into their own plan and taking it off of THEIR age
Older Surviving Spouse: leave in younger (deceased spouses) plan and take the RMD based on the deceased’s age 73
RMD Rules before 1/1/2020
Beneficiaries can take RMDs over the beneficiaries lifetime (NOT 10 years)
TEST TIP
Look for answers with “gather additional information”
Does the (5%>) owner age 73+ need to take an RMD if still working?
YES, An owner in a Pension Plan (more than 5%) must take RMDs or has a 25% penalty.
R32
Is there a still working RMD exception in IRAs?
NO. No “still working” exception in IRAs.
MT: “It’s Required Anyway”
Is there a still working RMD exception in 401(k)s?
Yes. You are exempt from RMDs in a plans where you are still working.
How do RMDs work? When are you required to take your first RMD?
If you turn 73 in 2023 your 2023 RMD will be based on 12/31/2022 Balance.
BUT
First year you don’t have to take your RMD until April 1,2024.
MT: IRS is nice the 1st time
What are exceptions to the 10% early withdrawal rule in a plan?
What are exceptions to the 10% penalty for IRAs?
Plan: Death and Disability are exceptions to the 10% early withdrawal rule before age 55 in a plan
IRA: exception to 10% penalty for IRA(3) 1st house & qualified education costs (59 1/2)
Mandatory withholding on a check from a qualified plan?
AND what are the exceptions to the witholding?
20% withholding will be imposed on a distribution if a qualified plan issues a check the the recipient.
EXCEPTIONS:
- Substantially equal payments (72T)
-distribution to comply with minimum distribution
Life Insurance Test to be considered “Incidental” to the retirement benefit purpose of the plan.
If the amount of insurance meets either of the following tests it is considered incidental.
- Traditionally defined contribution plans use the “percentage” limits. The aggregate premiums paid for a participants insured death benefit are at all times less than the following percentages of the plan cost contributions for that participant.
Ordinary Life Insurance (whole life) 50%
Universal Life 25%
Term Life 25% - Defined benefit plans typically factor the “100 times” limit. The participants insured death benefit must be no more than 100 times the expected monthly benefit. For example, if the monthly benefit is $4,000 than the life insurance death benefit cannot exceed $400,000.
What’s a 457?
A 457 plans are non-qualified deferred comp.
Section 457 plans are nonqualified, unfunded deferred compensation plans established by state and local government and tax-exempt employers.
Remember government always gets different rules
Who does cross testing provide the most generous benefit?
The OLDER owner/employee.
HCE: Max 20%
NHCE: 5%
*this is the governments way of protecting the non highly compensated employee
ADP/ACP Actual Deferral/ Actual Contribution Test
Shortcut Method:
0 to 2% is “times 2”
2% to 8% is “plus 2”
Deferral NHCE HCE
1% x2 2%
2% +2 4%
3% +2 5%
4% +2 6%
What is the 21 AND 2 Rule?
Requires the employee to be age 21 or older AND have 2 years of service.
Top Heavy Defined Benefit versus Non Top Heavy
Top Heavy DB:
+ ALL defined contribution plan
Faster vesting schedule
3 year cliff
OR
2 to 6 year graded
OR
100% vested with 2 year eligibility
Non Top Heavy DB
Defined Benefit Plan
Slower vesting schedule
5 Year Cliff
3 to 7 year graded
or
100% vested 2 year eligibility
think gravity with vesting schedule, top heavy goes faster than something “less” top heavy
Remember this is the worst case anything better is ok
What’s Top Heavy?
More than 60% of it’s aggregate accrued benefits or account balance allocated to key employees
What’s the minimum benefit for a non-key employee in a top heavy Defined Benefit and Defined Contribution plan?
Defined Benefit = 2%, MT 2nd letter in alphabet
Defined Contribution = 3% MT 3rd letter in alphabet
Who is a Key Employee?
-Greater than 5%
kEy
vEsting
officer and compensation greater than $215K
greater than 1% owner and compensation greater than $150K
Who is a Highly Compensated Employee?
HCE:
hIghly compensated employee
dIscriminated
greater than 5% owner, $150K+
Test Tip: if the goal is for a plan to be flexible what can you do?
Cross Out ALL pensions
Test Tip: what perspective is the exam always written from?
The owners perspective not the employees. Think your client is usually the owner.
Other names for a Solo 401k?
- Sole Propertier 401k
- Uni - k
Defined Benefit Plan Memory Trick
When playing Dodge Ball (DB) you target older people
What are employer contributions in a defined benefit plan?
Mandatory and FIXED
Profit Sharing 401k Plan
Flexible employer contributions with higher limits ($66,000)
What’s the max for salary reduction and discretionary employer contributions?
Salary reduction $22,500
May not EXCEED section 415 limit of $66,000 OR 100% of Salary
What kind of an account should a REIT always go into?
A tax deferred account.
Think ordinary income tax rates, defer it!
What’s a Rabbi Trust?
- Private letter ruling
- Merger, acquisition or change of company ownership
- immediate vest
- only way you can lose money is if the company goes bankrupt
A rabbi trust is a type of trust used by companies to provide non-qualified benefits to key employees. Most rabbi trusts are irrevocable, meaning a company can’t take the assets out once they’ve been put in.
Most Fortune 500 CEOs have this
Holding Periods for NSO and ISO
LTCG Holding Period:
NSO
1 Year
ISO
1+ Year from exercise date
2+ years from grant date
MT: E GG
1 2
R48
Is a Section 457 Plan protected from creditors?
NO
- subject to creditors
- if they go bankrupt you lose it all
Those funds are subject to the employer’s creditors. For this reason a 457(b) provides excellent asset protection against your creditors, but it provides no protection at all against an employer’s creditors.
Remember: Section 457 plans are nonqualified, unfunded deferred compensation plans established by state and local government and tax-exempt employers.
Which features on a bond decrease yield?
Put and Conversion Features
think these features benefit the bond holder so that will come at a price.
Conversion Value of a Convertible Bond Formula
CV = (PAR/CP) X Ps
CP= Conversion Price
Ps= Current price of underlying stock
PAR= Par value of bond (typically but not necessarily $1000)
Risk with Corporate and Muni Bonds
Default Risk
Reinvestment Risk
Interest Rate Risk
Purchasing Power Risk
MT: DRIP
CMO
CMO has A to Z Tranches
Fast pay A
Medium pay M
Slow pay Z
Plus issue of Z Tranche no coupon (most risk) no cash flow basically gets the leftovers (Z Slowest = Longest Duration)
Revenue Bond
Backed by a specific source of revenue. Credit of issuer is NOT pledged.
Backed by a single source (tolls, hospital, nuclear plant)
Riskier so higher yields
General Obligation Bond
Backed by full fait and credit and TAXING power of the issuer.
MT: Think GO Bond we won’t GO broke.
Safest muni credit
Taxes can be raised until debt is paid back to the bond holder.
GNMA
FNMA
FHLMCC
GNMA = government / guaranteed
FNMA
FHLMC
you can get Fed out of your money. (Technically these are NOT guaranteed)
Who has to own EE bonds for the “education” status?
Only the parents ownership qualifies the bond for EE education status.
Taxation of Federal Issues
ONLY pays FEDERAL Tax
Basis on TIPS
any increase in the inflation adjusted principal amount is treated as taxable and increases basis.
So gain is…
Original Basis + Adjusted Basis
Sale - Basis = Gain
ex.
1000 + 300 principal sold for 1400
Gain of $100
STRIPS
-Treasury zero coupon bonds
-Produce phantom income
STRIPS are normally purchased by tax deferred entities like pensions/IRAs/Annuities given their tax deferred nature the phantom income need not be recognized
Treasury:
Bills
Notes
Bonds
NO STATE OR LOCAL TAX ON INTEREST (THINK FED ONLY TAXES FED)
Bills: 3-12 Months
Notes: 1-10 Years
Bonds: 10-30 Years
Beta β
Beta measures systematic risk. Measures volatility of securities return relative to a market index. (MT: Think B is for Bounce)
Higher Beta β = greater risk (& return potential)
β of 1 = stock return moves exactly with the market as a whole
β of <1 = (ex 0.25) means stock return fluctuates less than market as a whole
β > 1 = (ex 1.25) means stock return fluctuates more than market as a whole.
What can you lose on a naked call?
to zero. Limited loss can only go to zero.
What’s the most risky thing you can lose in our industry?
Naked Call! Unlimited loss (could never stop going up)
Derivatives: IV + TV = Premium
Intrinsic Value is NEVER negative only ZERO
How do you hedge futures?
You are So
Long Go short
ex. you are a corn farmer you love corn
Short Go Long
MT: Do today what you want in the future
The point of futures is to provide balance and regulate prices for consumers think corn farmer and cereal industry
Private Placement = Reg D
Regulation D
offering memoranDum
1 2 3 Test
$1M net worth
$200K Single Income
$300K Joint Income
Correlation Coefficent
the test likes to make you move this around
COVij = Pijσiσj
or
(COVij/σi x σj) = pij
DON’T panic just plug in answers if you can’t figure this out!
Alpha and Beta of S&P 500?
Alpha of S&P 500 = 0
Beta of S&P 500 = 1
R2
Index funds based on S&P 500 will have an R2 close to 100%
Sector funds will have a lower R2 around 25%ish
Sharpe
Risk measured in terms of standard deviation σ
Variability systematic and unsystematic risk
- look for low R2 (less than 60) OR non-diversified portfolio
- look for highest Sharpe number
think RATS
R2 over 60 use Alpha if no Alpha use Treynor
if R2 less than 60 use Sharpe
Jensen (Alpha)/Treynor
Risk measured in terms of Beta β
Volatility Systematic Risk Only
- Look for higher R2 (60+) OR Diversified Portfolio
- Look for highest positive Alpha *if none given look for highest Treynor number
Point of Tangency of SML and CML
SML = Micro think SML is Small
CML= Complete/capital market line
Call Options and Attitudes
Bullish = Buyers (UP)
Bearish(7) = Writers(7)(down)
Cap Rate
Value/NOI = CAP Rate
OR
NOI/Cap Rate = what you should pay (value)
Test Tip
NSOs and ISOs are OPTIONS (it’s in the name)
Is Compensation subject to income tax and FICA
YES
Is ordinary income subject to FICA?
NO, Ordinary income is only subject to income tax no FICA
Medicare doesn’t cover?
Dental
Eye Care/Emergency outside of US
Most immunizations
Prescribed Drugs
MT: DEMP
What does Worker’s Comp Cover?
Medical expense
Disability income
Death benefit
Rehabilitation
MT: WC (covers) MD DR
WCMDDR
What are homeowners insurance exclusions?
OPEN WIF
Ordinance or Law
Power Failure
Earth Movement
Neglect /Nuclear Hazard
War
Intentional Loss
Flood
Homeowners Parts (Letter)
A = Adobe (dwelling)
B = buildings/backyard (garages)
C = Contents (covers content owned or used anywhere in the world)
D = Days Inn (if loss of use they put you up)
E = enemies/everyone loves to sue (comprehensive liability insurance)
F = First Aid (medical payment to others)
Nursing Home Progression covered by Medicare
3 Days in Hospital
20 Days of skilled care (they pay all)
next
80 days $200 a day (for a max of 100 days) anything over $200 patient covers
after
100 days Grandma pays all
COBRA
18 Months = Job Related
36 Months = Non Job Related
Medicare is like?
Swiss cheese, little holes filled in by additional parts
What’s under the 3 Year Rules?
Gift taxes: paid on any gifts within 3 years of death are added to gross estate
Incidence of Ownership: if you had incidence of ownership that you gifted and then you die within the 3 years gift is clawed back into your estate
How to remember what is subject to Probate?
MT: COMESTIC
COMmunity property
ESTate is the beneficiary
Singly owner property
TIC tenants in common
Are Roth 401ks subject to RMDs?
YES! for the test only
(this requirement goes away in 2024)
