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Retirement- CFP > Retirement > Flashcards

Retirement Flashcards

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1
Q

Basic Concepts of Social Security

A

Coverage: Nearly every worker is covered under OASDI.

Employment categories not covered by Social Security include:

  • Federal employees who have been continuously employed since before 1984.
  • Some Americans working abroad
  • Student nurses and students working for a college or college club
  • Railroad Employees
  • A child, under age 18, who is employed by a parent in an unincorporated business
  • Ministers, members of religious orders and Christian Science practitioners if they claim an exemption
  • Members of Tribal Councils
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2
Q

Social Security

(Reduction of Benefits)

A

Before FRA (Full Retirement Age): Benefits reduced $1 for every $2 earned over $19,560 (2022 threshhold)

Year in which you reach FRA (Full Retirement Age): Benefits reduced $1 for every $3 earned over $51;960 (2022 threshhold)

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3
Q

Social Security

(Taxation)

A
  • Must include Muni Bond Income to calculate MAGI
  • If income (MAGI) plus ½ of Social Security Benefits is:
    • SINGLE TAXPAYER- Above $25K for a single taxpayer, then 50% of the total Social Security is included in Income.
    • Above $44k for MFJ, then 85% of the total Social Security is included in Income.
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4
Q

Types of Qualified Plans / ERISA

A
  • Defined Benefit
    • Cash Balance Pension
    • Defined Benefit Pension
  • Defined Contribution
    • Money Purchase Pension
    • Target Benefit Pension
    • Profit Sharing
    • Profit Sharing 401(k)
    • Stock Bonus ESOP (NOT integrated with Social Security or cross-tested)
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5
Q

Types of Retirement Plans

(No Vesting / Limited Admin Costs)

A
  • SEP IRA
  • SIMPLE IRA
  • SAR-SEP
  • Thrift or Savings Plans
  • 403(b)
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6
Q

Defined Benefit PENSION plan- Qualified Plan

Road Map

A
  • Favors older employee/owner (50+)
  • Certain retirement benefit; Max $245K or 100% Compensation (415 limit) (2022)
  • Meet a specific retirement objective ​
  • Company must have very stable cash flow
  • guaranteed retirement benefit amount
  • Past service credits allowed
  • Forfeitures MUST be applied to reduce employer contributions
  • PBGC Insured required (along with Cash Balance Plan)
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7
Q

Cash Balance Pension Plan

A

Defined Benefit

PBGC Insurance required

EmployER controls the investments

low cost

simpler DB Plan

may allow for past service credits

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8
Q

Money Purchase - Qualified Plan

DEFINED CONTRIBUTION

A
  • Up to 25% Employer Deduction
  • Fixed Contributions
  • Need stable cash flow
  • Maximum Annual Contribution lesser of 100% or salary of $61K (2021)
  • Only the first 305Kof income
  • favors younger employees
  • RETAIN employees
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9
Q

Target Benefit - Qualified Plan

DEFINED CONTRIBUTION

A
  • Up to 25% Employer Deduction
  • Fixed Contributions
  • Need stable cash flow
  • Maximum annual contribution less of 100% of salary or $61K (2022)
    (415 Limit)
  • Favors older workers
  • discriminates based on age
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10
Q

Profit Sharing - Qualified Plan

DEFINED CONTRIBTUION

A
  • Up to 25% Employer Deduction
  • Flexible contributions (must be recurring and substantial)
  • Maximum Annual Contribution lesser of 100% of salary or $61K (2022)
  • Can have 401(k) provisions]
    • (FICA) (hardship withdrawals)
  • SIMPLE 401(k) exempt from creditors
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11
Q

Section 401(k) Plan

DEFINED CONTRIBUTION

A

Qualified profit sharing or stock bonus plan that allows plan participants to defer salary into the plan.

  • Max $20,500 (2021) deferral for participants under 50 (subject to FICA)
  • Additional $6,500 catch-up for age 50 and over (2021)
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12
Q

Stock Bonus / ESOP - Qualified Plan

A
  • Up to 25% employer deduction
  • Flexible contributions
  • Maximum Annual Contribution lesser of 100% of salary or $61K (2022)
  • 100% of contribution can be invested in company stock ESOP cannot be integrated with Social Security or cross-tested
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13
Q

Section 415 Annual Additions Limit

A
  • Lesser of 100% of compensation or $61K (2022)
  • Includes employer contributions, employee salary reductions and plan forfeitures
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14
Q

Safe Harbor Non-Discrimination

A

A Safe Harbor 401(k) plan automatically satisfies the non-discrimination tests involving highly compensated employees (HCEs) with either an employer matching contribution or a non-elective contribution.

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15
Q

Safe Harbor Match / Vesting

A

The statutory contribution using a match is $1/$1 on the first 3% employee deferral and $0.50/$1 on the next 2% employee deferral.

  • If the employer chooses to use the non-elective deferral method, the employer must contribute 3% of all eligible employees’ compensation regardless of whether the employee is deferring or not.
  • Employer contributions must be immediately vested.
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16
Q

Net Unrealized Appreciation (NUA)

A

NUA Example:

Stock is contributed to the retirement plan with a basis of $20k. The stock is distributed at retirement with a market value of $200k. The NUA, $180k, is not taxable until the employee sells the stock, but the $20k is taxable NOW as ordinary income.

The $180k is always LTCG. If the client sells the stock for $230k, the $30k of extra gain is either STCG or LTCG depending on the holding period after distributed at retirement.

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17
Q

Keogh Contribution

A
  • Only for sole proprietor and partnerships
  • Self-Employment Tax must be computed and a deduction of one-half of the Self-Employment Tax must be taken before determining the Keogh deduction.

Shortcut below takes into account Self-Employment Taxes:

  • If contribution 15%: multiply by 12.12% of net earnings
  • If contribution 25%: multiply by 18.59% of net earnings

expect one ? on the exam!

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18
Q

SIMPLE IRA Plan

A
  • Fewer than 100 employees
  • Employer cannot maintain any other plan
  • Participants fully vested
  • Easy to administer and funded by employee salary reductions and an employer match
  • No loans on ANY IRA plans
  • $14,000 plus $3,000 catch up
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19
Q

SEP (Simplified Employee Pension)

A
  • NO Salary Deferrals - Employer contributions only
  • Up to 25% contribution for owner (W-2) / treated like Keogh contributions for self-employed
  • Maximum of $58K (2021)
  • Account immediately vested
  • Can be integrated with social security
  • Special Eligibility: 21+ years old, paid at least $650 (2021) and worked 3 of the 5 prior years
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20
Q

Tax-Deferred Annuity (TDA)

Tax Sheltered Annuity (TSA)

403(b)

A
  • For 501(c)(3) organizations and public schools
  • Subject to ERISA only if employer contributes
  • Salary reduction limit up to $20,500 (2022) plus $6,500 catch-up if 50 or over
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21
Q

Age and Service Rules - Qualified Plans

A
  • Max age and service are age 21 and one year of service (21-and-one-rule)
  • Special provision allows up to 2-year service requirement, BUT then employee is immediately vested (2-year/100%)
  • Year of service is 1,000 hours (includes vacations, holidays and illness time) or 500 hours if worked 3 consecutive years
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22
Q

Highly Compensated Employee (HCE)

A
  • A greater than 5% owner, OR ​
  • An employee earning in excess of $135,000 during the preceding year (2021)
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23
Q

Key Employee

A

An individual is a Key Employee if at any time during the current year he/she has been one of the following:

  • A greater than 5% owner, or An officer and compensation > $200,000 (2022), or
  • Greater than 1% ownership and compensation > $150,000 (2022)
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24
Q

Ratio % test for NHCE vs. HCE

Average Benefit Test

A

The plan must cover a % of NHCE that is at least 70% of the % of HCE who are covered

avgerage benefits for all NHCE must be at least 70% of thos for HCE

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25
Q

Vesting - Fast / Slow

A

Fast:

  • DB Top-heavy Plans / All DC Plans- ALL the time!
  • 3-year cliff or 2-6 year graded or 100% vested after 2 years

Slow:

  • Non-top-heavy DB Plans only
  • 5-year cliff or 3-7 year graded or 100% vested after 2 years
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26
Q

Defined Contribution Plans

(Integration with Social Security)

A

Base % + Permitted Disparity = Excess %

Base % - DC plan contribution for compensation below integration level

Permitted Disparity - Lesser of base % or 5.7%

Excess % - DC plan contribution for compensation above integration level

27
Q

Defined Benefit Plans

(Integration with Social Security)

A

Base % + Permitted Disparity = Excess %

Base % - DB plan contribution for compensation below integration level

Permitted Disparity - Lesser of base % or 26.25%

Excess % - DB plan contribution for compensation above integration level

28
Q

Multiple Plans 2021

Elective Deferrals

A

Elective Deferrals: More than one employer (2021)

  • Elective Deferrals to multiple plans are always aggregated (2021)

401k/403(b)/SIMPLE/SARSEP

  • $19,500 plus catch up $6,500

SIMPLE and other SIMPLE

  • $13,500 plus catch up $3,000

457 Plans are NOT part of aggregated amounts.

29
Q

Life Insurance as a Funding Vehicle

A

According to the Treasury Regulations, life insurance benefits must be merely “incidental” to the primary purpose of the plan. If the amount of insurance meets either of the following tests, it is considered incidental:

  • The aggregate premiums paid for a participant’s insured death benefit are all times less than the following percentages of the plan cost for that participant:
    • Ordinary life insurance 50%; Term Insurance 25%; Universal Life 25%
  • The participant’s insured death benefit must be no more than 100 times the expected monthly benefit. Defined benefit plans typically use the “100 times” limit.
30
Q

Rollovers NOT Permitted

A
  • Transfers to another 457 plan remain the only option for non-governmental tax exempt organizations
  • Hardship distributions can not be rolled into any other qualified plan
  • Required minimum distributions
31
Q

IRA Exceptions to 10% Penalty for Early Distributions before age 59½

A
  • Death
  • Substantially equal payments
  • Disability
  • First home expense up to $10,000
  • Qualified education expense
  • Medical expense greater than 7.5%
  • Distribution used to pay insurance premium after separation from employment (must have received unemployment compensation for 12 weeks)
32
Q

Qualified Plan Early (age 59½) - 10% Tax Penalty Exceptions

A
  • Death
  • Disability
  • Substantially equal periodic payments following separation from service
  • Distribution following separation from service after age 55
  • Distribution in accordance with QDRO (to any alternative payee)
  • Medical expenses in excess of 7.5% of AGI or health insurance costs while unemployed
  • Distribution used to pay insurance premium after separation from employment (must file for unemployment)
33
Q

Required Beginning Date (RBD) for

IRAs / SEPs / SARSEPs / SIMPLEs

A

The required beginning date is April 1st of the year following the year in which the covered individual attained 72.

Subsequent distributions must be made by December 31st of each year thereafter.

34
Q

Required Beginning Date (RBD) for

Qualified Plans / 403(b) / 457 plans

A

The required beginning date, with the exception of 5% owners, is the later of April 1st following the year in which the individual attained 72 or retired.

5% owners RBD is

Subsequent distributions must be made by December 31st of each year thereafter.

5% owner RBD is the same as IRA/SEP RBD.

35
Q

IRA Deductibility Keys

A
  • If neither spouse (or single person) is an active participant in an employer plan, the IRA is deductible.
  • Employer plans that affect participant status include almost all plans EXCEPT for 457 plans.
  • If one spouse is an active participant, the other spouse (not active) can do a deductible IRA if combined AGI is less than $198K-$208K (2021)
  • If both spouses are active, AGI limits apply: $66K-$76K (single) and $105K-$125K (Married) (2021)

NOTE: Activity that results in active status: annual additions to a DC account or benefits accrued to a DB plan.

36
Q

Roth IRA

Ordering Rules for Distribution

A
  • Any contributions (not conversions) are withdrawn first
  • Conversions are withdrawn second
  • Earnings are withdrawn last
37
Q

Roth IRA

Required Minimum Distributions

A
  • Distributed within 5 years of owner’s death (no named beneficiary), or
  • Distributed over 10 years of the designated beneficiary with distributions commencing prior to the end of the calendar year following death (stretch)
  • Where the sole beneficiary is the owner’s surviving spouse, the spouse may delay distributions until the Roth owner would have reached 72, or may treat the Roth as his or her own (roll it to her/her Roth)
38
Q

Non-Qualified Deferred Compensation Plans

A
  • Salary Reduction Plan: Uses some portion of the employee’s current compensation to fund the ultimate compensation benefit (also called Pure Deferred)
  • Salary Continuation Plan: Uses employer contributions to fund ultimate benefit
39
Q

Rabbi Trust

A
  • Key Words: Merger, Acquisition, or Change of Ownership
  • Assets in Rabbi Trust available for company’s creditors
  • Fear that ownership / management may change before deferred compensation is paid
40
Q

Incentive Stock Option (ISO)

Holding Period

A

Holding Period:

  • 1 year from Exercise Date and 2 years from Grant before selling ISOs
  • Violating either rule results in a Disqualifying Disposition
41
Q

Section 457

Deferred Compensation Plan

A
  • Non-Qualified Deferred Compensation Plans of governmental agencies and non-church controlled tax exempt organizations
  • Deferral limited to $20,500 or 100% of compensation (2022)
  • Catch-up of $6,500 allowed for those 50 and over ONLY for governmental plans (2022)
  • Salary deferrals NOT aggregated with other plans (401k, etc.)
  • Non-governmental plans can ONLY be rolled into another 457 plan
  • NOT creditor protected
42
Q

IRA Keys

(SIMPLE, SEP, SARSEP)

A
  • No Loans
  • No Life Insurance
  • Immediate Vesting
  • May not be creditor protected (state specific)
  • 59½ not 55 for no 10% penalty
  • Must take RMDs at 72 (even if not owner)
43
Q

ADP/ACP Testing

A

0 to 2% is Times 2

2 to 8% is Plus 2

NHCE

Deferral 1% (x2) HCE 2%

Deferral 2% (x2) HCE 4%

Deferral 3% (+2) HCE 5%

Deferral 4% (+2) HCE 6%

Max income to calculate is $290,000

44
Q

What Type of entity can NOT do an ESOP

A

Partnership

45
Q

annual additions

A

salary deferral 20,500 + 6,500

company match

company plan- i.e.profit sharing or money purchase plan- (EMPLOYER is paying)

or

forfeitures

46
Q

Dependent Benefits

A

Surviving Dependent of deceased, disabled or retired insured worker qualifies if

  1. Under age 19 and FT school (not college)
  2. Age 18 or over but disabled before age 22
47
Q

Spousal Benefits

A
48
Q

Taking SS before FRA

A
49
Q

Social Security Disablility Benefits

A
50
Q

Top Heavy Plans

A
51
Q

Unfunded Plans

A
52
Q

Life insurance and Section 162

A

employER will own policy and be beneficiary

premiums not currently deductible

DB paid to employer are not taxable b/c premiums paid were not deductible

When employEE is the beneficiary = 162 insurance plan and

DB paid to survivor are deductible as an expense to employer as paid b/c this constitutes economic benefit.

payment is deferred compensation NOT a death benefit and is taxable either way

53
Q

Section 415 limit

A

$61,000 (2022)

54
Q

Money Purchase Plan How much is taken into consideration

A

$305,000!!! NOT Liz 290k

55
Q

Prohibited from establishing an ESOP

A

Partnerships (KEOGH) Don’t issue stock

56
Q

NHCE contribution rate

A

LESSER OF 1/3 or 5% the HCE

57
Q

Vesting for RETENTION

A

Pick the GRADED SCHEDULE on the exam

58
Q

Defined Benefit Plan integration with SS

A

Permitted disparity is LESSER of base or 26.25%

59
Q

Defined contribution integration with SS

A

Permitted disparity is LESSER of base or 5.7%

60
Q

More than 5% owner

A

Can wait until April 1st of year following 72 for distribution

61
Q

Imposes extensive reporting and disclosure requirements on a SB plan

A

ERISA

62
Q

Types of pension plans

A

Defined benefit cash balance money purchase target benefit

63
Q

Who can I name is beneficiary of my pension plan

A

Only the spouse!! Unless my spouse consents

Retirement- CFP (1 decks)

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