Retirement Flashcards
Steps For Inflating annual need in todays dollars?
- N= # of years to retirement
- I/Y = Inflation Rate
- P/V= Today’s dollar amount
- PMT = 0
- Solve for FV
(End Mode)
Steps for Lump sum needed at retirement?
- N= #of years in retirement
- I/Y = (1+Rate of Return)/ (1+ Inflation Rate) then - 1 and x 100
- PMT = FV from inflated annual needs in todays dollar
- FV = 0 or $ amount listed at death
- Solve for PV
(Begin Mode)
If you need $X at retirement, and you are given the fact that you will have $Y at the end of the first year of retirement, what are the steps to solve for extra payment needed?
1.N = # years until retirement
2. I/Y = rate of return (numbers will include inflation, unless stated)
3. PV = 0
4. FV = X - Y
5. Solve for PMT
(End Mode)
What is pension maximization for retirement planning?
Using excess pure life payout vs joint and survivor annuity to fund a life insurance policy on pure life annuitant
Fully Insured Social Security
If worker has 40 quarters of coverage
Currently Insured for Social Security
Attained 6 quarters of coverage
Worker benefits qualifications?
Retirement - Over 62 and fully insured
Disability - Under 65, has completed 5 month waiting period &
1. Disabled for > 12 months
2. Expected to be disabled for > 12 months
3. Expected disability to result in death
( 1 of the 3 listed)
Spouse benefits of retired or disabled worker?
Requirement: (Meets any of below)
1. >= Age 62
2. If spouse has children in care under 16
3. If spouse has child > 16 and child disabled before 22
Surviving spouse benefits requirements?
If deceased qualified for SS and was >= 60
Divorced spouse benefits requirements?
Must have been married >= 10 years and not remarried
At least age 62 and divorced for > 2 years
They can get 50% of his/her ex spouse PIA unless theirs is greater
Dependent benefits of a retired, disabled or deceased ss insured worker requirements?
< 19 and full time elementary or secondary school student
or
> 18 and has disability before age 22
Taking social security benefit before retirement age calculation
months prior/180= reduction amount
PIA - (reduction amount x PIA) = Reduced benefit amount
PIA stands for Primary Insurance Amount
Only receive 50% of spouse if their PIA is < 50% of spouses
Working after retirement
Workers < full retirement age earning > $21,240. SS will deduct $1 of benefits for every $2 earned above $21,240
Workers > full retirement age earning > $56,520. SS will deduct $1 of benefits for every $3 earned above $$56,520
Working while taking SS benefits, what amount of benefit is taxed?
If income (including muni bond interest) + 1/2 SS benefit is > values listed below, that’s the taxable rate on the entire SS benefit.
Single Married 50% >25k >32K 85% >34k >44k
SS disability benefits
Elimination periods get paid the month after they end.
SS disability has a 5 month waiting period, not paid until month 6.
Month 5: Schedule C Income (No elimination period)
Month 6: Schedule C Income + SS Disability Benefit
Month 7: Schedule C Income + Earned Income from Disability Policy (less SS Disability Benefit) + Disability benefit
SS application withdrawal time after initial claim?
12 months, then its locked in
Non-Qualified Plan Characteristics
- May Discriminate
- Exempt from most ERISA requirements
- No employer tax deductions for contributions until
employee is taxed - Plan earnings are taxable to employer
- Distributions taxable at ordinary income tax rates
Qualified Plan Characteristics
- Can’t discriminate
- ERISA requirements
- Immediate tax deduction for contribution
- Earnings accrue tax deffered
- Distributions taxable at ordinary income rates (see below)
~ Exceptions (401ks, ESOPs, NUA under stock bonus, 10 year
averaging)
Defined Benefit Pension: Keys
- Employers want to max contributions to older employees (favors older) or older controlling employee doing it for own benefit
- Guaranteed retirement benefit amount
- Requires stable cash flow & PBGC insurance
- Past service credits allow
- Vesting schedule / exempt from creditors/ integrates with SS
*Cash balance a type of DB pension
Defined Contribution Plans and other retirement plans difference from DB plans?
Favors younger employees
Money Purchase Pension: Keys
Defined Contribution Plan - vesting and exempt from creditors
1. Max employer deduction 25% of all employees
2. Mandatory fixed employer contributions
3. Max employee contribution is less of $66k or 100% of salary
4. Simple to administer and explain
5. Employer wants stable work force, employees are relatively
young and plan is simple to administer/explain
Target Benefit Pension: Keys
Defined Contribution Plan - vesting and exempt from creditors
1. Retirement benefit determined by account balance
2. Employees assume investment risk
3. Forfeitures can be reallocated
4. Benefits older employees
5. Mandatory fixed contributions (actuary determines initial
contribution level)
6. Lower cost than DB plan but similar features
7. Max employer deduction 25% of all employees
Profit Sharing Plan: Keys
Defined Contribution Plan - vesting and exempt from creditors
1. Max employer deduction 25% of all employees
2. Flexible contributions, must be recurring and substantial
3. No employee contributions
When to utilize
1. Incentivizes employees to make company profitable
2. Employers profit margin varies from year to year
3. Young, well-paid employees have time to accumulate retirement savings
Stock Bonus Plan: Keys
Defined Contribution Plan - vesting and exempt from creditors
1. Max employer deduction 25% of all employees
2. Flexible employer contributions
3. May invest in company stock
When to utilize
1. Broaden ownership, create liquidity, business continuity of stock
2. Tax advantaged means for employees to acquire stock
3. Workers feel sense of ownership
ESOP: Keys
- Employers borrow money from own bank
- Must invest plan assets in company stock
-Participants > 55 and 10 years of participation can diversify
up to 50% of their account balance - Cant be integrated with SS
401(k): Keys
Regular: Minimal expense, employees increase savings on tax deferred/deductible basis
1. Deferral limits are $22,500 with a $7,500 catch up for >50
Solo(k):
1. Deferral limits are $22,500 with a $7,500 catch up for >50
2. Employer contributions with a $66k cap
Safe Harbor 401(k)
1. 1 to 1 match on first 3%
2. .5 to 1 match on the next 2%
Distributions can be taken at age 55 without 10% penalty
Unit Benefit Formula vs final average
Unit Benefit:
years of service x salary x formula factor = annual benefit
Final Average:
Final 3 years (up to $330k each year) / 3 = annual benefit ($265k cap annual benefit)
Cash Balance Pension: Keys
Defined Benefit Plan
1. Guaranteed rate of return and contribution level
2. Less expensive DB plan
Qualified Plan Requirements
Age:
>= 21 years old and >=1 year of service
Service
1000 hours during initial 12 months or
500 hours for 3 consecutive years
Coverage:
70% of all NHCE to HCE or
70% of average benefits to NHCE for HCE
(non-highly compensated employees)
DB Requirement
Same as QP requirement and
Lesser of
50 employees
or
40% of all employees or 2 employees (or one if only one)
HCE: Keys
- Relates to plan discrimination (i 2nd letter in each)
- Employee is either >5% owner or earning >$150k in preceding year
Key Employee: Keys
- Relates to plan vesting (e 2nd letter in each)
- Meets any of the requirements during the current year
- 5% owner
- Officer and compensation >$215k
- >1% owner and compensation >$150k
Top Heavy Plan: Keys
> 60% of aggregated benefits are to key employees
Top Earners ($330k cap per) / [others + top earners (330k cap)]
DB must have at least 2% compensation x years of service (up to 10)
DC must have at least 3% compensation x years of service (up to 10)
Vesting Schedule options For Top Heavy DB & DC plans
- 3 year cliff
- 2 - 6 year graded or 100% with 2 year eligibility
use graded on exam
Vesting Schedule options For Non-Top Heavy DB plans
- 5 year cliff
- 3 - 7 year graded or 100% with 2 year eligibility
use graded on exam
Vesting Schedule
Year
1. 0
2. 20%
3. 40%
4. 60%
5. 80%
6. 100%
Can be more as long as percentages are better than this each year
Actual Deferral Percentage/Actual Contribution Percentage testing
NHCE HCE
0% to 2% : multiply by 2
2% to 8% : plus 2
Control Group
Parent-Subsidiary: One entity owns >80% of other entities
Brother-Sister: Five or less own 2 or more entities >80%
ASG: Health, Law, Accounting, Engineering
Contributions limited to the lesser of 100% of comp or $66,000 across all aggregated accounts unless unrelated employer plans
DB and DC Integration with SS and permitted disparity
DB
Lesser of base % or 26.25%
Base percentage + Permitted disparity = Excess Percentage
DC
Lesser of base % or 5.7%
Excess is multiplied by the salary over the base contribution plan integration level
415 annual contribution limit
For defined contribution plans
Lesser of 100% of employees comp or $66k
415 contribution limit - Deferrals - Match- Forfeitures= max addition limit
Max contribution limits
One Plan or Combining Two Plans
401k/403b: $22,500 & $7,500 catchup for deferral, total contribution (employer included match) cant exceed $66,000 or 100% of comp for employee
SARSEP: $22,500 & $7,500 catchup for deferral
SIMPLE & SIMPLE 401(k): $15,500 & $3,500 catchup (Employee); 3% up to $330k, or 2% for non-elective (employer)
Qualified Plan Employer
Lesser of 100% of employee comp or $66,000
In aggregate when single or related employers, separately to
each account for unrelated
Keogh
Net Income * Contribution Factor (see below
15% Contribution = 12.12% Contribution Factor
25% Contribution = 18.59% Contribution Factor
Qualified plan loans
- Doesn’t exceed 50% of participants vested benefit or $50k
- Loan is repaid over a period up to 5 years and level installments at least quarterly
- Made under enforceable agreement
- Interest on loan is treated as consumer interest
-unless loan is for primary residence & loan is secured by the
residence - Are permitted for 403b and TSA’s
Loans are not available for IRA, Roth, SEP and SIMPLE
Traditional IRA
Contribution Limit: 6,500 & 1,000 catch up for age > 50
Must have earned income (alimony and fees included) to contribute, unless married. Spousal IRA can contribute without working but contribution must be >= to IRA contribution of working spouse
If both partners or a single person are non-active participants in a plan, then IRA contributions are deductible (Not subject to AGI).
If one spouse is an active participant and other is not then deductible IRA’s are phased out between 218k- 228k*.
Active participants phase out
Phase Out: Single (73k-83k)* Joint (116k-136k)*
*They can still contribute but can’t deduct
RMD at age 73 or following April after 73
Exceptions to early distribution:
Death, Total/Permanent Disability, Qualified Education Expense, Medical Insurance Premiums after employment separation, First home up to 10k, substantially equal payments
Active Participation in a Plan
Either
Participation in a:
Qualified plan, SIMPLE, SEP, TSA or Union Plan (not 457’s or nongovernmental plans
or
Annual additions to a defined contribution account or benefits accrued for the tax year to a defined benefit plan.
- Include employer or employee additions and forfeitures
Roth IRA
Contributions not deductible. Must have earned income to contribute
Limit is $6,500 combined between IRA and Roth
Distributions are tax free
Phase Outs: Single (138-153) Married Joint (218-228) Married Sep (0-10)
No RMD
Roth Conversion
Does not satisfy RMD.
Non-spouse beneficiaries who inherit a qualified plan can convert to a Roth
Distribution Order - Needs to satisfy 5 year holding or 59.5 age
1. Contributions : Tax Free (Subject to early withdraw 10%)
2. Conversions : Tax Free (Subject to early withdraw 10%)
3. Earnings: Taxed at ordinary income
Roth 401(k)
Max contribution is 22,500 & 7,500 catch up, No employer contributions allowed
ABLE accounts
Contribution limit $17k
SEP IRA
Employer contributions limited to lesser of 25% of compensation ($330k max) or $66,000 (self employed use Keogh contribution limits 12.12% or 18.59%)
Easy and inexpensive to install
Must cover all employees >=21, have worked for employer 3 out of last 5 years including part time and make >$750 a year
Salary Reduction SEP (SARSEP)
Plan must have been adopted before 1997
<= 25 employees during the year
> = 50% of all eligible employees must participate
Same contribution limits as 401(k)’s and new employees can be grandfathered in
SIMPLE IRA
Employers contributions represent $ for $ MATCHING up to 3% of compensation (see below for cap)
Employer contribution is 3% up to salary cap of $516,667. = 15,500 / .03
Employee contribution limit is 15,500 + $3,500 for special catch up
For employers with <= 100 employees
Cannot maintain another qualified plan and cannot terminate plan mid year
Fully vested at all times
SIMPLE 401(k)
Employees must contribute to be eligible. Contribution limit 15,500
Employer contribution limit is 3% of salary up to 330k = 9,900
Exempt from ADP/ACP tests and top heavy requirements
Exempt from creditors
Special $3,500 catch up
403(b)
For Religious, Charitable, Medical or Educational Purposes
Contributions: $22,500. > 50 additional $7,500. >15 years of service additional $3k
Contribution + employer contribution cannot exceed lesser of 100% compensation or $66k
Limited to mutual funds or annuities
Subject to FICA and FUTA
457
Non Qualified plan. Subject to creditors
Government worker and non church controlled plans
Contribution limit: $22,500. >50 additional $7,500
Not coordinated with 401k, 403b or SARSEP (can contribute to both)
Only government plans can be rolled over
ERISA
Imposes duties, standards and prohibitions on plan fiduciaries
BD not a fiduciary
Pension Benefit Guaranty Corporation (PBGC)
Control the operation of qualified plans
Guarantee DB and cash balance plans
DB plans can be terminated voluntarily or by the PBGC under these conditions (only PBGC and initiate involuntary termination)
1. Employer in bankruptcy liquidation proceedings
2. Employer in bankruptcy reorganization proceedings
3. Employer can prove to PBGC plan termination is necessary to pay debts
Establishing a qualified plan
DB and DC plans:
Must be established within the year they wish to take the tax deduction
Safe Harbor 401(k):
Must be adopted before beginning of the plan year
Standard 401(k):
Must be adopted before first deferral can be made
Simpe 401(k):
Established anytime after 1/1 but before 10/1 of year adopted
SIMPLE IRA:
May be established up to the due date for employers tax return
SEP:
May be established until the due date of the business tax return including extensions. To establish and make contributions
Plan diversification requirement
Trustee has duty to diversify the investments to minimize large losses
DC plans must allow participants to diversify employer contributions after 3 years
Fiduciary could be sued for failing to diversify investments
UBTI for QP
Subject to income tax if UBTI > $1k. Income from LP or dividends from margined accounts are considered UBTI income
Life insurance death benefit for QP’s
DB plans: Can be upto 100x the defined benefit for the Death benefit
DC plans: Premiums paid are either (25% or 50%) of the plan benefit of the participant
Ordinary or whole life = < 50%
Term or UL = < 25%
Cash value of death benefit is taxed at ordinary income, remaining pure death benefit is tax free
Premature distributions from QP while participant is working
Allowable under 3 circumstances
- Attainment of age or years of service
- Normal retirement age reached (Money purchase pension)
- 59.5 for 401(k)
- Hardship withdrawal (medical expense, tuition, purchase of primary residence or damages to said residence, prevent eviction, funeral expense. Expense cannot exceed need)
-Financial needs test (immediate and heavy financial need)
-Resources test (participant has no other sources to satisfy
need) - DB plans allow for in service distributions for age >=62
Substantially equal payments (72t) exemption
Makes premature distributions exempt from 10% penalty if….
- Paid not less frequently than annually
- Paid without changing amount for 5 years or to 59.5 if start age to 59.5 is greater than 5 years
- Based upon life expectancy of recipient
- Based upon reasonable rate of interest
5.
Annuity distribution options for QP’s
Life: payments for participants life
Joint and Survivor: payments for participants life, and % to beneficiary if they die and bene is still living
Life annuity guaranteed: Payments made for participants life or specified period whichever is greater
Annuity certain: Specified payment for a specific period, guaranteed
QJSA: cannot be < 50% of nor > 100% of the annuity payable during joint lives of participant and spouse (pension plans)
QOSA: must be at least 50% of joint and survivor annuity, most plans are 75%. Participant can elect out of this benefit with spouse consent (pension plans)
QPSA: Preretirement death benefit for participant who dies before the starting date of QJSA (pension plans)
Rollover (specialties you know the other info)
- 457 non-governmental tax exempt plans can only be rolled into another 457, not into a qualified plan.
- Hardship distributions cannot be rolled into any other qualified plan
- RMD’s cannot be rolled into another qualified plan
- SIMPLE IRA distributions can be rolled into QP if the SIMPLE has been established for at least 2 years
IRA 60 day rulle
Can withdraw funds and reinvest within 60 days into another IRA once per year (not per IRA)
Required Minimum Distribution (RMD)
Required for people 73 or older with a
- IRA, SEP, SARSEP and Simple by April 1 of the following year
which they turned 73. - Participants still working and <5% owner of a qualified plan, government 457 or 403(b) can delay required beginning date until they retire, otherwise same rules as line 1.
Calculation Normal= previous year ending balance / distribution factor
Turned age 73 during year = ending balance of the year before he turned 73 / distribution factor
QCD’s
Direct transfer from an IRA to a qualified charity. Limited to $100k annually, amount is excluded from taxable income
Spousal Beneficiary
- Spouse rolls assets from deceased owner into their own IRA and takes distributions based on their RBD (if owner died before or after RBD)
- Keep assets in deceased IRA
- If deceased died before RBD, and take RMD’s when
deceased would have turned 73 - If deceased died after RBD, take distributions on the longer
of spouse’s single life expectancy or take payment over 5
years
- If deceased died before RBD, and take RMD’s when
In year of death if RMD hasn’t been taken the RMD for that year alone is 0
Non-spouse benficiary
Must liquidate the inherited IRA within 10 years. Unless that person is a minor or not less than 10 years younger than plan participant.
Minor’s have to wait until they are 18.
No specified beneficiary
Estate must liquidate the entire IRA by 12/31 5 years after death
QDRO (Qualified domestic relation order)
Two Rules
1. IRS may attach qualified plans to collect federal taxes owed
2. Divorce decree may make qualified plan pay divorced spouse at age 55, assets from employed spouse need to be segregated at the time of the request
Net unrealized appreciation
Always taxed at long term cap gain rate for stock held prior to distribution
Non Qualified Deferred Comp vs Qualified Deferred Comp
Non-QP vs QP
May discriminate May Not discriminate
ERISA Exempt ERISA requirements
No employer deductions Immediate employer deductions
Earnings may tax employer Earnings are tax deffered
Distribution: OI tax rate Distribution: OI tax rate
(except ISO)
Non-Qualified Deferred Comp Plans
Salary Reduction: Employee defers current comp
Salary continuation: employer contributions
Unfunded: can either be a mere promise to pay or be informally funded by life insurance, annuities or other investments because assets are owned by the company
- Life insurance: employer is owner and bene. Premiums not
deductible, employee taxed on benefits
Rabbi trust use
Used to protect deferred assets for following events but not from bankruptcy (subject to creditors)
1. Ownership may change before deferred comp benefits are
paid
2. New management may be hostile to key employee in future
3. Litigation would be too costly in the future
Employee stock options
Enable employees to buy shares of employers stock at a specified price
Funded plan if
1. If options are free transferable
2. If their a presence of substantial risk of forfeiture at the time
of contribution
Vesting: most options not exercisable for a period of time
ISO’s
ISO plan is tax favored. ISO’ must remain with person they are granted to
Only first $100,000 worth of ISOs granted is entitled to favorable treatment, anything more is an NSO
Bargain element =Exercise price - Option purchase price (basis)
Bargain element is AMT add back item.
Sale Price - Basis = LTCG and taxed at LTCG rate
Holding period requirement of for sale of option not to turn into NSO:
at least 1 year from exercise, at least 2 years from grant (EGG… 1 E 2 G)
NSO’s
Right to purchase an employers stock at a specific time and price
No holding period requirement
Bargain element is taxed at ordinary income rates
Sale must be > 1 year from exercise to receive LTCG rates
Phantom stock
Right to a cash bonus based on performance of phantom shares
Keogh Plans
Qualified retirement plan for sole proprietorship or partnerships.
Operate as DB, money purchase or profit sharing plans
Non owner-employee contribution is net schedule C income * either 12.12% (for 15%) or 18.59% (for 25%) [also for self-employed SEP contribution]
Secular Trusts
Funds are beyond reach of creditors.
Deductible to employers
Funded nonqualified deferred comp
