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Retirement Flashcards

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1
Q

Steps For Inflating annual need in todays dollars?

A
  1. N= # of years to retirement
  2. I/Y = Inflation Rate
  3. P/V= Today’s dollar amount
  4. PMT = 0
  5. Solve for FV
    (End Mode)
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2
Q

Steps for Lump sum needed at retirement?

A
  1. N= #of years in retirement
  2. I/Y = (1+Rate of Return)/ (1+ Inflation Rate) then - 1 and x 100
  3. PMT = FV from inflated annual needs in todays dollar
  4. FV = 0 or $ amount listed at death
  5. Solve for PV
    (Begin Mode)
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3
Q

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?

A

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)

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4
Q

What is pension maximization for retirement planning?

A

Using excess pure life payout vs joint and survivor annuity to fund a life insurance policy on pure life annuitant

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5
Q

Fully Insured Social Security

A

If worker has 40 quarters of coverage

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6
Q

Currently Insured for Social Security

A

Attained 6 quarters of coverage

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7
Q

Worker benefits qualifications?

A

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)

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8
Q

Spouse benefits of retired or disabled worker?

A

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

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9
Q

Surviving spouse benefits requirements?

A

If deceased qualified for SS and was >= 60

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10
Q

Divorced spouse benefits requirements?

A

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

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11
Q

Dependent benefits of a retired, disabled or deceased ss insured worker requirements?

A

< 19 and full time elementary or secondary school student
or
> 18 and has disability before age 22

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12
Q

Taking social security benefit before retirement age calculation

A

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

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13
Q

Working after retirement

A

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

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14
Q

Working while taking SS benefits, what amount of benefit is taxed?

A

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
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15
Q

SS disability benefits

A

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

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16
Q

SS application withdrawal time after initial claim?

A

12 months, then its locked in

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17
Q

Non-Qualified Plan Characteristics

A
  1. May Discriminate
  2. Exempt from most ERISA requirements
  3. No employer tax deductions for contributions until
    employee is taxed
  4. Plan earnings are taxable to employer
  5. Distributions taxable at ordinary income tax rates
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18
Q

Qualified Plan Characteristics

A
  1. Can’t discriminate
  2. ERISA requirements
  3. Immediate tax deduction for contribution
  4. Earnings accrue tax deffered
  5. Distributions taxable at ordinary income rates (see below)
    ~ Exceptions (401ks, ESOPs, NUA under stock bonus, 10 year
    averaging)
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19
Q

Defined Benefit Pension: Keys

A
  1. Employers want to max contributions to older employees (favors older) or older controlling employee doing it for own benefit
  2. Guaranteed retirement benefit amount
  3. Requires stable cash flow & PBGC insurance
  4. Past service credits allow
  5. Vesting schedule / exempt from creditors/ integrates with SS

*Cash balance a type of DB pension

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20
Q

Defined Contribution Plans and other retirement plans difference from DB plans?

A

Favors younger employees

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21
Q

Money Purchase Pension: Keys

A

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

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22
Q

Target Benefit Pension: Keys

A

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

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23
Q

Profit Sharing Plan: Keys

A

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

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24
Q

Stock Bonus Plan: Keys

A

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

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25
Q

ESOP: Keys

A
  1. Employers borrow money from own bank
  2. Must invest plan assets in company stock
    -Participants > 55 and 10 years of participation can diversify
    up to 50% of their account balance
  3. Cant be integrated with SS
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26
Q

401(k): Keys

A

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

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27
Q

Unit Benefit Formula vs final average

A

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)

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28
Q

Cash Balance Pension: Keys

A

Defined Benefit Plan
1. Guaranteed rate of return and contribution level
2. Less expensive DB plan

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29
Q

Qualified Plan Requirements

A

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)

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30
Q

DB Requirement

A

Same as QP requirement and

Lesser of
50 employees
or
40% of all employees or 2 employees (or one if only one)

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31
Q

HCE: Keys

A
  1. Relates to plan discrimination (i 2nd letter in each)
  2. Employee is either >5% owner or earning >$150k in preceding year
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32
Q

Key Employee: Keys

A
  1. Relates to plan vesting (e 2nd letter in each)
  2. Meets any of the requirements during the current year
    - 5% owner
    - Officer and compensation >$215k
    - >1% owner and compensation >$150k
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33
Q

Top Heavy Plan: Keys

A

> 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)

34
Q

Vesting Schedule options For Top Heavy DB & DC plans

A
  1. 3 year cliff
  2. 2 - 6 year graded or 100% with 2 year eligibility

use graded on exam

35
Q

Vesting Schedule options For Non-Top Heavy DB plans

A
  1. 5 year cliff
  2. 3 - 7 year graded or 100% with 2 year eligibility

use graded on exam

36
Q

Vesting Schedule

A

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

37
Q

Actual Deferral Percentage/Actual Contribution Percentage testing

A

NHCE HCE
0% to 2% : multiply by 2
2% to 8% : plus 2

38
Q

Control Group

A

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

39
Q

DB and DC Integration with SS and permitted disparity

A

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

40
Q

415 annual contribution limit

A

For defined contribution plans
Lesser of 100% of employees comp or $66k

415 contribution limit - Deferrals - Match- Forfeitures= max addition limit

41
Q

Max contribution limits

A

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

42
Q

Qualified plan loans

A
  1. Doesn’t exceed 50% of participants vested benefit or $50k
  2. Loan is repaid over a period up to 5 years and level installments at least quarterly
  3. Made under enforceable agreement
  4. Interest on loan is treated as consumer interest
    -unless loan is for primary residence & loan is secured by the
    residence
  5. Are permitted for 403b and TSA’s

Loans are not available for IRA, Roth, SEP and SIMPLE

43
Q

Traditional IRA

A

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

44
Q

Active Participation in a Plan

A

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

45
Q

Roth IRA

A

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

46
Q

Roth Conversion

A

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

47
Q

Roth 401(k)

A

Max contribution is 22,500 & 7,500 catch up, No employer contributions allowed

48
Q

ABLE accounts

A

Contribution limit $17k

49
Q

SEP IRA

A

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

50
Q

Salary Reduction SEP (SARSEP)

A

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

51
Q

SIMPLE IRA

A

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

52
Q

SIMPLE 401(k)

A

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

53
Q

403(b)

A

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

54
Q

457

A

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

55
Q

ERISA

A

Imposes duties, standards and prohibitions on plan fiduciaries

BD not a fiduciary

56
Q

Pension Benefit Guaranty Corporation (PBGC)

A

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

57
Q

Establishing a qualified plan

A

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

58
Q

Plan diversification requirement

A

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

59
Q

UBTI for QP

A

Subject to income tax if UBTI > $1k. Income from LP or dividends from margined accounts are considered UBTI income

60
Q

Life insurance death benefit for QP’s

A

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

61
Q

Premature distributions from QP while participant is working

A

Allowable under 3 circumstances

  1. Attainment of age or years of service
    • Normal retirement age reached (Money purchase pension)
    • 59.5 for 401(k)
  2. 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)
  3. DB plans allow for in service distributions for age >=62
62
Q

Substantially equal payments (72t) exemption

A

Makes premature distributions exempt from 10% penalty if….

  1. Paid not less frequently than annually
  2. Paid without changing amount for 5 years or to 59.5 if start age to 59.5 is greater than 5 years
  3. Based upon life expectancy of recipient
  4. Based upon reasonable rate of interest
    5.
63
Q

Annuity distribution options for QP’s

A

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)

64
Q

Rollover (specialties you know the other info)

A
  1. 457 non-governmental tax exempt plans can only be rolled into another 457, not into a qualified plan.
  2. Hardship distributions cannot be rolled into any other qualified plan
  3. RMD’s cannot be rolled into another qualified plan
  4. SIMPLE IRA distributions can be rolled into QP if the SIMPLE has been established for at least 2 years
65
Q

IRA 60 day rulle

A

Can withdraw funds and reinvest within 60 days into another IRA once per year (not per IRA)

66
Q

Required Minimum Distribution (RMD)

A

Required for people 73 or older with a

  1. IRA, SEP, SARSEP and Simple by April 1 of the following year
    which they turned 73.
  2. 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

67
Q

QCD’s

A

Direct transfer from an IRA to a qualified charity. Limited to $100k annually, amount is excluded from taxable income

68
Q

Spousal Beneficiary

A
  1. Spouse rolls assets from deceased owner into their own IRA and takes distributions based on their RBD (if owner died before or after RBD)
  2. 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

In year of death if RMD hasn’t been taken the RMD for that year alone is 0

69
Q

Non-spouse benficiary

A

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.

70
Q

No specified beneficiary

A

Estate must liquidate the entire IRA by 12/31 5 years after death

71
Q

QDRO (Qualified domestic relation order)

A

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

72
Q

Net unrealized appreciation

A

Always taxed at long term cap gain rate for stock held prior to distribution

73
Q

Non Qualified Deferred Comp vs Qualified Deferred Comp

A

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)

74
Q

Non-Qualified Deferred Comp Plans

A

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

75
Q

Rabbi trust use

A

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

76
Q

Employee stock options

A

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

77
Q

ISO’s

A

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)

78
Q

NSO’s

A

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

79
Q

Phantom stock

A

Right to a cash bonus based on performance of phantom shares

80
Q

Keogh Plans

A

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]

81
Q

Secular Trusts

A

Funds are beyond reach of creditors.

Deductible to employers

Funded nonqualified deferred comp

CFP (20 decks)

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