Retirement

Question 1

10% Penalty of early withdrawal (prior to age 59.5) is avoided in IRAs under what circumstances (but not for qualified plans)?

Answer 1

The 3 H’s:
Higher education (no matter who it is for)
Health Insurance PREMIUMS while unemployed
Home purchase - first time ($10,000 max)

Question 2

What are the contribution limits as a SE person in a SEP plan?

Answer 2

(Income - 50% of SE tax) x 20%

Question 3

IRA contributions are fully deductible no matter AGI under what circumstances?

Answer 3

When they are not an active participant in an employer-sponsored retirement plan and there has been no annual addition.

Question 4

When is a 20% withholding required?

Answer 4

When using the “traditional rollover method” of transferring from a 401k plan. Unless replaced within 60 days, if under age 59.5, it will also incur a 10% penalty for early withdrawal.

Question 5

The 5-year distribution rule applies to a non-designated beneficiary of an IRA. What 3 beneficiaries are classified as non-designated?

Answer 5

Charities
Estate
Trust

Question 6

The 10-year distribution rule applies to which IRA beneficiaries?

Answer 6

Non-spouse
See-Through Trust
Successor

Question 7

The lifetime distribution rule applies to which IRA beneficiaries?

Answer 7

Spouse
Thier Minor child (until 18, then 10-year rule applies)
Chronically Ill
Younger beneficiaries (not more than 10 years their junior)

Question 8

Where are SEP (Simplified Employee Accounts) held?

Answer 8

IRA accounts managed by participants.

Question 9

What is significant at grant of ISOs and NQSOs?

Answer 9

Not taxed at this point. AKA “strike price.” Will be used to determine “Bargain element” - needed for both ISO and NQSO.

Question 10

How are ISOs and NQSOs taxed at Exercise?

Answer 10

NQSO is W-2 taxation based on “Bargain element”
ISO is preference item for AMT based on “Bargain element”

Question 11

How are ISOs and NQSOs taxed at Sale?

Answer 11

NQSO: Sale price - Strike price = Capital gain/loss
ISO: Sale price - Strike price = Capital gain/loss (If qualifying ie: at least 1 year from exercise and 2 years from grant)
If not qualifying:
Sale price - Strike price = Ordinary income and FICA when bought and sold in same year
OR
If bought and sold in different years: Sale price - Strike price = Ordinary income and NO FICA

Question 12

How is basis determined for NQSOs?

Answer 12

NQSO: Grant/Strike price + Bargain Element

Question 13

How is “Bargain element” determined for ISOs and NQSOs?

Answer 13

Fair market value at exercise - exercise (aka grant or strike) price

Question 14

What is the maximum amount of grant allowed per year for ISOs?

Answer 14

$100,000

Question 15

What are considered Tax Advantage Plans?

Answer 15

403b
457
SEP
Simple

Question 16

What is required of beneficiaries if deceased was taking RMDs?

Answer 16

If a 5-year rule beneficiary (Estate, Charity, Trust), or 10-year rule beneficiary (non-spouse, See through trust, successor)
Must take annual RMDs and have drained by final year (5 or 10)

Question 17

What can Section 403b plans invest in?

Answer 17

Mutual funds and annuities (with any underlying asset/equity) only.

Question 18

What are the vesting requirements for a Simple IRA?

Answer 18

100% immediate vesting.

Question 19

What is the special catch up allowance under a 457(b) plan?

Answer 19

Can defer 2x the normal deferral limit (does not include over 50 catch up allowance) within the last 3 years of employment based on the normal retirement age under the plan.

Question 20

What is the special catch up allowance under a 403(b) plan?

Answer 20

Once reach 15 years employment in same school system, an additional $3,000 may be contributed.

Question 21

What are the thresholds to be considered a highly compensated employee in a Money Purchase Pension Plan?

Answer 21

5% + ownership
$330,000+ income

Question 22

In all DC plans, vesting must be what?

Answer 22

At least as generous as a 3-year cliff or 2-6 graded

Question 23

What is the maximum deductible contribution an employer may make to a DB plan (Cash Balance or Traditional)

Answer 23

The amount necessary to fund the plan’s guaranteed benefit at retirement.

Question 24

What is Section 72(t) and when is it applicable?

Answer 24

A series of substantially equal periodic payments over the 401k, 403b, or IRA’s lifetime as determined by life expectancy table. This allows for distributions prior to age 59.5 to avoid 10% for early withdrawal.

Employee must no longer work for the employer that holds the 401k or 403 to be eligible.

Question 25

What is the highest % (cost) that you will be required to pay for Cobra?

Answer 25

102% of cost

Question 25

Employer contributions are OR are not aggregated to determine annual contribution limit ($66,000)?

Answer 25

Employer contributions are NOT aggregated to determine $66,000 max threshold across multiple employers.

However, employee contributions ARE aggregated - with the exception of 457 Deferral programs.

Question 26

What rule applies to RMD at 73 for your employer’s plan, if you are still working for them at 73?

Answer 26

Employer plan ONLY can be deferred until the year you are leaving the employer.

EXCEPTION: If you have 5% ownership in the company, you cannot defer RMD in that plan.

Question 27

To calculate RMD, you divide the FMV of combined accounts as of 12/31 of the previous year by what?

Answer 27

The age factor

Question 28

What is the penalty for failure to distribute the RMD?

Answer 28

25% of the undistributed amount

Question 29

Another option to satisfy RMDs is a QCD. What is it, what is the minimum age of the donor, and maximum annual amount?

Note: ALWAYS do as a direct distribution (check) to the receiving charity. As such, it is not reported as income and is not an itemized deduction.

Answer 29

QCD - Qualified Charitable Distribution
Must come from your IRA
Cannot do until age 70.5 (the old RMD age)
Maximum is $100,000 total per person per year

Question 30

What does a NUA (Or Qualified Plan Net Unrealized Appreciation) relate to?

Answer 30

Tax treatment of employer stock (contributed by the employer) in a qualified plan (most likely a profit sharing plan since it’s 100% employer funded and 100% of it can be in company stock).

Question 31

What are the two tax treatments of a NUA (Or Qualified Plan Net Unrealized Appreciation)?

Answer 31

Ordinary income tax - based on the employer contributions of the company stock at the time of distribution

LTCG - at ANY time when sold in the future - the difference between the FMV and the employer basis at the time of distribution

Question 32

What are the time-line requirements of a NUA (Or Qualified Plan Net Unrealized Appreciation)?

Answer 32

Must be 100% distributed within 1 year as a result of a qualifying lump sum distribution

Employer stock is transferred in kind to a brokerage account

Question 33

What are the tax and penalty implications of a Qualified Domestic Relations Order (QDRO)?

Answer 33

Owner of qualified plan has no tax or penalty (other than losing money!)

Recipient IS taxed at ordinary income UNLESS they roll it over to an IRA. There is no penalty incurred. (lucky dog)

Question 34

Once an individual meets the 5 year rule, under what 3 circumstances does an individual NOT need to wait until they are 59.5 to make a qualified distribution of earnings?

Hint: HDD

Answer 34

H - First-time homebuyers (up to $10,000)
D - death of account owner
D - disability of account owner

Question 35

If a non-qualified distribution is taken from a Roth, what is the penalty for non-qualifying distributions (ie: earnings, or Roth conversions that occurred in past 5 years)

Answer 35

10%

Earnings would also be taxed at the individual’s standard rate

Conversions, although they would incur 10% if occurred within the past 5 years, would NOT incur standard tax treatment of the distribution (it was taxed at the time of the conversion)

Question 36

What is the basis for heirs when NUA has been applied?

Answer 36

The employee basis that was recognized as ordinary income at the time of the execution, plus any subsequent appreciation (heirs receive at a stepped-up basis).

Question 37

What are the self-employment tax rates?

Answer 37

12.4% Social Security
2.9% Medicare

15.3% Total (half is as employer, and half as employee)

Question 38

How much of the self-employment tax is deducted from gross income?

Answer 38

50%

Question 39

How do you calculate the self-employment tax amount?

Answer 39

Net Earnings x .9235 = Taxable amount x 15.3% Self-employment tax

92.35% is derived from 100% - 15.3%/2

Question 40

What happens if self-employment net earnings exceed the earning limit (on the tax table)?

Answer 40

Subtract net earnings from the limit; anything below the limit will be multiplied by .9235 and the result will be taxed at 15.3%.
Anything above the limit will be taxed at 2.9% (Medicare tax rate)

Question 41

How is maximum retirement plan contribution for a self employed person calculated?

Answer 41

Net Earnings - 50% of self-employment tax = income to base contribution

Adjust employEE contribution rate
If employee is 25%, employER will be 20%
otherwise:
.xx (employee rate) / 1.xx(employee rate) = employER rate
Example:
.25 / 1.25 = .20

Question 42

10% Penalty of early withdrawal (prior to age 59.5) is avoided in both IRAs and Qualified Plans under what circumstances?

Answer 42

Health cost (if greater than 7.5% of AGI)
Total and permanent disability
AND
Section 72(t) - series of substantially equal periodic payments over lifetime as determined by life expectancy table.

Question 43

If employee separates from service during or after the year of turning 55, they avoid a 10% Penalty for early withdrawal for what plans?

Answer 43

Qualified plans only