Retirement Flashcards
10% Penalty of early withdrawal (prior to age 59.5) is avoided in IRAs under what circumstances (but not for qualified plans)?
The 3 H’s:
Higher education (no matter who it is for)
Health Insurance PREMIUMS while unemployed
Home purchase - first time ($10,000 max)
What are the contribution limits as a SE person in a SEP plan?
(Income - 50% of SE tax) x 20%
IRA contributions are fully deductible no matter AGI under what circumstances?
When they are not an active participant in an employer-sponsored retirement plan and there has been no annual addition.
When is a 20% withholding required?
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.
The 5-year distribution rule applies to a non-designated beneficiary of an IRA. What 3 beneficiaries are classified as non-designated?
Charities
Estate
Trust
The 10-year distribution rule applies to which IRA beneficiaries?
Non-spouse
See-Through Trust
Successor
The lifetime distribution rule applies to which IRA beneficiaries?
Spouse
Thier Minor child (until 18, then 10-year rule applies)
Chronically Ill
Younger beneficiaries (not more than 10 years their junior)
Where are SEP (Simplified Employee Accounts) held?
IRA accounts managed by participants.
What is significant at grant of ISOs and NQSOs?
Not taxed at this point. AKA “strike price.” Will be used to determine “Bargain element” - needed for both ISO and NQSO.
How are ISOs and NQSOs taxed at Exercise?
NQSO is W-2 taxation based on “Bargain element”
ISO is preference item for AMT based on “Bargain element”
How are ISOs and NQSOs taxed at Sale?
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
How is basis determined for NQSOs?
NQSO: Grant/Strike price + Bargain Element
How is “Bargain element” determined for ISOs and NQSOs?
Fair market value at exercise - exercise (aka grant or strike) price
What is the maximum amount of grant allowed per year for ISOs?
$100,000
What are considered Tax Advantage Plans?
403b
457
SEP
Simple
What is required of beneficiaries if deceased was taking RMDs?
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)
What can Section 403b plans invest in?
Mutual funds and annuities (with any underlying asset/equity) only.
What are the vesting requirements for a Simple IRA?
100% immediate vesting.
What is the special catch up allowance under a 457(b) plan?
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.
What is the special catch up allowance under a 403(b) plan?
Once reach 15 years employment in same school system, an additional $3,000 may be contributed.
What are the thresholds to be considered a highly compensated employee in a Money Purchase Pension Plan?
5% + ownership
$330,000+ income
In all DC plans, vesting must be what?
At least as generous as a 3-year cliff or 2-6 graded
What is the maximum deductible contribution an employer may make to a DB plan (Cash Balance or Traditional)
The amount necessary to fund the plan’s guaranteed benefit at retirement.
What is Section 72(t) and when is it applicable?
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.
What is the highest % (cost) that you will be required to pay for Cobra?
102% of cost
Employer contributions are OR are not aggregated to determine annual contribution limit ($66,000)?
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.
What rule applies to RMD at 73 for your employer’s plan, if you are still working for them at 73?
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.
To calculate RMD, you divide the FMV of combined accounts as of 12/31 of the previous year by what?
The age factor
What is the penalty for failure to distribute the RMD?
25% of the undistributed amount
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.
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
What does a NUA (Or Qualified Plan Net Unrealized Appreciation) relate to?
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).
What are the two tax treatments of a NUA (Or Qualified Plan Net Unrealized Appreciation)?
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
What are the time-line requirements of a NUA (Or Qualified Plan Net Unrealized Appreciation)?
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
What are the tax and penalty implications of a Qualified Domestic Relations Order (QDRO)?
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)
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
H - First-time homebuyers (up to $10,000)
D - death of account owner
D - disability of account owner
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)
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)
What is the basis for heirs when NUA has been applied?
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).
What are the self-employment tax rates?
12.4% Social Security
2.9% Medicare
15.3% Total (half is as employer, and half as employee)
How much of the self-employment tax is deducted from gross income?
50%
How do you calculate the self-employment tax amount?
Net Earnings x .9235 = Taxable amount x 15.3% Self-employment tax
92.35% is derived from 100% - 15.3%/2
What happens if self-employment net earnings exceed the earning limit (on the tax table)?
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)
How is maximum retirement plan contribution for a self employed person calculated?
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
10% Penalty of early withdrawal (prior to age 59.5) is avoided in both IRAs and Qualified Plans under what circumstances?
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.
If employee separates from service during or after the year of turning 55, they avoid a 10% Penalty for early withdrawal for what plans?
Qualified plans only
