Retirement Flashcards
Retirement Planning
Needs Analysis
Step 1: Inflate the annual need in today’s dollars.
Funds needed 1st year of retirement
Step 2: Determine what lump sum is needed at the BEGINNING of retirement
Amount needed to fund
Social Security Benefits
Social Security (old age, survivor & disability - OASDI)
Medicare
Federal Unemployment
Supplemental Security Income (SSI)
Social Security Fully Insured
40 quarters
Eligible for both survivor AND retirement benefits
Social Security Currently Insured
6 quarters of coverage
Eligible for:
Lump sum death benefit
Survivor spouse’s benefit
Dependent benefit
SS Worker Benefits
Retired fully insured aged 62 or over entitled to retirement benefits
Under age 65 disabled 12mos, expected to remain disabled at least 12mos or result in death entitled to disability benefit with 5 month waiting period
SS Spouse Benefits
- Spouse of a RETIRED or DISABLED worker qualifies if meets any of the following:
- 62 or over or any age if
- Has child in care under 16
- Has child 16 and over and disabled before 22
- Spouse of DECEASED insured worker qualifies if 60 or over or any age if caring for child of deceased under age 16 or disabled before 22
- Divorced for two years, ex spouse qualifies if 62 or over and married at least 10yrs
SS Dependent Benefits
Surviving dependent, unmarried child of deceased, disabled or retired qualifies if:
- Under 19 and full time student
- 18 or over and disabled before 22
SS Lump sum death benefit
One time lump sum benefit of $255
Qualified Plans/ERISA
Vesting
Admin costs
Exempt from creditors
Integrate with social security
May NOT discriminate
Immediate tax deduction for contribution
Retirement Plans
NO vesting
Limited admin costs
MAY discriminate
No employer tax deduction for contributions until employee is taxed
Defined Contribution Plans
(Qualified plans/ERISA)
(Vesting/admin/exempt from creditors/integrate with SS)
- Money purchase PENSION
- Target benefit PENSION
- Profit Sharing
- Profit Sharing 401k
- Stock Bonus Plan
Minimum employer contribution must be no less than 3% of non key employees compensation. (C is 3rd letter; use 3%)
Factors affecting employee’s DC plan benefits
Years to retirement
Investment returns
Salary levels
Employer contributions
Forfeitures
Solo 401k
NOT subject to coverage testing and non discrimination
2 different contributions: employee elective salary referral AND employer contribution (25% of compensation) with $66,000 cap
Catch up of $7,500 permitted
412i plan
Defined benefit plan funded entirely with insurance products such as life insurance and annuities.
Qualified Plan Eligibility Requirements
Age & Service: (1) age 21 & 1yr of service (21 and one rule)
(2) 2yr service but immediately vested (2-yr/100% rule)
Year of service: 1,000 hrs within initial 12mos or 500 hrs 3 conservative years
Qualified Plan Coverage Requirements
Ratio percentage test: Must cover a percentage of NHCEs that is at least 70% of the percentage of HCEs who are covered
Average benefit test: Average benefits for all NHCEs must be at least 70% off HCEs
Highly Compensated Employees (HCEs)
A greater than 5% owner*
OR
Earn more than $150,000 in PRECEDING year
**Employees who are the spouse, parent, child or grandparent of a >5% owner is deemed to be a >5% owner
Key Employees (Key Vest)
Relates to vesting
Greater than 5% owner*
OR
Officer AND earn more than $215,000
OR
Greater than 1% owner AND earn more than $150,000
**Employees who are the spouse, parent, child or grandparent of a >5% owner is deemed to be a >5% owner
Top Heavy Plans
More than 60% of aggregate accrued benefits or account balances are allocated to key employees
Faster Vesting Schedule
Top heavy DB plans
All defined CONTRIBUTION plans
Vesting Alternatives:
100% 2yr eligibility
2-6 year grade
3 year cliff
Slower Vesting Schedule
Non top heavy DB plans ONLY
Vesting Alternatives:
100% vested 2yr eligibility
3-7 year grades
5 year cliff
ADP/ACP Testing
Compares the percentages of HCEs to those of the NHCEs. The HCEs rate must be both of the following:
Not more than 125% of the NHCE rate
Not more than 200% of the NHCE rate and not more than two percentage points greater than the NHCE rate
Short hand
NHCE HCE
Deferral 1% (x2) 2%
Deferral 2% (x2) 4%
Deferral 3% (+2) 5%
Deferral 4% (+2) 6%
Controlled Group
Parent subsidiary: One entity owns 80% of other entities
Brother sister: 5 (or fewer) owners of two or more entities own 80% or more of each entity
Affiliated Service Group: Service orgs (HAEL) that provide professional services
Employee Leasing: Employers choosing to lease employees from independent employee leasing org
Defined Benefit Plan SS integration
Excess method
Integration level: Level of compensation above which the excess contribution is made
Base benefit percentage: Plan benefit for compensation below the integration level
Excess benefit percentage: Plan benefit for compensation above the integration level
Permitted disparity: Lessor of base benefit percentage or 26.25%
Defined Contribution Plan SS Integration
Integration level: Any dollar amount up to Social Security wage base ($160,200 for 2023)
Base benefit percentage: Contribution percentage for compensation below the integration level
Excess benefit percentage: Contribution percentage for compensation above the integration level
Permitted disparity: Lessor of base benefit percentage or 5.7%
Annual Compensation Limit
Only first $330,000 of each employee’s compensation is taken into account
Elective deferrals with more than one employer
401k/403b/SIMPLE/SARSEP $22,500 + $7,500 catch up
SIMPLE and SIMPLE $15,500 + $3,500 catch up
IRA Eligibility
Any person receiving compensation can contribute
Keys to IRA deductiblity
Neither spouse is an active participant or if single person is not an active participant
Active participant status includes qualified plans, SIMPLE, SEPS, TSA and union plans NOT 457
Active participant = annual additions
Compensation for IRA purposes
Wages, salaries, tips, professional fees and bonuses
Alimony
Separate maintenance payments
Roth conversion distributions
No income tax/no penalty:
- Meet 5 year holding period
- Fails to meet 5 year holding period with special purpose
No income tax/10% penalty
- Fails to meet 5 year holding period with no special purpose
Either wait 5yrs or turn 59 1/2
Roth earnings distributions
NO income/NO penalty:
- Meet 5 year hold period with qualifies triggering event (59 1/2 or older, death, disability, 1st home buy up to $10,000)
Income tax/NO penalty:
- Meet 5 year hold period with special purposes (medical expenses, insurance prem while unemployed, birth/adoption, higher education, 72t)
Income tax/10% penalty:
- Meet 5 year hold period with NO triggering events or special purposes
- Fails to meet 5 year hold period with NO special purpose
Wait 5yrs AND turn 59 1/2
Roth 401k
Only 401k, 403b and governmental 457 may offer
ABLE Accounts (Helen)
Tax advantaged accounts for the disabled.
Contribute up to $17,000 annually
Qualified expenses not included in gross income
Disabled before 26
Keogh (HR-10)
Operates as a DB, money purchase or profit sharing plan
PBGC
Guarantees a monthly benefit for DB and cash balance plans
Unrelated Business Taxable Income UBTI
Income from a limited partnership or dividends from a margined account
Substantially equal payments 75t
- Paid not less frequently than annually and without changing the amount for the longer of 5yrs or payee reaches 59 1/2
- Based on life expectancies & rate of interest and mortality (if applicable)
Annuity Distribution Options
Life: lifetime
Joint & Survivor: lifetime and survivors lifetime
Life with Guaranteed Payments: Longer of life or guaranteed PERIOD
Annuity Certain: Guaranteed PAYMENTS
RMD Penalty
25% excise tax first year
10% second year
Withdrawals with early retirement
Retire between 55 & 59 1/2, 401k participants can withdraw directly without paying a 10% penalty
NOT available for IRAs
Unit benefit formula
Most frequently used DB formula also known as percentage of earnings per year of service.
Average compensation of $100,000 with 30 years of service with 1.5% per year of service (given). Pension $45,000 1.5% x $100,000
Loans from qualified plans
- Do not exceed lessor of 50% off vested plan or $50,000
- Repayment 5 years or less, unless for home purchase
- At least quarterly payments or entire balance due is taxable
- **Interest is NEVER deductible for key employees **
- Interest is only deductible for non-key if loan is for AND secured by primary residence
Establishing a qualified plan
- Safe harbor 401k plans generally must be adopted before the beginning of the plan year
- Standard 401k plans (with deferrals) must be established before the first deferral can be made
- New SIMPLE 401k plans must be adopted any time on or after January 1 but not later than October 1 of the year in which it is adopted
Rules for inherited IRAs
Dies before RBD
Spouse
- Rollover IRA assets to own IRA and take distributions based on own RBD
- Keep assets in IRA and take distributions based on deceased’s RBD
Non spouse
- 10yr rule
Dies after RBD
Spouse
- Rollover IRA assets to own IRA and take distributions based on own RBD
- Keep assets in IRA and take distributions based on the longer of:
1. Spouse life expectancy
2. 5yr rule
QDRO Distributions
CANNOT require the trustee to make such a cash payment to the assistant payee
ISO
ISO: Tax favored plan for compensating executives by granting options to buy company stock.
- Only first $100,000 gets favorable ISO treatment. Options granted which exceed that amount are NSOs
HOLDING REQUIREMENTS
EGGS
- 1yr from Exercise to Sell
- 2yrs from Grant to Sell
DISQUALIFYING DISPOSITIONS
- If sold **same calendar year ** as exercised subject to FICA/FUTA. If sold within 12 months (but following calendar year) of exercise subject to ordinary income **NOT ** FICA/FUTA
Phantom stock & Stock Appreciation Rights (SARS)
A child under age 18 who is employed by a parent in an unincorporated business
Excluded from social security but may be subject to federal income tax
Surviving unmarried dependent of deceased insured worker qualifies for SS if
UNDER 19 and full time student
OR
Age 18+ and disabled before age 22
Profit Sharing - Qualified Plan
Employer may contribute AND deduct up to 25% off the employee’s salary in addition to the elective deferral
SEP (Simplified Employee Pension)
Simple to install
CAN be integrated with social security
412(e)3 [or 412(i)] ERISA plan
DB plan funded entirely with insurance products such as life insurance and annuities.
Appeals to employers that have some need for life insurance.
Exception to joint life distributions (RMD)
Sole beneficiary is spouse and is more than 10 years younger can use last survivor life expectancy for slower distribution
Taxation of SS Benefits
50% taxable: Income plus half benefits > $25,000 (single) $32,000 (MFJ)
85% taxable: Income plus half benefits > $34,000 (single) $44,000 (MFJ)
Retirement Savings Credit
No credit over $73,000 MFJ
MAC CREDIT $2,000 Single/$4,000 MFJ
Annuity Distribution Options
- Life annuity: Participant’s lifetime (highest payout)
- Joint & survivor: Specified percentage paid to beneficiary
- Life with guaranteed payments: Longer of life or specified period
- Annuity certain: Certain specified amount of payments and then stops
Section 404
Employer can only deduct max 25% of all participants’ aggregate eligible compensation
