Retirement Flashcards
Who is not eligible for Social Security benefits?
- Railroad employees and their dependents (are covered by Medicare)
- Members of tribal councils
- Children under 18 employed by parents in an no incorporated business (sole prop/partnership)
- Typically taxed at the child’s own tax bracket
Social Security Eligibility: Worker
- Insured workers age 62+
- Entitled to disability benefits and has been disabled for 12 months (or expected to be). “5 month waiting period - paid in 6th month”
one time right to withdraw application if made within 12 months after they begin
Social Security Eligibility: Spouse
Worker Alive
- Spouse of retired/disabled worker & 62+ & the worker is receiving benefits
- Has child in care under 16 (15 years old)
- Has child disabled before age 22
Worker Dead
- Age 60+ (includes divorced spouse)
- Any age if child is under 16 or disabled before 22
Divorced spouses must be divorced for at least 10 years & not remarried. If Divorce spouse is 62+ and divorces for 2+ years, benefit eligible if worker is still working
Social Security Eligibility: Child
Worker must be retired, disabled, or dead:
- Under age 18 (age 17) or under 19 (age 18) and full time student
- Disabled before age 22
Loan From Qualified Retirement Plan
Watch out for questions asking for larger loan then allowed (ex. Loan for more than $50k)
- Loans cannot exceed the lesser of 50% or $50k of participants VESTED balance
- Special rule allows for participants with balances with small accounts to borrow up to $10k (assuming they have $10k)
- Loans must be paid back in 5 years (with the exception of using it to buy a home)
How are SS Benefits Calculated?
Primary Insurance Amount (PIA) - 100% of PIA is paid to worker at FRA
- Spouse or divorced spouse is entitled to their own benefit or 50% of the workers benefit
- Death = spouse gets greater of own benefits or 100% of spouses benefits
Claiming Retirement Benefits While Working (Temporary Reduction)
If you work @ FRA you are allowed to keep your full benefits; below the benefits are reduced below:
- Under FRA: reduced $1 for every $2 above $21,240 (on sheet)
- SS Benefit - $21,240 = Excess / 2 this is the reduction amount
- Year of FRA: reduced $1 for every $3 above $56,520 year in which you reach FRA (months before FRA)
Permanent Reduction to SS
1/180 * amount of months taken early = permanent reduction %
Provisional Income
Provisional Income = AGI (Income) + 1/2 SS + tax exempt Interest (municipal bond income)
50% Reduction
- Single = $25,000 (to next reduction)
- MFJ = $32,000 (to next reduction)
85% Reduction
- Single = $34,000+
- MFJ = $44,000+
SS disability insurance are subject to the same tax rules as SS benefits
Types of Plans That Favor Older Employees
Defined Benefit Plan
- Qualified plan (ERISA / PBGC)
- Guarantees a specific benefit at retirement (you get X amount)
- Need very stable cash flows (yearly contributions that are based off an actuary)
- Benefit Limit
- Company contributes whatever is needed to meet benefit (determined by actuary)
- Maximum benefit an employee can receive is the lesser of $265K or 3 highest consecutive average salary years ($330k is the max compensation taken into consideration)
- Watch out for the 3 year average being more that the $265k
- Factors affecting employer contribution
- Participants proximity to age (older employees will need larger contribution)
- Investment return assumptions (if return is low, you will have to contribute more) (sometimes lower assumptions are good if business owner wants max contribution)
- Employee turnover (forfeitures offset employer contribution)
- Salary scale assumptions (higher salary = higher contribution)
- Inflation (higher inflation, higher salaries, higher contribution)
- Unit Benefit Formula
- Most frequently used formula
- AKA percentage-of-earnings-per-year-of-service
Cash Balance Plan
- Qualified Plan (ERISA / PBGC)
- Individual accounts for each participant - employer contributes annual amount and guarantees a hypothetical rate
- Both the contribution level and hypothetical rate are guaranteed
- 3 year cliff vesting
** Target Benefit Plan (pension plan / DC plan)**
- ERISA only
- Not guaranteed benefits
- Actuary determines initial contribution amount (REMEMBER to not go above $66k per year)
- Employer tries to give a certain benefit but that is not guaranteed
- Up to 25% employer deduction
- Characteristic shared with DC plan
- Max contribution limit of $66k
- Retirement amount determined by account balance
- Employee assumes investment risk
- NO ANNUAL actuarial determination
- Forfeitures may be reallocated to participants or reduce employer contribution
Social Security Integration
Plans that CAN be integrated with Social Security
- Defined Benefit
- Cash Balance
- Money Purchase Plan
- Target Benefit
- Profit Sharing
- Stock Bonus
- SEP (watch out)
- some plans can be but are harder to such as: 401(k) regular and safe harbor (difficult without profit sharing contributions)
Plans that CAN NOT be integrated with Social Security
- ESOP
- SIMPLE IRA & 401(k)
Plans that Favor Younger Employees: Qualified
Money Purchase Pension Plan
- DC pension plan
- Fixed benefit formula (12% of compensation) - only first $330k taken into account
- Employer may deduct up to 25% of covered compensation
- Annual additions limited to lesser of $66k or 100% of compensation
- Want a stable workforce and retain key young employees
- simple to administer and explain
- stable cashflow and profit to make annual fixed contributions
Profit Sharing Plan - NEED 401(k) component for employee deferrals
- DC Plan featuring flexible employer contributions
- Employer contribution is discretionary; however, must be recurring and substantial
- Forfeitures can be used to reduce employer contributions / add to participant accounts
- Variable profits as contribution is variable
- Incentives employees to help company make a profit
- Employees have substantial time to accumulate retirement savings
- Employer can only deduct a maximum of 25% of compensation
Section 401(k) or CODA
- added to profit sharing plan for EMPLOYEE contributions
- 415 Limits - catch up limits are not included
- Subject to FICA and FUTA (opposite of employer contribution to HSA)
Safe-Harbor 401(k)
- Allows the plan to avoid ADP/ACP testing and Top Heavy Limits
- All contributions are immediately vested
- 3% non-elective
- 100% on first 3% and 50% on next 2% = 4%
- 100% on first 4%
Solo 401(k)
- No subject to coverage testing
- must only be you (you and spouse or two partners)
- Not limited by Keogh rules
- Part-time employees under 1,000 hours do not count*
Stock Bonus / ESOP Plans
- Benefits invested in employee stock (ESOP MUST)
- Appropriate when company wants to give ownership to employees
- Company has limited cash resources
- ESOP CAN NOT be integrates with SS
- Flexible contributions
- up to 25% employer deduction
- No cross testing
Hardship Withdrawls
Section 401(k) Plans
- A financial hardship is defined as immediate and heavy with no other resources reasonable available to meet this need
- Subject to 10% penalty
- Required for 401(k), 403(b), and 457(b) plans
- Boats and TV’s do not qualify for a hardship
- Medical expense, funeral costs, purchase of primary residence, qualify for casualty loss, disaster zone, etc.
Net Unrealized Appreciation (NUA)
Applies to ESOP’s or distributions of employer stock from other qualified plans
Rules:
- Must be lump sum distribution (transfer stock to brokerage account and rest of funds to IRA)
- 72(t) distribution would disqualify this transaction
- dont roll over employer stock to IRA (NUA will be lost)
- 10% penalty if under 59 1/2 or dont have a waiver
How it works:
- Basis taxed @ Ordinary Income (taxed at distribution)
- Growth in plan not matter holding period is taxed @ LTCG
- Growth outside of plan is taxed dependent on holding period
- NO CAPITAL GAIN tax until sold
NO 20% withholding if distribution is taken in stock
Watch out for S-corp question - typically they force you to take the cash as ESOP is only one shareholder
Keogh Plan (Qualified Plans for Self-Employed - Sole Prop or Partnership)
Qualified retirement plan that covers business organization that are not incorporated is called a Keogh or HR-10 plan
- Plans are Defined Benefit, Money Purchase, or Profit Sharing
- SEP plans are not Keogh; however, contribution is calculated like Keogh for business owners
- 15% plan = 12.12% and 25% plan = 18.59%
- these are just for the owners
Plans that Favor Younger Employees: Not Qualified
Simplified Employee Pension (SEP)
- Contributions are made to employees IRA
- Provides Employer contributions only
- Not required to make contribution
- Vested immediately
- Form 5305-SEP
Employer Contributions
- Limited to 25% of compensation up to $330k or $66k
- Self-employed owners are subject to Keogh percentages
Eligibility Requirements
- Must cover all employees:
- Age 21
- 3/5 years of service (part-time employees count)
- $750 or more in salary
watch our for numerous returning employees
Savings Incentive Match Plan for Employees (SIMPLE)
- Term SIMPLE refers to the SIMPLE IRA plan
- Lower elective deferrals (see tax tables)
- No discrimination testing
- Salary deferrals are subject to FICA and FUTA
- 100 or fewer employees
- Can not maintain any other plan at same time as SIMPLE
-SIMPLE 401(k) is an ERISA plan exempt from creditors
Employer Contributions
- Typically dollar for dollar up to 3%
- Special 1% if done no more than 2 in 5 years
- 2% Non-Elective
- Matching contribution are mandatory and no salary cap
Who is eligible?
- plan must include any employee who received $5,000 in compensation during any of the preceding 2 years and is expected this year
Vesting / Distributions
- Immediately vested (IRA)
- Restrictions to typically IRA distributions apply
- 10% penalty is increased to 25% in first two years of participation
Tax Deferred Annuity Plan (TDA) / Tax-Sheltered Annuity Plan (TSA) / 403(b)
- 501(c)(3) - most non-profit institutions, churches, hospitals, private schools, and colleges
- Salary reductions subject to FICA and FUTA
- When employers contribute, subject to ERISA non-discrimination rules
-Special catch-up contribution of $3,000 for employees with 15 years of service (can take both catch up contributions)
Integration with Social Security
5.7%
Multiple Plan Rules
Employee Contribution = Always aggregated (except if there is a 457 plan) with more than one employer
- 415 limits apply across the board
- If have SIMPLE and 401(k)/403(b)/Other = $22,500 + Catch Up
- If have SIMPLE and SIMPLE = limited to $15,500 (SIMPLE 401(k))
Employer Contributions:
- If employers are related = $66k
- If employers are not related = separate annual additions
Controlled Groups / Related Employers
Parent - Subsidiary: Parent company owns at least 80% or more of other entities
Brother - Sister: Five (or fewer) owners of two or more entities own 80% or more of other entities
Affiliated Service Group: a service organization and a professional organization
Vesting
Most common vesting schedule is the 2-through-6 year graded (also 3 year cliff)
- Remember the first year they are not eligible
- Vesting is cumulative
Life Insurance in Retirement Plans
Life Insurance must be merely incidental to retirement plans and must meet the following tests:
Defined Contribution: aggregate premiums paid for a participants death benefit must at all times be below the below % of the cost of the plan
- Whole Life = 50%
- Universal/Term = 25%
Defined Benefit: Death benefit can be no more than 100 times the expected monthly benefit (if monthly benefit is $4k than it can’t be more than $400k)
412(e)3 or 412(i) = defined benefit plans funded with insurance (fully funded). Can use the low rate as the investment rate.
Unrelated Business Taxable Income (UBTI)
UBIT = taxable income generated by a tax-exempt entity by means of passive activities
- UBTI in excess of $1,000 annually becomes currently taxable to the qualified plan or IRA
- Plan considering an investment in a passive activity such as a limited partnership
- Real estate partnerships can also be a problem
Distributions From Qualified Retirement Plans
Participant receives distribution check directly: 20% withholding and sent to the IRS
- Distribution remains tax deferred if rolled over into IRA within 60 days
- Exceptions are 72(t) & RMD’s
- Even if you are able to roll the money out with not penalty (Spouse taking a lump sum from deceased partners plan)
Direct Rollover (Trustee-to-Trustee Transfer): NO 20% withholding (check made payable to institution not individual)
Multiple Rollovers
- Rollover from qualified plan to IRA does not count
- 1 60 day IRA rollover every 12 months (excess taxed)
- Unlimited direct transfers
- Multiple IRA’s are look at as one
Must take the same property that you contribute (Cash for Cash)
Substantially Equal Periodic Payments (72t)
Allows for substantially equal periodic payments out of retirement account before 59 1/2 without 10% penalty
Rules:
- Can not modify during this time (exception is moving from annuity/amortization method to RMD or Death)
- Penalty tax that would have been imposed on all payment + Interest occurs in year of modification
- The 10% penalty is only on payments before 59 1/2 + Interest
- Take these payments for the greater of 5 years or 59 1/2
Required Beginning Date (RBD) / Required Minimum Distributions
Qualified Plans:
- Can wait until retired if still working 73+
- If 5% or more owner, need to take April 1st year after turning 73
- Subsequent distributions must be made 12/31 of that year as well
IRA’s / SIMPLE’s / SEP’s
- Must take April 1st year following attaining age 73 and subsequent distribution 12/31 of the same year
Use balance at the beginning of the year (or previous year) - Ex. Balance at the beginning of year turning 73 divided by 73 divisor
25% penalty on missed distributions unless it is corrected within 2 years and it is dropped down to 10%
Inherited IRA Options
Inherited Beneficiary: Spouse
- Roll over assets into own IRA and take distributions based on own life expectancy (stretch)
- Keep assets in the original IRA and take distributions at their RBD, recalculated for your life expectancy.
**Inherited Beneficiary: Disabled Person / Chronically Ill / Non-Spouse less than 10 years younger / Minor Dependent
- Roll into an inherited IRA and deplete account based on their life expectancy (-1 rule), following the year after death
- MINOR CHILDREN: deplete account based on life expectancy until age of majority and then have 10 years
ALL OTHER BENEFICIARIES
- Must deplete account no later than 12/31 the year of the 10th anniversary after death
NO Beneficiary = 5 year clock starting year after death
Joint Life Expectancy IRA
If spouse is more than 10 years younger you can elect a joint life distribution divisor
Qualified Joint and Survivor Annuity (QJSA)
Any benefit distributed by a qualified pension plan (all 4) must be in the form of a QJSA unless the employees spouse waives their right
Pension plans require spousal consent for any distribution or change in beneficiary
Qualified Domestic Relations Order (QDRO)
Qualified plan included 403(b) and 457 must provide that retirement benefits are can not be assigned, alienated, or subject to garnishment, unless:
- Pay federal taxes
- Pay a spouse in accordance with a QDRO
QDRO can not require trustee to distribute if it goes against the plan documents (must be set aside in another account)
- Cash distributions can only be made at the earliest time they would be permitted under plan provisions
No 10% penalty
Distribution taxes to the participant:
- Spouse = no tax and no penalty
- Child or dependent = tax but no penalty
- Other beneficiary = tax and 10% penalty
Traditional IRA: Rules
- Need EARNED income to contribute (can not just assume earned income if the question gives AGI or just say income)
- Bonus, tips, professional fees, alimony before 2019, and separate-maintenance payments before 2019 are considered earned income
- Contribution limit = lesser of $6,500 of 100% of earned income | $1,000 catch up when 50+ before end of tax year
- Non-Working spouses can contribute based on other spouse earned income (more than what is already contributed)
- Active Participation on another note card
- No loans are permitted / also can not pledge loan
- US minted gold coins are allowed
- No annuities
Traditional IRA: Active Participation
Active Participant: $0.01 cent is contributed to a retirement plan (employee deferral, employer deferral, or forfeiture)**
- 457 Plans DO NOT count
Deductible Contributions
- Neither spouse is a participant and has enough earned income
Partially Deductible Contribution
- One or both spouses is covered by retirement plan (not 457) and under or in the middle of the phaseout / has earned income
- Two different phaseouts one for spouse covered and a spousal IRA phaseout
Not a Deductible Contribution
- One or both spouses covered by retirement plan (not 457) and over phaseout for both / does not have earned income
Roth IRA
Phaseouts always apply & need EARNED income as well
- Roth phaseouts are dependent on AGI only not Active Participation
- Contributions are NOT deductible
- Qualified distribution are tax free
- Non-working spouse may also contribute to a Roth IRA
- No RMD’s @ 73
Roth 401(k)
Participants with plans that have a Roth feature can designate all or a portion of their deferrals to Roth source
- No income restrictions with 401(k), 403(b), and 457
Inherited Roth IRA RMD’s
- Normally Roth IRA’s are not subject to RMD rules
-
Inherited Roth’s have the following RMD rules
- Must be distributed within ten years of owners death (tax free)
- Surviving spouse can treat the same as regular IRA (Keep in Roth IRA and take distributions when decedent would have been 73 or roll it into their own and don’t have to take distributions)
Non-Qualified Deferred Compensation
Employer retirement savings account not subject to the tax and labor law (ERISA)
- May discriminate (unlike in an ERISA plan)
- Exempt from most ERISA requirements
- No tax deductions for contributions until employee is taxed
- Fund earnings taxable to employer (annuities or capital gains) - this is why life insurance is used
- Distribution taxable at ordinary income rates
When are NQ plans used?
- When employer wants to provide additional benefits to key employee already contributing max amount in plan (recruit & retain)
Fund vs. Unfunded (Informally Funded) NQ Plans
Unfunded = Assets are still owned by the company and subject to the creditors of the company
- May be funded with life insurance or assets on the balance sheet
- No tax deductions for contributions until the employee is taxed (constructive receipt or direct economic benefit)
Funded = Employee can freely transfer interest or no substantial risk of forfeiture at the time the contribution to the plan is made
- Substantial Risk of Forfeiture:
- Dependent on the employee not having right to assets for a time period of 5 years
- If the employee is part of the family of the owner or officers then there probably is not substantial risk of forfeiture
Informal Funding with Life Insurance
- Employers often fund NQ plans with life insurance (employee has not rights or security in the policy)
- Policy owned by company and premiums not deductible
Rabbi Trust
Assets in a Rabbi Trust must be available to all general creditors of the company if the company files for bankruptcy or becomes insolvent
Participants must not have greater rights than unsecured creditors
Protected from change in company ownership (pick Rabbi Trust when questions talk about mergers, acquisitions, or change of company ownership
The trust does not need to be funded prior to constructive receipt
The trust is irrevocable, it can not go back to the company once funded
Incentive Stock Options (ISO) / Non-Qualified Stock Options (NSO)
ISO/NSO
|——OI————|—STCG/LTCG—|
|———————|———————|
Grant Exercise Sale
AMT Bargain
|———-Long Term Gain————|
ISO Rules
- Tax favored plan for executives to buy company stock
- Only the first $100k per year is eligible for ISO treatment - excess is treated as NSO
- Corporation does not receive a deduction
- Not deferred comp or qualified plans
- Twp big differences (dont get OI tax until sold for ISO where NSO is OI when exercised & LTCG treatment on whole position)
- Gifts turn ISO to NSO but death inheritance allow it to keep its character
- Must hold 1 year from exercise and 2 years from grant
Does a corporation get a deduction?
- No for ISO and Yes for NSO
FICA/FUTA
- Grant violation = NO FICA/FUTA
- Exercise violation = YES FICA/FUTA
Oportune time to exercise option is January 2nd to have full year to figure out if you want to hold or sell - watching out for AMT
Restricted Stock Units
- No limits in amount of grants or who they are given to
- RSU’s are treated as compensation (subject to FICA/FUTA)
- Subject to capital gains but not capital loss
- Taxable when it becomes vested (no longer subject to substantial risk of forfeiture)
- 83(i) allows employees to defer taxation for five years after the stock vests (qualified equity grants)
Section 457 Plans
- Governmental plans allow everyone | Non-Governmental are limited to highly compensated (top hat plant - operates on top of 403(b))
- Governmental has catch ups | Non-Governmental has NO catch ups
- Governmental can be rolled into traditional IRA tax free | Non-Governmental CAN NOT roll into traditional IRA
- Only Non-Governmental to Non-Governmental
- NOT aggregated with qualified plans
- FICA taxed
- RMD’s and QDRO rules apply
Thrift Savings Plan
Federal Law Enforcement Officers can withdraw from plain without 10% penalty as long as they separate from service during the year in which they turn 50 or later
Exceptions to 10% Penalty: Qualified Plan & IRA
Both IRA & Qualified
- 59 1/2
- Death
- Disability
- 72(t)
- $5,000 Birth & Adoption
- Medical Bills over 7.5% of AGI
- Terminal Illness
- Presidentially Declared Disaster
IRA Only
- First Time Home Purchase $10,000
- Qualified Education Expenses
- Health Insurance after 12 Weeks of Unemployment
Qualified Only
- QDRO
- Separation From Service at 55 or Later
Summary Plan Document
Document must be given to participants when they are eligible to partcipate in the plan. This document includes:
- When beneficiaries will receive benefits
- How and when employees will become eligible
- Contributions to the plan
- How long it takes to become vested
- When are employees eligible to recieve benefits
- filing claims for benefits
- Rights of the participant
- Admin expenses
Time Horizon Questions
- 6-7 years is long enough for stock investment on the exam
- 4 year time horizon can have phatom income and still be good
