Retirement Flashcards
1
Q
Employment categories not covered by social security
A
- federal employees who have been continuously employed since before 1984
- some Americans working abroad
- student nurses and students working for college or college club
- railroad employees
- a child, under age 18, who is employed by a parents in an unincorporated business
- ministers, members of religious orders and Christian Science practitioners if they claim an exemption
- members of tribal councils
2
Q
Social security- reduction of benefits
A
Age 62 through FRA: benefits reduced $1 for every $2 earned over $21,240
3
Q
Social Security taxation
A
- must include muni bond income to calculate MAGI
- if income (MAGI) plus 1/2 of social security benefits is:
1. Above $25k for a single taxpayer, then 50% of the total social security is included in income
2. Above $44k for MFJ, then 85% of the total social security is included in income
4
Q
Types of qualified plans/ERISA
(vesting/admin costs/exempt from creditors/integrate with social security)
A
- defined benefit
- cash balance
- money purchase
- target benefit
- profit sharing
- profit sharing 401k
- stock bonus
- ESOP (not integrated with social security or cross tested)
5
Q
Types of retirement plans
(no vesting/limited admin costs)
A
- SEP
- SIMPLE
- SARSEP
- thift or savings plan
- 403b
6
Q
Defined benefit
A
Qualified plan
- favors older employees/owner (50+)
- certain retirement benefit; max $265k meet a specific retirement objective
- company must have very stable cash flow
- past service credits allowed
- forfeitures must be applied to reduce employer contributions
- PBGC insured (along with cash balance plan)
7
Q
Money purchase
A
Qualified plan
- up to 25% employer deduction
- fixed contributions- need stable cash flow
- maximum annual contribution: lesser of 100% of salary or $66k
8
Q
Target benefit
A
Qualified plan
- up to 25% employer deduction
- fixed contributions- need stable cash flow
- maximum annual contribution: lesser of 100% of salary or $66k
- favors older workers
9
Q
Profit sharing
A
Qualified plan
- up to 25% employer deduction
- flexible contributions- must be recurring and substantial
- maximum annual contribution: lesser of 100% of salary or $66k
- can have 401k provisions
- SIMPLE 401k exempt from creditors
10
Q
Section 401k plan
A
- qualified profit sharing or stock bonus plan that allows plan participants to defer salary into the plan
- max $22,500 deferral for participants under 50 (subject to FICA)
- additional $7,500 catch up for age 50 and over
11
Q
Section 415 annual additions limit
A
- lesser of 100% of compensation or $66k
- includes employer contributions, employee salary reductions, and plan forfeitures
12
Q
Safe harbor nondiscrimination
A
Automatically satisfies the nondiscrimination tests involving highly compensated employees (HCE) with either an employer matching contributions or a nonelective contribution
13
Q
Safe harbor match/vesting
A
- the statutory contribution using a match is $1/$1 on the first 3% employee deferral and $0.50/$1 on the next 2% employee deferral
- if the employer chooses to use the nonelective deferral method, the employer must contribute 3% of all eligible employees’ compensation regardless of whether the employee is deferring or not
- employer contributions must be immediately vested
14
Q
Stock bonus/ESOP
A
Qualified plan
Qualified plan
- up to 25% employer deduction
- flexible contributions
- maximum annual contribution: lesser of 100% of salary or $66k
- 100% of contributions can be invested in company stock
- ESOP cannot be integrated with social security or cross tested
15
Q
Net unrealized appreciation
(NUA)
A
Ex:
Stock is contributed to a retirement plan with a basis of $20k. Stock is distributed at retirement with a market value of $200k. The NUA is $180k and it is not taxable until the employee sells the stock but the basis ($20k) is taxable now as ordinary income.
The NUA (180k) is always LTCG. If the client sells the stock for $230k the extra gain ($30k) is either STCG or LTCG depending on the holding period after distributed at retirement
16
Q
Keogh contribution
A
- only for sole proprietors and partnerships
- self employment tax must be computed and deduction of 1/2 of the self-employment tax must be taken before determining the Keogh deduction
shortcut:
- if contributing 15%- multiply by 12.12% of net earnings
- if contributing 25%- multiply by 18.59% of net earnings
17
Q
SIMPLE plan
A
- fewer than 100 employees
- employer cannot maintain any other plan
- participants fully vested
- easy to administer and funded by employee salary reductions and an employer match
18
Q
SEP
(Simplified employee pension)
A
- no salary deferrals- employer contributions only
- up to 25% contributions for owner (W-2)/treated like Keogh contributions for self-employed
- maximum of $66k
- account immediately vested
- can be integrated with social security
- special eligibility:
- 21+ years old
- paid at least $750
- worked 3 out of 5 prior years
19
Q
Taxed-Deferred Annuity (TDA)/ Tax-Sheltered Annuity (TSA)/403b
A
- for 501(c)(b) organizations and public schools
- subject to ERISA only if employer contributes
- salary reduction limit up to $22,500 (plus $7,500 if 50+)
20
Q
IRA keys
(SIMPLE/SEP/SARSEP)
A
- no loans
- no life insurance
- immediately vested
- may not be creditor protected (state specific)
- 59.5 not 55 for no 10% penalty
- must take RMDs at 73 (even if not an owner)
21
Q
Age and service rules- qualified plans
A
- max age and service are 21 and one year of service (21 and one rule)
- special provisions allows up to 2 years service requirement but then employee is immediately vested (2 year/100%)
- year of service is 1,000 hours (includes vacation, holiday and sick time) or 500 hours and worked for the company for 3 years
22
Q
Highly compensated (HC) employee
A
- greater than 5% owner or,
- an employee earning in excess of $150,000 during the preceding year
23
Q
Key employee
A
An individual is a key employee if at any time during the current year he/she has been one of the following:
- a greater than 5% owner, or
- an officer and compensation > $215,000, or
- greater than a 1% ownership and compensation > $150,000
24
Q
Vesting- fast
A
DB top heavy plans and all DC plans
3 year cliff or 2-6 year graded or 100% vested after 2 years
Get your money faster as the employee
25
Vesting- slow
Non top heavy DB plans only
5 year cliff or 3-7 year graded or 100% vested after 2 years
26
Defined contribution plans
(Integrated with social security) calculation
Base % + permitted disparity = excess %
- Base%- DC plan contribution for compensation below integration level
- Permitted disparity- lesser of base% or 5.7%
- excess%- DC plan contribution for compensation above integration level
27
Defined benefit plans (integrated with social security) calculation
Base % + permitted disparity = excess %
- Base%- DB plan contribution for compensation below integration level
- Permitted disparity- lesser of base% or 26.25%
- excess%- DB plan contribution for compensation above integration level
28
Multiple plans 2023 elective deferrals
- elective deferrals- more than one employer
- elective deferrals to multiple plans are always aggregated
- 401k/403b/SIMPLE/SARSEP- $22,500 + catch up of $7,500
- SIMPLE & other SIMPLE- $15,500 + catch up of $3,500
457 plans are not part of aggregated amounts
29
Life insurance as a funding vehicle
according to treasury regulations, life insurance benefits must be merely “incidental” to the primary purpose of the plan. If the amount of insurance meets either of the following tests it’s considered incidental:
1. Aggregate premiums paid for participants- insured death benefit are all times less than the following percentages of plan costs:
- ordinary life: 50%
- term: 25%
- universal life: 25%
2. Participant’s insured death benefit must be no more than 100 times the expected monthly benefit. DB plans typically use the “100 times” limit
30
Rollovers NOT permitted
- transfer to another 457 plan remain the only option for non-government tax exempt organizations
- hardship distributions cannot be rolled into any other qualified plan
- RMDs
31
Qualified plan early (age 59.5) 10% tax penalty exceptions
- death
- disability
- substantially equal periodic payments following separation from service
- distribution following separation from service at age 55
- distribution in accordance with QDRO (to any alternative payee)
- medical expenses in excess of 7.5% of AGI or health insurance cost while unemployed
- distribution to pay insurance premium after separation from employment
- $5,000 withdrawal for birth/adoption of child
- federal declared disaster (limited)
32
Required beginning date (RBD) for IRA/SEP/SARSEP/SIMPLE
April 1 of the year following the year in which the covered individual strains age 73
Subsequent distributions must be made by December 31 of each year thereafter
33
Required beginning date (RBD) for qualified plans/403b plans/457 plans
- with the exception of 5% owners, is the later of April 1 following the year in which the individual attains 73 or retired
- subsequent distributions must be made by December 31 of each year thereafter
- 5% owners RBD is the same as IRA/SEP RBD
34
IRA deductibility keys
- if neither spouse (or single person) is an active participant in an employee plan, the IRA is deductible. Includes almost all plans except 457 plans
- if one spouse is an active participant, the other spouse (not active) can do a deductible IRA if combined AGI is less than $218k-$228k
- if both spouses are active, AGI limit applies- $73k-$83k (single) and $116k-$136k (married)
- activity that results in active status: annual additions to a DC account or benefits accrued to a DB plan
35
IRA exceptions to 10% penalty for early distributions before 59.5
- death
- substantially equal payments
- disability
- first home expense up to $10,000
- qualified education expenses
- medical expenses greater than 7.5%
- distribution used to pay insurance premium after separate from employment (must receive unemployment compensation for 12 weeks)
- $5,000 withdrawal for birth/adoption of child
- federally declared disaster (limited)
36
Roth IRA ordering rules for distribution
1. Any contributions (not conversions) are withdrawn first
2. Conversions are withdrawn second
3. Earnings are withdrawn last
37
Roth IRA RMD
- distributed within 5 years of owner’s death, or
- distributed over 10 years (stretch eliminated)
- where sole beneficiary is the owner’s surviving spouse, the spouse may delay distributions until the Roth owner would have reached age 73 or may treat Roth as his/her own (roll it into his/her Roth)
38
Salary reduction plan
Non qualified deferred compensation plan
- uses some portion of employee’s current compensation to fund the ultimate compensation benefit
- also called pure deferred compensation
39
Salary continuation plan
No qualified deferred compensation plan
Uses employer contributions to fund ultimate benefit
40
Rabbi trust
- key words: merger, acquisition, or change of ownership
- assets in rabbi trust are available for company’s credits
- fear that ownership/‘management may change before deferred compensation is paid
41
ISO holding period
- 1 year from exercise date and 2 years from grant before selling ISO
- violating either rule results in disqualifying disposition
42
Section 457 deferred compensation plan
- nonqualified deferred compensation plans of government agencies and non-church controlled tax exempt organizations
- deferral limited to $22,500 or 100% of compensation
- catch up of $7,500 for those age 50+ only for government plans (no catch up for non-government plans)
- salary federally not aggregated with other plans (401k, etc.)
- nongovernment plans can only be rolled into another 457 plan
43
Social Security benefits- caring for a child under 16
You are entitled to benefits
44
Target Benefit Plan- maximum retirement benefit
Value of the participant’s account at retirement
45
Forfeitures not reallocated to remaining money purchase plan participants
Employer contributions would decrease
If not reallocated, then they must be used to reduce company contributions
46
Increasing investment returns on a money purchase plan
Employer contributions would not change
Investment return affects account balance, not contributions
47
In money purchase plan, higher salary employee retires and is replaced with a lower salary employee
Contributions would decrease
Employer contributes less for lower paid employee than for higher paid employee
48
Defined Contribution plan contribution limit
Lesser of 100% of salary or $66,000
49
Defined Benefit maximum permissible contribution
Actuarially determined
50
Defined Benefit maximum benefit
$265,000
51
Defined Benefit and Defined Contribution salary cap
$330,000
52
Highly Compensated Employee (HCE)
- Relates to discrimination
- greater than 5% owner, or
- an employee earning more than $150,000 in the preceding year
53
Key Employee
- relates to vesting
- greater than 5% owner
- an officer and has compensation greater than $215,000
- greater than 1% owner and compensation greater than $150,000
54
Want to retain employees
Use a graded vesting schedule
55
Lots of employee turnover and don’t care about retaining employees
Use a cliff vesting schedule
Forfeitures can be reallocated to long term employees
56
Integrated profit sharing plan contribution example
Dale earns $180,000. The plan’s integration level is $160,200 with base contribution of 10% and excess contribution of 15.7%. What amount will be contributed to her account this year?
$160,200 x 10% = $16,020
($180,000 - $160,200) x 15.7% = $3,108.60
$16,020 + $3,108.60 = $19,128.60
57
Interest paid on a plan loan for a principal residence deductability
Only deductible if:
1. The loan is secure by the residence for which the loan is made, and
2. The participant is not a key employee
58
ADP/ACP maximum contribution
0-2%: + 2
2-8%: x 2
(Percentage above x salary) + $7,500 if 50+
59
Deferral percentage provided
If a plan only allows for a specified deferral percentage, that is what you are allowed to do. Not the $22,500
Ex: plan allows 6% deferral. You would do compensation x 6% not use the $22,500
60
Roth IRA Conversion withdrawals
- if conversion value is withdrawn before 5 years, it will be subject to the 10% penalty
- when converted, taxes were paid so it is not subject to income tax
- there are no conversion penalty
61
Plan that permits maximum allowable contribution but requires mandatory annual contributions
Money purchase pension plan
Allows for a $66,000 contribution and subject to mandatory contribution
62
Does not allow matching
SEPs
There are no employee contributions so there cannot be any matching
63
SARSEP contribution limit
415 limits apply- less of 25% of compensation of $66,000
64
Plan not subject to FICA and FUTA
SEP
since it is only funded by the employer those taxes don’t apply
65
When can a SEP or SARSEP account balance be withdrawn by a participant?
Anytime
As IRA arrangements, participants must be given the opportunity to withdraw the account balance at any time. Penalties may apply
This applies to all IRA accounts
66
Uni-401k deferral and contribution
Allows deferral of $22,500 plus add employee profit sharing contribution cap of $66,000 plus catch up of $7,500
67
Imposes extensive disclosure requirements on Defined Benefit Plans
ERISA
it is then filed with the IRS or DOL
68
Exempt from 10% early withdrawal penalty for qualified plans
- distribution due to separation from service at age 55
- qualified plan loan
69
QDROs apply to
Qualified plans, 403b, government 457 plans only
Do not apply to IRAs
70
Merger/acquisition and rabbi trusts
Rabbi trust MIGHT trigger constructive receipt due to merger or acquisitions
It is not automatic
71
More than $100,000 of ISOs
If more than $100,000 of ISOs that vest in the same year are granted, only the first $100,000 are treated as ISOs and the rest are NSOs
72
ISO taxation
At exercise- no regular tax but the bargain element is AMT add back item
At sale- excess above basis is a capital gain
73
NSO taxation
At exercise- the certain element (exercise - basis) is taxable at ordinary income tax rates
At sale- excess above basis (now exercise price) is capital gain
74
SIMPLE salary deferrals
Subject to FICA and FUTA
75
SIMPLE employer contributions
Subject to a match (3% or other options)
76
SEP contributions
For self employed individuals the maximum contribution percentages are:
- 25% plans: 18.59%
- 15% plans: 12.12%
77
Benefit of rolling deceased spouse’s qualified plan into your own qualified plan at work
Provides flexibility- you can use separation from service at age 55 (no 10% penalty) or wait until after retirement to take RMDs
78
Assets to use to pledge as collateral for a margin loan
Common stock
79
Secular Trust
- deductible in contribution year by the employee
- irrevocable (funded)
- not subject of the company’s creditors
- can be funded with various investments including variable annuities
80
When there is a substantial risk of forfeiture
Deferred compensation is not taxable until it is distributed to the employee
81
AGI keys
- if MFS, allows only 1/2 of capital losses
- pre 2019 divorces, can deduct premium for life insurance when owner/beneficiary is payee spouse but payor spouse pays premium and policy is on their life
82
Social security early benefit amount calculation
1. (Months before FRA ➗180) ✖️FRA benefit
2. FRA benefit - step 1 answer
83
Calculating vested amount in profit sharing using graded vesting
1. Add up years of eligible income (usually need 1 year of eligibility to participate) = eligible earnings
2. Eligible earnings ✖️ company contribution percentage
3. Step 2 answer x vesting percentage
84
Selling puts
- shorting puts- bullish position that can provide income
- write = sells
85
Loans from a qualified plan
Not subject to ordinary tax or 10% penalty as long as you have the funds
$10,000 loan for accounts with $10,000
86
Top heavy calculation
Top heavy employees ➗ rest of employees
- rest of employees does not include excluded employees. It does include top heavy
- top heavy threshold is 60%
87
Nondiscriminatory group life insurance tax consequences
Income tax applies only on the cost of insurance over $50,000 to the employee
88
Solo 401k Contributions
- elected deferrals
- employer contributions
- catch up (age 50+)
89
HCE Ratio Percentage Test
1. 70% ✖️ covered HCE % = included
2. 100 - step 1 answer = NHCE excluded
Ex: plan covers 50% of HCE. What percentage can be excluded?
1. 70% ✖️50% = 35% included
2. 100% - 35% = 65% excluded
90
NQDC plans are only available for
Regular C Corporations
91
Under 401k hardship withdrawal rules, an employee can request an amount equal to
- an amount equal to elective deferrals
- an amount equal to vested profit sharing contributions
92
Annual additions
Deferrals (EE $)
+ Contributions (ER $)
+ forfeitures (company $ forfeited by workers who left early)
93
Keogh (HR-10 plans)
Cover business organizations that are NOT incorporated (sole proprietorships and partnerships)
Special contribution limits for owner employees
Keogh itself isn’t a complete answer
For DB, money purchase, and profit sharing plans
- no calculations for DBs
- 12.12% or 18.59% for others
