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CFP > Retirement > Flashcards

Retirement Flashcards

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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
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2
Q

Social security- reduction of benefits

A

Age 62 through FRA: benefits reduced $1 for every $2 earned over $21,240

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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
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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)
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5
Q

Types of retirement plans
(no vesting/limited admin costs)

A
  • SEP
  • SIMPLE
  • SARSEP
  • thift or savings plan
  • 403b
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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)
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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
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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
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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
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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
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11
Q

Section 415 annual additions limit

A
  • lesser of 100% of compensation or $66k
  • includes employer contributions, employee salary reductions, and plan forfeitures
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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

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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
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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
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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

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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

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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
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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
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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+)
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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)
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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
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22
Q

Highly compensated (HC) employee

A
  • greater than 5% owner or,
  • an employee earning in excess of $150,000 during the preceding year
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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

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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

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25
Q

Vesting- slow

A

Non top heavy DB plans only

5 year cliff or 3-7 year graded or 100% vested after 2 years

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26
Q

Defined contribution plans
(Integrated with social security) calculation

A

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
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27
Q

Defined benefit plans (integrated with social security) calculation

A

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
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28
Q

Multiple plans 2023 elective deferrals

A
  • 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

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29
Q

Life insurance as a funding vehicle

A

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

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30
Q

Rollovers NOT permitted

A
  • 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
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31
Q

Qualified plan early (age 59.5) 10% tax penalty exceptions

A
  • 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)
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32
Q

Required beginning date (RBD) for IRA/SEP/SARSEP/SIMPLE

A

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

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33
Q

Required beginning date (RBD) for qualified plans/403b plans/457 plans

A
  • 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
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34
Q

IRA deductibility keys

A
  • 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
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35
Q

IRA exceptions to 10% penalty for early distributions before 59.5

A
  • 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)
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36
Q

Roth IRA ordering rules for distribution

A
  1. Any contributions (not conversions) are withdrawn first
  2. Conversions are withdrawn second
  3. Earnings are withdrawn last
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37
Q

Roth IRA RMD

A
  • 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)
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38
Q

Salary reduction plan

A

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
Q

Salary continuation plan

A

No qualified deferred compensation plan

Uses employer contributions to fund ultimate benefit

40
Q

Rabbi trust

A
  • 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
Q

ISO holding period

A
  • 1 year from exercise date and 2 years from grant before selling ISO
  • violating either rule results in disqualifying disposition
42
Q

Section 457 deferred compensation plan

A
  • 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
Q

Social Security benefits- caring for a child under 16

A

You are entitled to benefits

44
Q

Target Benefit Plan- maximum retirement benefit

A

Value of the participant’s account at retirement

45
Q

Forfeitures not reallocated to remaining money purchase plan participants

A

Employer contributions would decrease

If not reallocated, then they must be used to reduce company contributions

46
Q

Increasing investment returns on a money purchase plan

A

Employer contributions would not change

Investment return affects account balance, not contributions

47
Q

In money purchase plan, higher salary employee retires and is replaced with a lower salary employee

A

Contributions would decrease

Employer contributes less for lower paid employee than for higher paid employee

48
Q

Defined Contribution plan contribution limit

A

Lesser of 100% of salary or $66,000

49
Q

Defined Benefit maximum permissible contribution

A

Actuarially determined

50
Q

Defined Benefit maximum benefit

A

$265,000

51
Q

Defined Benefit and Defined Contribution salary cap

A

$330,000

52
Q

Highly Compensated Employee (HCE)

A
  • Relates to discrimination
  • greater than 5% owner, or
  • an employee earning more than $150,000 in the preceding year
53
Q

Key Employee

A
  • 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
Q

Want to retain employees

A

Use a graded vesting schedule

55
Q

Lots of employee turnover and don’t care about retaining employees

A

Use a cliff vesting schedule

Forfeitures can be reallocated to long term employees

56
Q

Integrated profit sharing plan contribution example

A

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
Q

Interest paid on a plan loan for a principal residence deductability

A

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
Q

ADP/ACP maximum contribution

A

0-2%: + 2
2-8%: x 2

(Percentage above x salary) + $7,500 if 50+

59
Q

Deferral percentage provided

A

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
Q

Roth IRA Conversion withdrawals

A
  • 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
Q

Plan that permits maximum allowable contribution but requires mandatory annual contributions

A

Money purchase pension plan

Allows for a $66,000 contribution and subject to mandatory contribution

62
Q

Does not allow matching

A

SEPs

There are no employee contributions so there cannot be any matching

63
Q

SARSEP contribution limit

A

415 limits apply- less of 25% of compensation of $66,000

64
Q

Plan not subject to FICA and FUTA

A

SEP

since it is only funded by the employer those taxes don’t apply

65
Q

When can a SEP or SARSEP account balance be withdrawn by a participant?

A

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
Q

Uni-401k deferral and contribution

A

Allows deferral of $22,500 plus add employee profit sharing contribution cap of $66,000 plus catch up of $7,500

67
Q

Imposes extensive disclosure requirements on Defined Benefit Plans

A

ERISA

it is then filed with the IRS or DOL

68
Q

Exempt from 10% early withdrawal penalty for qualified plans

A
  • distribution due to separation from service at age 55
  • qualified plan loan
69
Q

QDROs apply to

A

Qualified plans, 403b, government 457 plans only

Do not apply to IRAs

70
Q

Merger/acquisition and rabbi trusts

A

Rabbi trust MIGHT trigger constructive receipt due to merger or acquisitions

It is not automatic

71
Q

More than $100,000 of ISOs

A

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
Q

ISO taxation

A

At exercise- no regular tax but the bargain element is AMT add back item

At sale- excess above basis is a capital gain

73
Q

NSO taxation

A

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
Q

SIMPLE salary deferrals

A

Subject to FICA and FUTA

75
Q

SIMPLE employer contributions

A

Subject to a match (3% or other options)

76
Q

SEP contributions

A

For self employed individuals the maximum contribution percentages are:
- 25% plans: 18.59%
- 15% plans: 12.12%

77
Q

Benefit of rolling deceased spouse’s qualified plan into your own qualified plan at work

A

Provides flexibility- you can use separation from service at age 55 (no 10% penalty) or wait until after retirement to take RMDs

78
Q

Assets to use to pledge as collateral for a margin loan

A

Common stock

79
Q

Secular Trust

A
  • 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
Q

When there is a substantial risk of forfeiture

A

Deferred compensation is not taxable until it is distributed to the employee

81
Q

AGI keys

A
  • 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
Q

Social security early benefit amount calculation

A
  1. (Months before FRA ➗180) ✖️FRA benefit
  2. FRA benefit - step 1 answer
83
Q

Calculating vested amount in profit sharing using graded vesting

A
  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
Q

Selling puts

A
  • shorting puts- bullish position that can provide income
  • write = sells
85
Q

Loans from a qualified plan

A

Not subject to ordinary tax or 10% penalty as long as you have the funds

$10,000 loan for accounts with $10,000

86
Q

Top heavy calculation

A

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
Q

Nondiscriminatory group life insurance tax consequences

A

Income tax applies only on the cost of insurance over $50,000 to the employee

88
Q

Solo 401k Contributions

A
  • elected deferrals
  • employer contributions
  • catch up (age 50+)
89
Q

HCE Ratio Percentage Test

A
  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
Q

NQDC plans are only available for

A

Regular C Corporations

91
Q

Under 401k hardship withdrawal rules, an employee can request an amount equal to

A
  • an amount equal to elective deferrals
  • an amount equal to vested profit sharing contributions
92
Q

Annual additions

A

Deferrals (EE $)
+ Contributions (ER $)
+ forfeitures (company $ forfeited by workers who left early)

93
Q

Keogh (HR-10 plans)

A

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

CFP (6 decks)

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