Retirement Flashcards
What is NUA?
- Tax strategy that can be used when employer stock is held in qualified plan
- Lump sum distribution of Employer stock to taxable account
− Lump sum means all must be distributed in the same year
− Other assets can be rolled to an IRA - ER stock basis is taxed at Ordinary Income at distribution
− Doesn’t have to be 100% ER stock; can do partial if desired and roll rest to IRA - NUA (FMV – basis) will lock in LTCG rates for the time that it is sold
- Amount above FMV (date of distribution) will be taxed based on holding period
- 10% penalty applies to distribution under age 59 ½ unless exception
Qualified Plan vs Non- Qualified Plan
Deferred compensation is a form of qualified or non qualified plans?
Deferred compensation is a form of non-qualified plans. Set up rabbi trust, still subject to creditors.
ER gets a tax deduction when an nonqualified plan is exercised. True or False?
True
A client being granted ISOs, grant price $0.17/share, client exercised the option, AMT bill is like 400k. AMT add back, as soon as exercise the ISO, the stock dropped. The stock is projected to go down, market is going down. What do you have your client do as soon as they can do it?
Sell the stock intentionally fails this holding period so ISO can be taxed like a NQSO, avoid AMT.
ISO cashless exercise
Date of exercise and sale is the same day, no AMT.
What can executive do with NQSO that they cannot do with ISOs?
People can gift away NQSO, they cannot gift ISOs.
ISO vs NQSO
If client A been granted ISO, on grant date value $7, strike price $10. 2 years later, exercise at $25. 1 years later sold at $45. What is the tax treatment at grant, exercise and sale?
At grant: None. At exercise: $15 AMT, not taxed. At sale= $45 – 10=$35 LTCG
If a qualified plan require age 21 and 2 yrs of service. Is it possible?
Yes, Not possible for 401(k). 100% vested immediately.
Qualified Plan Entrance requirements
If somebody meets eligibility, enroll within 6 months. 1/1 and 7/1 enrollment
Qualified Plan coverage requirements and test
Coverage: annual, cover 70%, only considers eligible EE
- Safe harbor test/coverage test: #NHC enrolled / # of NHT eligible >=70%. Does not relate to HC.
- Ratio benefits: : (#NHC enrolled / # of NHT eligible) / (# of HC enrolled/ #HCT eligible) >=70%
- Average benefits test: AB% of NHC covered / AB% of HC covered >=70%
Qualified Plan Vesting
Vesting: ERISA – no more than 7 yrs.
DB plan: 3-7 yr graded or 5 yr cliff; top heavy is 2-6 yr graded or 3 yr cliff
Cash Balance plan: 3 yr cliff ONLY
DC plan: 2-6 yr graded or 3 yr cliff
What is top heavy qualified plan?
> 60% of plan assets are for KEY employees; DC– 3%, DB – 2% (C—third letter, B— 2nd letter)
If a son owns 35% of the company, Dad works in this company salary 35k, Dad Highly Compensated Employee?
Yes
Joe, works 40 yrs FT, company this year set up a profit sharing plan and ER contributed 6k to this plan. What is Joe’s vesting percentage for this yr?
$0
Joe, works 40 yrs FT, company 30 years ago set up a 401(k) plan and ER contributed 6k to this plan this year. What is Joe’s vesting percentage for this yr?
$6k – previous credit count if the plan is old.
Jerry Jones, age 40, earnings $100,000, wants to establish a DB plan. He employes 4 ppl who’s combined salary are $60,000 and range in age from 23 to 30. Average employment period is 3.5 years. What is the best vesting schedule for Jerry’s plan: 3 yr cliff, 3-7 yr graded, 5 yr cliff, 2-6 yr graded. Which one to choose?
This is a top heavy plan — go with 2 to 6 yr graded
Which plans allow employee deferral?
401(k) plan, 403b, SIMPLE
What testing does 401(k) plan offer?
Traditional(testing) or safe Harbor(exempt for all testing)
401(k) ADP testing
look at NHC and HC’s deferral
If 401(k) plan fails the ADP test, how to correct?
Corrective distribution to HC, refund HCE as 1099-R;
QNEC(Qualified Nonelective Contribution)to the NH to bring up, the QNEC is 100% vested and goes to all eligible ppl, doesn’t matter enroll or not.
What is 401(k) safe harbor election?
3% flat non elective contribution to all eligibles;
100% $ for $ match up to 4% of pay for those ppl actually put money in the plan and 100% vested
401(k) safe harbor match – If EE puts 10%, how much will ER give?
ER give 4%
Client Joins XYZ 401(k) plan under age 50, they plugged $22,500 into the 401(k) plan in the Q1 of the year. Are they eligible immediately if they quit their job and go to ABC company 401(k). How much can they put in their 401(k) new plan?
$0. Already hit the limit for XYZ.
Client Joins XYZ 401(k) plan under age 50, they plugged $22,500 into the 401(k) plan in the Q1 of the year. Are they eligible immediately if they quit their job and go to ABC company 403(b). How much can they put in their 403(b) new plan?
$0. $22,500 for all deferral sources
Client Joins XYZ 401(k) plan under age 50, they plugged $22,500 into the 401(k) plan in the Q1 of the year. Are they eligible immediately if they quit their job and go to ABC company 457Plan. Can they contribute in 457 Plan?
Yes
What is 401(k) annual contribution limit?
Lessor of 100% of compensation or $66,000, per ER
Client Joins XYZ 401(k) plan under age 50, they plugged $22,500 into the 401(k) plan on Jan 2 of the current year. How much could XYZ ER put in? They quit their they quit their job and go to ABC company with 401(k). How much can EE and ABC contribute to the plan?
$66k-22.5k=$43,5k.
EE - $0. ER- $66k
If a person work for 5 companies, could potentially get $66k from all 5 companies. True or false?
True
Client Joins XYZ 401(k) plan under age 50, they plugged $22,500 into the 401(k) plan on Jan 2 of the current year. They quit their they quit their job and became self-employed. Making a solo IRA wouldn’t make any sense. The client could create SEP IRA, how much could contribute to the SEP IRA this yr?
$66k
Ricky makes $400,000 per year and just turned 53. His employer sponsors a 17% money purchase pension plan and a 401(k) plan with a 50% match. What is the most, in dollars, that can be deferred in this 401(k) plan by Rickey in 2023?
Start with $66,000. Money purchase pension contribution=$330,000 x 17%=$56,100. $9,900 left.
1.5 times X = $9900 X=$6,600, while the client is age 53 and has a catchup contribution of $7500
$6600 + $7500=$14,100, total is $14,100.
An employee, age 45, earnings $350,000 can have what maximum amount put in the following retirement plans: a 10% money purchase plan and a 401(k) plan with no employer match (2023).
$22,500 + $330,000x10%=$55,500
Pension vs Profit Sharing vs Other Tax Advantage Accounts
Pension vs Profit Sharing vs Other Tax Advantage Accounts
FICA paid on deferrals
PS, Other TAA
Pension vs Profit Sharing vs Other Tax Advantage Accounts
10 year averaging / Capital Gain treatment
Pension Pension, PS – Lump sum distribution strategy
Pension vs Profit Sharing vs Other Tax Advantage Accounts
Subject to NUA
Pension, PS —- Lump sum distribution strategy
Pension vs Profit Sharing vs Other Tax Advantage Accounts
> 10% of ER $$$ in ER stock
PS, Other TAA
Pension vs Profit Sharing vs Other Tax Advantage Accounts
In service withdrawals allowed
PS, other TAA
Pension vs Profit Sharing vs Other Tax Advantage Accounts
100% vesting
Other TAA
Pension vs Profit Sharing vs Other Tax Advantage Accounts
Annuities required
Pension
Pension vs Profit Sharing vs Other Tax Advantage Accounts
Annual Funding Required
Pension
Pension vs Profit Sharing vs Other Tax Advantage Accounts
20% withholding required on lump sum distribution (partial)
Pension, PS
Pension vs Profit Sharing vs Other Tax Advantage Accounts
Creditor protection
ALL
Pension vs Profit Sharing vs Other Tax Advantage Accounts
Life Insurance allowed as an investment
Pension, PS
What plans are included in Profit sharing plans?
4 Penguins Swim Every Time Near Antarctica
401(k)
Profit Sharing
Stock Bonus Plan
ESOP
New Comparability Plans
Age-based Profit Sharing Plans
What plans are included in Other Tax Advantage Accounts?
SEP
SIMPLE
Traditional IRA
Roth IRA
SARSEP
403(b) TSA TDA
What plans favors old people?
DB Plan
TB plan
Age weighted Porfit Sharing plan
WHich plan requires an actuary?
DB, CB, TB
Which plan requires PBGC insurance?
DB, CB
Pension plan always have a contribution every single year. True or false?
True
Pension plan ER money only. True or false?
True
How much can go into DB plan in a yr?
No limit. The withdrawal is limit to $265,000.
What is ESOP great in?
ESOP is really great in exit planning and liquidity planning
403(b) 15 year catch up contributions
$3000
403(b) max deferral contributions
$22,500 + $7500 (age 50) + $3000 (15 yr catchup)
SEP - qualifications, who fund, fund amount, fund date, delay funding possible, PT possible?
ER funded IRA
age 21 and employed 3 out of 5 yrs
ER money only, $66,000
Funded by 4/15, extension could delay the payment to 10/15
ER would possible have to pay SEP for all PT EE
SIMPLE IRA: qualifications, contributions; early withdrawal penalty
<100 EEs, 5k earnings to contribute
$15,500 /3500
A. 2% non elective contributions($330k).
B. Match $ for $ to 3%(no limit) ;
First 2 yrs early withdrawal penalty is 25%
What is 6%,, 10%, 25% penalty?
6% Overcontribution to an IRA
10% Normal early withdrawal penalty
25% People move money out of a SIMPLE IRA within 2 yrs; RMD
2/10/24 $6500 Contribute a Roth. While they made more money than they thought and exceeded the Roth IRA limits. What would be the consequence?
If not reclassify as a traditional IRA by next 4/15. Then the entire amount in the Roth will be subject with 6% penalty.
If IRA convert to Roth, what will happen?
Pay tax
tax contributions not deductible; Coordinate with other contributions;
Qualified distribution of Roth IRA
5yrs + 59.5/death/disabled/first home (10k)
Earnings come out tax free.
10% Penalty Exceptions
10% Penalty Exceptions (no tax)
Who is qualified for 72t?
Qualified plan if you no longer work there, needs to meet longer of 5 yrs or 59 ½.
QDRO paid to ex-spouse at age 35, subject to 10% penalty?
No tax penalty.
If client, age 61, had Roth IRA for 15 yrs. If the client withdraws all the money for Roth IRA. What is the tax and penalty consequences?
Earnings are tax free, no penalty.
Your client, single, first funds a Roth IRA when she is 59 yrs old. When she turns 61, she takes all of the funds to out to buy a Porsche for her son. What is the tax treatment of the earnings?
Ordinary income and no 10% penalty
When is NUA applies?
ER stock in a qualified plan, lump sum distribution strategy.
Client has ABC 401(k) –mutual fund $400k(basis $400k) and $100k(basis $10k) ABC stock. Client age 45 and quit. Mutual fund $400k will goes into IRA. The 100k stock goes to brokerage account, how is the tax treated in the brokerage account.
Need to pay 10k OI . The 90k NUA is tax free until sold.
Client has ABC 401(k) –mutual fund $400k(basis $400k) and $100k(basis $10k) ABC stock. Client age 45 and quit. Mutual fund $400k will goes into IRA. The 100k stock goes to brokerage account on 2/10. Sell it on 4/1 for $110,000 of the same year. What is the tax consequence?
90k LTCG, $10k STCG.
Client has ABC 401(k) –mutual fund $400k(basis $400k) and $100k(basis $10k) ABC stock. Client age 45 and quit. Mutual fund $400k will goes into IRA. The 100k stock goes to brokerage account on 2/10. Sell it on 4/1 for $110,000 of the same year. Is the brokerage account subject to 10% penalty? How much will be subject to penalty?
Only 10k basis(contribution) is subject to 10% penalty.
The client works for a 401(k) company, they died, they have appreciated stock in their 401(k). The beneficiary can elect anyway on the stock as if they were the employee when they inherited. True or False?
True
NUA - Basis, taxation on pre and post distribution
If a client with NUA dies, what is the basis to heirs? Any taxation?
NUA is income in decedent.
If holder dies, basis to heir=FMV- NUA
Which plans cannot integrate with Social security benefits?
4^3 STRES: 401(k), 403(b), 457, SIMPLE, Traditional IRA, Roth IRA, ESOP, SARSEP
Which plans can integrate with Social security benefits?
SEP
Non-qualified distribution of a Roth 401(K) Plan
Distribution on pro-rata basis
Qualified Plan Loans may not exceed
The lesser of $50,000 or ½ Vested account balance. Reduced by the highest outstanding loan balance within the previous 12 months period.
Qualified Plans Required Minimum Distribution
Age 72 Before 12/31/2022 — RMD age 72;
Age 72 after 1/1/2023—- RMD age 73.
Wayne turned 72 on 12/1/2022 – calculate his RMD, what date he will need to take it?
1st RMD by 4/1/2023; 2nd 12/31/2023
Oscar turned 72 on 1/5/2023 – calculate his RMD, what date he will need to take it?
1st RMD by 4/1/2024
Felix turned 73 on 1/10/2023 – calculate his RMD, what date he will need to take it?
1st RMD by 4/1/2023; 2nd 12/31/2023. Know he will need to continue RMDs or will need to take two in 2023 if he delayed the 2022 RMD.
Account balance on 12/31/2023 $400,000. Age 72 on 1/12/2024, age factor 26.5. Distribution required FOR 2024 ( by April 1, 2025) ?Distribution required in 2024?
Distribution required FOR 2024 ( by April 1, 2025) = $400k/ 26.5=15,094.34.
Distribution required in 2024=$0
Roth IRA Non-qualified distribution
EE is 3 years prior to normal retirement age, 457(b) max contribution= ?
$45,000.
Secular trust Characteristics
Not available to creditors; taxable immediately
Rabbi trust Characteristics
May be available to creditors; not currently taxable
