Retirement Flashcards
needs analysis retirement steps
Step 1: inflate the annual need in todays’ dollars
Step 2: determine what lump sum is needed at the beginning of retirement
what should a planner do to compensate for underestimating the retirement period?
add 5-10 years
pension maximization application
pure life annuity
difference between pure life and joint survivor payout is used to fund life insurance to provide for the living spouse
List the social insurance programs covered by the Social Security Act
OASDI (Social Security)
medicare
federal unemployment insurance
supplemental security income (SSI)
fully insured worker
40 credits of coverage
fully insured worker
needs 40 credits
insured for life
insured for both survivor benefits and retirement benefits
currently insured worker and what they’re eligible for
6 credits
1. lump sum death benefit ($255) for spouse or dependent
surviving spouse’s benefits (if children are under 16)
a dependent benefit
common examples of those not covered by OASDI
child, under 18, employed by a parent in an unincorporated business
federal employees continuously employed since 1984
social security disability
under age 65
has been disabled for 12 months
is expected to be disabled for at least 12 months (or has a disability which is expected to result in death and has completed a 5 month waiting period)
the spouse of a retired or disabled worker qualifies for social security if she meets any of the following
- is age 62 or over or at any age if the spouse
2 has a child in care under age 16
has a child age 16 and over and disabled before age 22
the surviving spouse (including a surviving divorced spouse) of a deceased insured worker qualifies, when?
if the widow(er) is age 60 or over
what does a surviving spouse need to do to qualify for social security benefits?
divorced spouse must have been married to the worker for at least 10 years and generally must not be remarried
the surviving spouse of a deceased insured worker, regardless of age, qualifies for social security if caring for an entitled child of the deceased who is either under 16 or became diabled before 22
surviving dependent benefits (social security)
surviving dependent, unmarried child of a deceased, disabled, or retired insured worker qualifies iiiffffffffff the dependent
Under 19 and full time student
age 18 or over but has a disability which began before age 22
PIA reduction if before FRA
1/180th per month for the first 36 months
reduction of social security benefits
<FRA
deduct $1 from benefits for each $2 earned above $22,320
in the year they reach FRA it’s $1 for each $3 of earned income above $59,520
taxation of social security benefits
income plus half of benefits
$25k single and $32k MFJ (up to 50%)
$34k single and $44k MFJ (up to 85%)
provisional income for social security benefits
AGI
+
tax exempt interest
+1/2 SSI
social security disability definitely
- under 65
- has been disabled for 12 months, is expected to be disabled for 12 months, or suffered from a disability that is expected to result in death
- filed and completed the 5 month waiting period
file and suspend
repealed in 2016
withdrawaling a social security application
a fully insured worker has a one time right to withdraw
within 12 months of initial claim
must repay the prior benefits
deduction amount for money purcahse pension plans
25%
are purchase pension plans fixed or flexible contributions?
fixed
What does a company need to implement a money purchase pension plan
stable cash flow
What is the only plan that favors older participants
defined benefit pensions
target benefit pensions
how much can be deducted for target benefit pension plans?
25%
fixed or flexible contributions for target benefit pensions
fixed
does a target benefit pension need cash flow?
stable cash flow
profit sharing plan keys
- up to 25% employer decution
- flexible contributions (must be recurring and substantial)
- 401k provisions $23000 (FICA) (hardship withdrawals)
- SIMPLE 401k is exempt from creditors
SIMPLE IRA keys
- for small employers
- requires employer match (immediate vesting)
- salary reduction limit up to $16,000 (FICA)
- company cannot have another plan
SEP IRA keys
no salary deferrals
1. up to 25% contribution for owner (w2)/up to 18.59% contribution for self employed
2. account immediately vested
3. can be integrated with social security
4. special eligibility: 21+ years old, paid at least $750, and worked 3 of the 5 prior years
SARSEP keys
- may have been up to 25 employees, and 50% of the eligible employees must defer
- must have been in existence before 12/31/96
- salary deduction limit $23,000 (FICA)
- new employees may participate in grandfathered plans
Stock bonus plan keys
- up to 25% employer deduction
- flexible contributions
- 100% of the contribution can be invested in company stock
- ESOP cannot be integrated with Social Secuirty or cross tested
403b/TSA/TDA
- for 501c3 organizations and public schools
- subject to ERISA only if employer contributes
- salary reduction limit up to $23k (FICA)
- Employer contributions may be subject to vesting schedule
Defined benefit pension plans (keys)
- favors older employes/owners 50+
- guaranteed retirement benefit amount
- requires very stable cash flow
- past service credits allowed
section 415 limit
lesser of 100% of salary or $69,000
salary cap for retirement compensation ccalc
$345,000
why would an employer select a money purchase pension plan
-the employer wants a stable work force (wants to retain key employees)
-the employer wants a plan that is simple to administer and explain (pension stated percentage contributed)
-the employees are relatively young and well paid
requirements to use a money purcahse pension plan
stable cash flow and profit
contributions are mandatory
why are target benefit pension plans unique
they are defined contribution plans but have certain features of DB plans
target benefit plan provisions shared with defined contribution plans
- max contrib is the lesser of 100% of comp or $69k
- retirement benefit is determined by account balance
employee assumes investment risk
no annual actuarial determination is required
forfeitures may be reallocated to remaining participants or used to reduce er contributions
target benefit pension plan provisions shared with DB plans
plan generally benefits older employees
fixed mandatory contributions
actuary determines the initial contribution level
investment risk in a target benefit pension plan
Falls on the EE
selection of a target benefit pension plan
alternative to a db plan
provides adequate retirement benefits to older EEs but has the lower cost and complicity of a DC plan
when would an employer select a profit sharing plan?
when profit margin or financial stability vary
when an ER wants to adopt a qualified plan with an incentive feature to motivate ees to make a company profitable
when the ees are young, well paid and have substantial time to accumulate retirement savings
what might they call a 401k plan on the exam?
CODA
what is a 401k plan really?
provision added to a qualified profit sharing or stock bonus plan
participants have an option to put money in the plan or to receive the same amount as taxable cash compensation
when would an ER select a 401k plan
wants to provide a qualfied retirement plan for EEs but can only afford minimal expenses
the ees want to increase their savings on a tax deductible basis
when is a Unik generally permitted
when the only participants are the owner and spouse or two partners
statutory safe harbor contribution
EITHER a matching contribution or a non elective contribution
$1/1 on the first 3% AND .5/1 ON THE NEXT 2%
ask 4% on the EEs 5%
—
if the ER chooses the nonelective deferral, the ER must contribute 3% of all comp
stock bonus plans and ESOPs are variations of what?
profit sharing plans
ESOP diversification
participants age 55 or older having ten years of participation in the ESOP generally have the right to diversity up to a total of 50% of their account balance
must offer at least three investment alternatives or distribute cash or certificates to the participants
cross testing doesn’t apply to what type of plan?
ESOPs
section 415 limit for benefit
beginning at 65
max annual life annuity benefit is the lesser of
$275k or 100% of the participant’s compensation
cash balance pension plan guarantees
ER guarantees not only the contribution level but also a minimum rate of return on each participant’s account
when would ERs select a cash balance pension plan?
less expensive and simpler db plan
412(i) plan
db plan funded entirely with insurance products such as life insurance and annuities
exempt from the minimum funding standard
nonqualified retirement plans
SEP
SIMPLE
SARSEP
403b
age and service requirement
only for QUALIFIED PLANS
21 and one year of service
2 year service requirement, BUT the EE is immediately vested
year of service
1000 hours
ratio percentage test
plan must cover a percent of NHCEs that is at least 70% of HCEs
average benefit test
avg bene for NHCEs must be at least 70% of those for HCEs
Minimum participation for DB plans
must benefit at least the lesser of:
-50 EEs
-the greater of
40% of all EEs or
two EEs
definition of HCEs
Either a greater than 5% owner or an ee earnign more than $155k
Key employee (def)
-greater than 5% owner
-an officer ND has comp > $220k
- >1% owner AND comp >$155k
top heavy (def)
if > 60% of aggregate accrued benefits or account balances are allocated to key employees
integration level (DB)
level of compensation above which the excess contribution is made
the integration level may not exceed the social security taxable wage base
base benefit percentage (DB)
plan benefit for comp below the integration level
excess benefit percentage (DB)
plan benefit for compenation above the integration level
Using the excess method short cut (DB)
the permitted disparity is the lesser of the base benefit percentage or 26.25%
integration level (DC)
any dollar amount up to the social security wage base ($168k for 2024)
base contribution percentage (DC)
contribution percentage for compensation below the integration level
excess contribution percentage (DC)
contribution percentage for compensation above the integration level
permitted disparity (DC)
lesser of the base contirbution percentage of the 5.7% formula for determining components of integrated DC plan
deduction limits - section 404c
ER can only deduct a max of 25% of all participants’ (aggregate) eligible comp
annual compensation limit
only the first $345k of each EE’s comp
elective deferrals when you have more than one employer
group 1
401k/402b/SIMPLE/SARSEP = $23k + $7,500 catch up
Group 2
SIMPLE and another SIMPLE = $16k + $3,500 catch up
Keogh (HR-10)
qualified retirement plan for sol props and partnerships
Owner-employee contrib or bene is based on net earnings instead of salary
self employment tax must be computed and a deduction of one half of the self employment tax must be taken before determining the deductible contribution
top heavy plan
DC plan is top heavy if more than 60% of the total amount in the accounts of all employees is allotted to key employees
DB plan if top heavy
bene must be at least 2% of comp multiplied by the number of ees years of service in which the plan is top heavy up to a max of 10 years
(remember: b is the 2nd letter of the alphabet, use 2%)
DC plan if top heavy
no less than 3% of each non key ees comp
(remember, c is the 3rd letter, so 3%)
Qualified plan loans max
Total loans can’t exceed the lesser of 50% of the participant’s vested plan bene of $50k
Small accounts can borrow up to $10k without regard to % limit
qualified plan loan repayment
no more than 5 years
level installments
at least quarterly payments
if failure to repay, the entire balance due is taxable ad 10% penalty
which plans can’t provide loans
IRAs
SEPs
SIMPLEs
Roth accounts
what’s considered comp for IRAs
wages
salaries
tips
professional fees
bonuses
alimony (pre 2019)
separate maintenance payments (pre 2019)
Exceptions to the IRA 59 1/2 10% penalty rule
death
total, permanent disability
qualified education expenses
distribution for medical (subject to floor of 10% of AGI)
72t
first home, up to $10k
medical expense > 7.5% of AGI
$5k for qualified birth/adoption
Federally declared disaster
roth ira mandatory distribution
TRICK QUESTION. there aren’t any at 73. this is for TRADITIONAL iras
ordering rules for IRA distributions
if the roth contains both conversion and contributatory amounts, annual roth contributions are considered to be withdrawn first. they are not taxable
the converted amounts are withdrawn second
earnings are considered to be withdrawn last
roth inherited rules
-within 5 years of the owner’s death if no bene
-over 10 years
-if surviving spouse is the sole bene, the spouse may delay distributions until roth owner would have reached age 73 or may treat the roth as his or her own (roll it into their roth)
SEP contributions
only employer contributions
SEP contribution limits
lesser of 25% (not 100%) of comp or $69,000
are employers required to make SEP contributions
no requirement to make a contribution
but all EE contributions are 100% vested
SEP coverage requirements
all employees who are at least 21 who have worked for ER for 3/5 years (includes PT)
EEs must make $750 or more
SIMPLE IRA contributions
ER contributions represent dollar for dollar matching contribution up to 3% of the EEs compensation
max number of EEs for a SIMPLE
100
who must be covered if the ER has a SIMPLE
EE has earned $5,000 in any two previous years and is reasonably expected to earn $5000 in the current year
SIMPLE Vesting
participants are fully vested at all times
10% distribution penalty is increased to 25% during the first 2 years of participation
SIMPLE 401(k) is exempt from
adp
acp
top heavy requirements
403bs are for what employers?
501c3s
funding options for 403bs
annuity contracts or mutual funds
Individual securities are NOT permitted
Section 457 deferral limit(s)
457 age 50 catch-up provision
government only
age 50 and over are eligible for an additional deferral of $7,500
types of plans guaranteed by the PBGC
defined benefit and cash balance plans
RMD age
73
RMD penalties
lowered to 25%
decreased to 10% if the RMD is taken by the end of the second year following the year it was due
PPA in service withdrawals
in service distributions as early as age 62 from DB plan
distributions will be treated as retirement income
hardship withdrawals cannot include…
unvested amounts and earnings
requirements for 72t
- paid not less frequently than annually
- paid w/o changing the amount for the longer of 5 years or until the payee reaches age 59 1/2
- based upon the life expectancies of the recipient(s)
- based upon a reasonable rate of interest
- based upon reasonable mortality assumptions
what happens if 72t payments are adjusted
if payments are modified in any way, the 10% additional tax is applied retroactively to all payments received before 59 1/2
taxation on a direct transfer
if a participant receives a direct distribution from a qualified plan 20% must be withheld
exception for joint life distributions
if the employee’s sole beneficiary is the employee’s spouse, and the spouse is more than 10 years younger than the employee
qualified charitable distribution (QCD)
direct transfer from an IRA to a qualified charity
age 70 1/2 or older can take up to $100k/year
excludable from tax income
exceptions to the 10 year rule
surviving sposuse
personan not more than 10 years younger than the plan participant
minor child
disabled person
chronically ill person
retiring “early” w/ a 401k plan
if you retire between 55 and 59 1/2 distributions from 401ks are not subject to 10% penalty
taxation of NUA
NUA is always taxed at long term capital gain rates, regardless of the holding period
rabbi trust
-assets must be available to all general creditors of the ER if it files for bankruptcy
secular trust
irrevocable trust that is established for the exclusive benefit of the employee
taxation occurs in the year in which the assets are placed in the trust
considered a funded nonqualified deferred compensation arrangement
ISO basics
tax favored
option to buy stock
first $100k worth of ISOs that vest in a calendar year are entitled to favorable treatment
Options in excess are non-qualified
nonqualified stock options
RIGHT to purchase a specific number of shares of the employer’s stock
ISO and NSO “grant” (def)
the date the employee is given the shares and the date the shares are typically value
ISO and NSO “exercise” (definition)
the date the employees choose to exercise the right to buy the shares awareded
ISO and NSO “exercise” - bargain element
the spread between the exercise price and the market price
what determines LT vs ST loss with Stock options
the amount of time between exercise and sale determines whether the gain or loss is long term or short term
83b election
the employee elects to recognize the tax at the time of the award instead of at the time of exercise
