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CFP > Retirement > Flashcards

Retirement Flashcards

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1
Q

ISO’s

A
  • Corporation may not ever receive a deduction.
  • May create an AMT.
  • No more than 100K per year.
  • At grant there is no taxable event.
  • At exercise, the bargain element is not subject to current taxation, but it is a preference item for AMT.
  • At sale, cap gain or loss from the strike price if qualifying disposition (after two years from Grant and one year from exercise)
  • If disqualifying disposition then same tax treatment as NQSO’s (income, and employer receives deduction)
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2
Q

NQSO’s

A
  • Usually subject to vesting.
  • Can be transferred or gifted to family members trust or a charitable org.
  • Corporation receives a deduction when employee pays Tax at exercise.
  • At Grant, there is no taxable event.
  • At exercise, the bargain element is subject to W-2 taxation.
  • The capital gains or loss difference between strike price plus W-2 income recognized at exercise.
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3
Q

Section 162 bonus plan

A
  • Another type of executive benefit.
  • A large cash value life insurance policy, the executive own the policy and names the beneficiary and the employer pays the premiums.
  • The executive pays taxes on the premiums paid as bonus compensation, and the death benefit is tax-free and the executive has all access to the cash value.
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4
Q

Three elements to consider when choosing between qualified plan and nonqualified plan

A

Three elements to consider:
1. Currently deductible employer plan contributions
2. Benefits not currently taxable to the employee or participant
3. Employer can limit participation to select individuals (pick and choose; discriminate)

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5
Q

Disqualifying disposition: ISO’s

A

Occurs if holding period of two years from grant in one year from exercise are not met and results in taxation like an NQSO which means that the bargain element will be taxed as W-2 income

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6
Q

What triggers compensation income with stock options?

A

NQSO’s or disqualifying disposition on ISO’s

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7
Q

Nonqualified deferred compensation plans

A
  • Provide retirement benefits to top executive that exceed limits available through qualified plans.
  • Plans are often referred to his top plans, excessive benefit plans, or supplemental executive retirement plans (SERP.)
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8
Q

Excess benefit plan

A

Typically mirrors a qualified plan benefit formula, but is not subject to funding or benefit amount limits, covered compensation limits, or the annual additions limit.

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9
Q

SERP

A
  • Typically promises to pay an executive additional compensation of a specified amount for a specified time.
  • Contingent on the executive remaining with a company for a specified period and or attaining specific goals, typically related to production or sales growth
  • Employers can select which executives are included in the plan and benefits.
  • Do not need to be uniform among plan participants
  • Promise to pay by the employer. There is no formal funding.
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10
Q

Substantial risk of forfeiture; Non qualified retirement plans

A
  • The goal is to avoid constructive receipt and current taxation
  • Typically have a vesting schedule
  • Executive does not recognize income and the employer does not receive a deduction until there is no longer a substantial risk of forfeiture
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11
Q

Rabbi trust

A

-Provides some security to the executive - Funds in the rabbi trust are not available to the corporation for other purposes and are safeguarded in the event of a merger or acquisition.
- Does not trigger immediate recognition of compensation to the executive
- Substantial risk of forfeiture is considered to exist because the funds in the rabbi trust are accessible by corporate creditors in the event of insolvency of the company.

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12
Q

Secular trust

A

Not subject to the companies creditors and results and immediate compensation recognition

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13
Q

Three common elements to determine the choice between a qualified plan and a nonqualified plan

A
  1. Currently deductible employer plan contributions.
  2. Benefits not currently taxable to the employee or participant.
  3. Employer can limit participation to select individuals.
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14
Q

SEP participation requirements

A

Must be offered to all employees for at least 21 years old, employed by the employer for three of the last five years, and had compensation of 750 for 2024

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15
Q

Simple IRA withdrawal in the first two years of participation

A

Subject to a 25% early withdrawal penalty tax

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16
Q

Adjustment formula: plan contribution percentage

A

Plan contribution % / (1 + plan contribution %)

EX: .25/1.25=20%

Applies to SE plan contributions: SEP, Simple, 401k

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17
Q

Active participation status for IRA deduction

A
  • Anyone who received annual additions to a DCP (EE/ER contributions, reallocated forfeitures)
  • Anyone who is eligible for a DBP
  • Participation in a SEP, simple, or 403B
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18
Q

How do spousal Social Security benefits work for current spouse?

A
  • A spouse can claim Social Security benefits based on the earnings record of their spouse (the primary earner) if they are at least 62 years old
  • The primary earner must have filed for their own Social Security benefits for the spouse to claim spousal benefits
  • The maximum spousal benefit is 50% of the primary earners FRA
  • If the spouse claims before their own FRA, the benefit is reduced, but if the spouse waits until FRA, they receive the full 50% of the primary earners PIA
  • Spousal benefits do not increase by delaying beyond FRA
19
Q

How do spousal Social Security benefits work for divorced spouses?

A
  • A divorce spouse can claim spousal benefits if the marriage lasted at least 10 years and they are not currently married
  • The spouse does not need to have started their own benefit for the divorce spouse to claim, but they must be eligible to claim so at least 62 years old
  • Marriage generally disqualifies a divorced spouse from collecting spousal benefit based on the previous spouses record
20
Q

Social Security taxation 50% bracket

A

MFJ: 32-44K = 50% taxable
Single: 25-34K = 50% taxable

21
Q

First year rule

A

In the first year of claiming Social Security benefits, income earned before claiming benefits is not considered. Then Social Security applies the monthly earnings limit to determine if you are eligible to receive benefits in any given month. The monthly limit is calculated as 1/12 of the yearly limit.

22
Q

How is your Social Security benefit affected when you have earned income?

A

Prior to your FRA one dollar of your Social Security benefit is withheld for every two dollars of earnings in excess of 22,320

In the year, your FRA is obtained one dollar for every three dollars is withheld an excess of 59,520

23
Q

What is the primary insurance amount (PIA)?

A
  • PIA is the monthly retirement benefit at FRA
  • Breaks average earnings down based on points
  • In 2024 the bend points are 1174 and 7078
24
Q

PIA: Benefit formula

A

90% of the first $1174
+32% of the next $5,904
+ 15% of excess above $7078

25
Q

AIME

A
  • Average indexed monthly earnings
  • Adjust each years earnings to present day dollars
  • Based on 35 best years of indexed earnings
26
Q

Social Security, what is fully insured status?

A

Retirement income benefits, requires fully insured status of 40 earned credits

27
Q

Who is eligible to receive Social Security retirement benefits?

A

Worker is 62 and older who have earned at least 40 credits

28
Q

Social Security disability benefits

A
  • For adults 18 or older who are unable to work due to a physical or mental disability that is expected to last at least 12 months or result in death
  • Five month elimination period
  • No ability to work
29
Q

How are Social Security credits earned?

A
  • 1/4 of coverage is earned for each $1730 of earned income subject to Social Security taxes with a max of four credits earned per year.
  • There is no requirement as to when credits are earned, and they could be fully insured as of January.
30
Q

Simple IRA contributions

A
  • Employee contributions not required
  • Employer contributions are required:
    100% on first 3% of comp match OR 2% non elective (contributed even if the employee doesn’t contribute)
31
Q

SIMPLE IRA features

A
  • Eligibility = all employees with at least $5k comp in any prior 2 years
  • Contributions 100% immediately vested
32
Q

SEP features

A
  • Easy to set up and maintain
  • Employer contributions only
  • Up to 25% of covered payroll or $69k
  • Employer can decide whether or not to make contributions year to year
  • Contributions 100% immediately vested
33
Q

Safe harbor 401(k)

A
  • Match 100% of the first 3% of compensation and 50% of the next 2% of compensation for a total of 4%
    OR
  • Non-elective contributions of 3% to all employees, regardless of if they make deferrals
  • A safe Harbor 401(k) plan is designed to automatically satisfy certain IRS nondiscrimination testing, allowing the plan to avoid ADP, ACP, and top-heavy testing.
  • These tests could result in additional employer contribution to non-highly compensated employees.
34
Q

Are employees SIMPLE IRA plan contributions aggregated?

A

Yes, employee elective referrals are aggregated with deferrals to other plans such as 401(k) plans. The only plan that is not aggregated is the 457B.

35
Q

Max retirement plan contribution for self-employed

A

Step 1 - subtract 50% of the SE tax from net earnings from SE.
Multiply net earnings from SE x .9235
Multiply that figure X .153
Divide by 2
Subtract from net SE earnings
Step 2 - adjust contribution rate for SE (regular
contribution percentage/1+ regular contributions percentage )
Step 3 - multiply step 1 by step 2

36
Q

INH IRA non-designated beneficiary

A

Five year rule generally applies
- Estates
- Charities
- Trust not qualifying as a designated beneficiary (non-see-through trust)

37
Q

eligible designated beneficiary

A

Distribution can be taken over life of the beneficiary except for minors

  • Surviving spouse
  • Minor child of a decedent until 21
  • Chronically ill
  • Other beneficiaries not more than 10 years younger than the decedent

Minors qualify as eligible designated beneficiaries only up until age of majority then 10 year rule applies

38
Q

Traditional rollover

A
  • Only one traditional rollover is allowed in a year
  • The plan administrator transfers vested account balance or portion of it to the participant
  • Within 60 days, the participant deposits the funds into an employer plan or IRA
  • Traditional rollover from qualified plan requires mandatory 20% federal taxes
  • If withheld amount not replaced and deposited with the rollover, withholding amount is considered distributed and is subject to income tax and possible 10% penalty
  • There is no mandatory withholding for IRAs
39
Q

Qualified plans can exclude:

A
  • employees who do not work 1000 hrs per year
  • employees under age 21
40
Q

Eligibility for SS requires that a worker:

A

Has attained age 62 and earned 40 credits (fully insured status)

41
Q

Safe harbor test

A

> =70% of NHCE covered

42
Q

Safe harbor test

A

> =70% of NHCE covered

43
Q

Ratio percentage test

A

% NHCE covered/% of HCE covered =>70%

CFP (10 decks)

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