Retirement Flashcards
Qualified vs tax advantage vs NQ plans
QUALIFIED
DB, DC
TAX ADVANTAGED
SEP IRA, SIMPLE IRA
NonQualified
NQ Def Comp
SERP
Top Hat plan
S162 bonus plan
Suitability of retirement plans
3 common elements
1. currently deductible ER contributions
2. benefits not currently taxable to EE/participant
3. ER can LIMIT PARTICIPATION to select individuals - pick and choose
Qualified plan 1 and 2
Tax advantaged plan 1 and 2
ie cannot pick and choose in these 2
NQ S 162 bonus 1 and 3
taxable to EE
NQ Def Comp 2 and 3
not deductible to ER (until paid)
Inherited ROTH IRAs
Spouse can treat as own and therefore no RMDs are required
Others must take RMDs from the ROTH!
Inherited Traditional IRAs
5 years
Estates, charities, trust not qual as desig
Own life
Spouse: own or spouse’s life exp
Eligible Desg not more than 10 years younger (ie a sibling) : own life expectancy
chronically ill falls in here too
Once a child is age of the majority they are NOT an eligible designated beneficiary and subject to 10-year rule
-Minors: years to 21 + 10
-Others: 10 years
if in RMD status, must take EVERY year
see through trusts, successor beneficiaries
NQSO and ISOs
Types of income:
-Ordinary/compensation
-AMT pref
-Capital gain/loss
GRANTdate Neither have tax consequences
EXERCISE DATE
NQSO taxed on bargain element (FMV @ ex vs grant) as ordinary income on W2 (Compensation income)
ISO
bargain element is positive AMT preference item
SALE DATE
NQSO taxed as capital gain. Sale price less strike price at ex date
ISO.
If holding periods met, capital gain or loss
If not, disq disp treated as NQSO and taxed as ordinary income
Something about an AMT negative item for the exercise price and the sale price difference
Do both ISOs and NQSOs have holding periods and if so how long
NQSO do NOT have holding period requirements
ISOs; hold 2 years from grant and 1 year from ex. (So 2 total ok if ex after 1 yr then held another)
If not, DISQ DISP and treated as ORDINARY income.
upside for ER is they can deduct it. Otherwise it is not deductible at all for ER
NQSO v ISO
When does company receive a deduction
Which one is subject to vesting
Which one is limited $/yr
NQSO
-usually subject to vesting
-can be transferred or gifted to fam members, charities or trusts
-Corp receives ded when EE pays tax @ exercise
ISO
-Corp only receives ded if EE has disq disp (does not meet the holding period)
-May create AMT
-No more than $100,000/year can be granted
83b election
appendix
Restricted stock
Normally pay tax on RSUs @ time of VESTING
-83b election @ time of grant and pay tax @ time of grant based on FMV @ grant date
-holding period then starts @ date of grant/election
-make this when expect the stock to go up (esp useful in a startup, nonpublicly traded)
Make election within 30 days
Nondiscrimination testing of QPs
ADP test
A qualified plan MUST meet one of the following three benefit tests:
-The Safe Harbor Test – plan must cover at least 70% of the non-highly compensated employees
-The Ratio Percentage Test - plan must cover a percentage of non-highly compensated employees equal to at least 70% of the percentage of highly compensated employees covered
-The Average Benefits Test – the percentage of benefits received by non-highly compensated employees must equal at least 70% of the percentage of benefits received by highly compensated employees
2nd test is tricky. Ex question
The Acme Corporation employs 56 employees of whom 18 are highly compensated. The plan covers 23 of the non-highly compensated employees and 15 of the highly compensated employees. Does the plan meet ERISA nondiscrimination testing requirements?
The plan does not meet the safe harbor test but it does meet the ratio percentage test. Safe harbor test: 23 / 38 NHCE = 60.53% Fail BUT….
Ratio percentage test:
23 of 38 = .6053 NHCE
15 / 18 = .8333 HCE
.6053 NHCE / .8333 HCE = .7264 = PASS
QP SS integration
for SS to get $ above the 168k
2 methods
1. Excess integration (DB &D DC) - may be tested. see below
2. Offset integration (DB)
In either integration method, the maximum increase in benefits produced by the integration formula used cannot exceed 26.25% (3/4ths of 1% x 35 years). This may be a stand-alone exam question.
Excess. Max above base rate they can put in is 2x for up to 5.7% and for 6% and above is base plus 5.7%
if base is 7% and income 208400, then EE gets 168400.07
Plus 40000.127
Nua election
When a person wants to keep the employer stock in their former employers profit sharing plan
Net unrealized appreciation
3 buckets
- Employer contribution taxed as ORDINARY income @lump sum date
- Nua. Fmv @lump sum date less employER basis will be taxed at LTCG without regard to holding.
- Subsequent appreciation is taxed as short-term OR long-term based on the holding period AFTER the lump sum distribution
No step up in basis at death for any nua remaining
But it does retain the long-term character
Applies only to the employer stock held in the plan
Must be executed as part of a qualified lump sum distribution ie 100% of the employee’s account
Exceptions to early withdrawal
Qp vs ira
SOS to QPs
Separation of service after 55 applies only to QP not IRAs
HHH to IRAs
Qual Higher Ed expenses,
First time HB and
Health insurance premium when unemployed applies only to IRAs
Exceptions to early withdrawal that apply to both QP and IRAs (most likely to be tested
Unreimbursed med
Death
Disability
SSEPP
QP only sep service 55
IRA only. HHH
Higher Ed
Homebuyer fthb 10k
Health premium unemployed
Qualified plans social security integration
Max increase in benefits is 26.25% per year 3/4% *35yrs
Plan may put in more $ above “integration level” (typically the SS wage base)
DC pension
Money purchase
Target benefit
BOTH
100% employer funded
mandatory annual contributions
>= 10% stock
Money purchase favors younger
Vs Target benefit favors older as skews higher cont to them
Target benefit needs an actuary in Year One.. expensive
*Money purchase is easy for participants to understand with stated guaranteed contributions defined in the plan document
DC Defined contribution summary
Flexibility is key with DC profit sharing
DC CONT
Profit sharing
Traditional
401k (coda added to traditional
Stock bonus
Esop
DC pension
Money purchase
Target benefit
DC Defined contribution common elements of all
Participant directed
Combined ee/er 69k excl catch-up
Accelerated vesting
>=3 yr cliff or <=graded 2-6
Maxcomp considered 345k
*Max deductible employer 25% of covered payroll (in total not per person)
Max covered 345k
DC
EmployER contribution differences between profit sharing and DC pension
Profit sharing substantial and recurring versus mandatory contributions DC pension
Therefore DC pension aren’t as good for younger companies with fluctuating profits
DC pensions are 100% employer funded
DC trad ps vs 401k
Traditional ps can offer loans but not hardship wd
401K allows employEE contributions, loans&hardship
Withdrawals
401k subject to ADP, ACP testing
ADP EE. D is for deferring inc
ACP ER. C is for ER cont
Testing is Expensive
Loans in 401k
Max is the lesser
vested balance or 50K
Must be charged interest
Max term is 5 years unless for primary residence
Default is deemed a distribution
Even if some is repaid any outstanding loan balance within the past 12 months is considered in the 50k Max
Solo 401k
For a business with only one owner and no employees other than spouse
EmployEE same as trad 401k
EmployER Max 25% of W-2
DC pension
Money purchase
Plan document defines mandatory ER contribution
Company needs stable cash flow
Remember in a $P company needs $
Favors younger
Easy for participants to understand, Stated guaranteed ER cont %
Like all DC participants have investment risk
Vesting
Accelerated
Defined benefit top-heavy plans
Cash balance plans
All DC plans
Forfeitures
If used to offset plan expenses does not count towards AAL or EE deferral limits
Reallocation among participants makes them an active participant
Also counts towards the 23 k and the 69k AAL
DB Traditional DB plan
Only QP that guarantees a specific monthly pension
Older higher earning can have substantial funding
Accruing a benefit in any way is considered active participant for IRA rules
If married must be joint and survivor and less spouse waives
No predetermined Max for employer contributions and NOT subject to the 69k
PBGC
must satisfy 50/40 rule
Expensive must have annual actuary
DB cash balance
Guarantees a specific cash balance at stated normal retirement age
Hypothetical participant accounts are for record keeping only.NOT participant directed
Accrues a pay credit % of comp plus an interest credit. fixed or variable rate linked to an index
Must use 3-year Cliff vesting
Uniform benefit accrual for all employees
Easier for participants to understand than a traditional DB
Can convert guaranteed CB into a lifetime pension
403b TSA
Tax advantages not qualified
2 special features…
*Limited investment choices mutual funds or annuities only
Extra catch-up.
3k Special catch-up IF > 15 yrs @ same employer
Over 50 can have BOTH the 3K and the 7500
457b
3 special features
Not aggregated with other salary deferrals for the max
Not considered active participant for IRA deduction
Special catch-up see below
I think also no early withdrawal penalty
Remember they can’t contribute more than 100% of compensation
Special catch-up in last 3 years of service at normal retirement age
Lesser of
Unused to deferrals from the past
Up to 2x normal contribution limit ie 46k
CanNOT use both the special catchup and the 50 plus in the same year
Special catchups
457b and 403b
Also 457b can use unused deferrals
Capital preservation and purchasing power
Amount needed day 1 retirement.
Capital utilization like steps 1 and 2 of education
Capital preservation. Then do another o
Pv calc using the FV of step 2 as PV and the nominal or portfolio rate. Use years IN retirement as n. Then add this pv to step 2 pv
Purchasing power
Same thing except use inflation adjusted rate
Who do SEP contributions have to be offered to
Employees over 21 who
-employed in 3 of last 5 years
-Had $750 in 24
SEP with employees
First do the owner because it’s easy to forget the extra calcs
Sch c - 50% of (C.9235.153)
And watch if above se max
Times 20% for owner
Use the 25% for the employees
Or if the rate isn’t 25% take the rate / 1 + rate for owner
Simple ira
Less than 100 employees
Ee 16k and 3500
Employer must contribute
2% on All or 3% match
Eligible employees are all with compensation over $5,000 in any of the prior two years
Early withdrawal is 25% in the first 2 years
Immediate 100% vesting
Like SEP
IRA contributions
As long as the taxpayer has sufficient income and IRA contribution can always be made. The issue is how much if any can be deducted
If not active participants, MAGI is not an issue unless mfj and spouse is active participant or MFS
Ask.
active participant?
If not is spouse an active participant?
Look at m a g i
Different limits for if you are an active participant or if you’re married to somebody who is an act of participant
Rollovers
Traditional vs direct transfer
Traditional. Only one allowed per year
Participant has 60 days to deposit
Mandatory 20% Federal withholding unless ira to ira
If the withheld amount is not replaced or deposited it is considered a distribution and subject to tax and possibly 10% penalty
Direct transfer rollover. No annual limit on the number
Participant never takes possession of the funds
No mandatory withholding tax
Rollovers
What can be rolled over to what
Roth IRA can only be rolled into another Roth IRA and only one in a 12-month period
Traditional, simple and sep
Can go to anything except a designated Roth
457b, QP like 401k, 403b
Can go to anything
Note to or from a simple generally only after 2 years prob bc of that 25% early wd in 1st 2 yrs
Rule 72t
Substantially equal periodic payments
Roth IRA distributions
What makes them qualified (TAX free)?
5-year-holding. Absolute requirement
Starts 1/1 of the year for which the contribution is designated
If 5 yr met
AND
Death, disabled, fthb lifetime 10k or 59.5
No tax or penalty
Roth distributions
non-qualified
Remember basis comes out first
If not over 59.5, EARNINGS are subject to tax and penalty.
If over 59.5 no penalty
Contributions have no tax and no penalty
Conversion contributions have no regular tax but if distributed within 5 years of conversion might be subject to penalty
Roth ira distributions when
Over 59.5
No penalty
The question is if it’s taxable
Less than 5 years the earnings are taxable
> =5 yrs earnings not taxable
Non-qualified deferred Comp for top execs
“Top hat”
Excess benefit plans
SERPs
Typically mirrors a qualified plan but without the limits/Max’s
SERP additional comp. Specific amount for specific period contributed on remaining or achieved goals
The company can select which execs
The goal is to avoid constructive receipt and current taxation
Therefore there must be substantial risk of forfeiture
Typically a vesting schedule
Executives do not recognize income and employer does not get a deduction until it’s no longer substantial risk of forfeiture
Rabbi trust
Funds are accessible by corporate creditors in the event of insolvency. Therefore substantial risk of forfeiture exist and constructive receipt is not triggered
Strikes balance between safeguarding comp for the executive but not triggering constructive receipt
Funds in the RT are not available to the corporation for other purposes
Funds are safeguarded in the event of a merger or acquisition
Rabbi trust vs secular trust
Assets in the secular trust are NOT subject to a company creditors and result in immediate compensation recognition
Substantial risk of forfeiture exist in Rabbi trust because the funds are accessible by corporate creditors
Elements to consider when selecting QP, NQP
Simple401k
Looks like the same as a simple to me
Appendix says matching of 3% or put in 2% of everyone’s. That’s a simple?!
One question noted that it’s different from a simple because the employer match can’t go below 3%
DC max contributions
Annual additions limit vs employee elective deferrals
EmployEE deferrals are aggregated between plans. Except 457b
The AAL is NOT aggregated between plans
Remember the AAL is the lesser of 69k or the employee’s compensation
DB Traditional DB pension
Fully insured
A fully insured traditional defined benefit plan is funded exclusively by cash value life insurance OR annuity contracts
DB
Traditional pension vs cash balance
Traditional pension is the only one that guarantees the final monthly pension amount
DB Traditional pension is suitable when
Benefit guarantees are desired
Pbgc insurance coverage is needed
Or stated goal is to skew benefits to older plan participants without many years until retirement
If it needs to satisfy the 50/40 rule
Esop
Probably not tested but if so
The company can borrow money to buy shares no other plan can do this Leveraged esop
Trust borrows from the bank, trust uses loan to purchase employer stock, employer makes deductible contribution to the plan, trust pays the bank loan, bank releases the stock
Was this for esop only???
If employer stock is not publicly traded participants must be given a put option to sell the stock back to the plan
Be careful
25% of 345 is more than 69,000. So remember to limit these people’s company contributions
Gets tricky with TB and MP because there’s only employer and your guard is down
DB employer only
Funded by employers only
Funding is whatever it takes to get there
While AAL does not apply remember the maximum annual pension is 275
And the maximum compensation that can be CONSIDERED in the benefit FORMULA is 345
Pension guarantees a benefit
Cash balance guaranteed a certain cash balance
SEP service >=55
Can this be done in QP, IRA or both? What are the consequences
Remember for qualified plans there is NO PENALTY
It can be taken in a lump - it does not have to be substantially equal periodic payments
There WILL of course be tax on any pretax $ or earnings
S162 bonus (nq)
Large cash value life insurance
The company buys in the executive has access to the cash value
Employer pays the premiums which are taxable to the employee as bonus comp
Executive owns and names the beneficiary
Death benefit is tax-free
Social security fully insured
Need 40 lifetime credits to be fully insured for retirement
Equivalent to 10 years
Can earn my maximum of 4 per year
earn 1 for every $1,730
SS AIME
Average indexed monthly earnings
Adjust to present day dollars
Based on 35 best years of index earnings
If you have less those years will be zero
Used to calculate pia
Pia
Primary insurance amount
The monthly retirement benefit at FRA
Uses bend points to calculate the benefit
Reduction in SS early
If start at 62, max reduction is 30%
It’s 5/12% for 24 mo 62-64
and 5/9% for 36 mo 64-67
SS delay past 67
Increase benefits by 2/3 %/mo
=8%/yr
24% if go all the way to 70
Social security benefits summary
Ss impact of earned income prior to fra. If claiming SS already
Temporary reduction
Prior to fra
See tables. Over 22230 wh 1 for every 2 over
First year rule. Use 1/12 for month. starts when they claim
Could have partial years or even scattered months
Taxation of ss benefits
First compute provisional income
0/50/85
32/44 mfj.
25/34 sing
Overview of Medicare
Also know irmma calc is on magi plus tax exempt
Spousal SS benefits
Frequently tested
Max benefit is 50%
Currently married to worker
-Worker must have filed for own benefit
-Must have been married at least a year
Divorced from worker
-Worker must be at least 62
-Must have been married for at least 10 years, currently unmarried to anyone, divorce from worker at least 2 years
And start when you are age 62 but the benefit is reduced
No delayed credits past fra
Claiming SS on another’s record
Survivor. Widower
With or without child
Age and percentage
Remarried ok?
Any age with child 75%
Once age 60 100%
Age 60 without child 100%
For both of these current sp must have been married greater than equal to 9 months
Or 10 years for ex
The ex does not have to have been divorced for 2 years
In both cases must be currently unmarried OR got married after age 60
Widower mother/father and child
Looks like each can receive 75%
The child must be under age 16 or disabled
Once the widowed is 60 it goes up to 100%
RMDs
Do not have to take out of current employers plan if you’re still working and less than a 5% owner
Deadline for the first one is April 1st of the year following you turn age 73
Or IF a QP year of retirement if less than 5% owner
Penalty for not taking is 25%
Frequently tested is that if you delay that first one to April you’re going to have two RMDs that year
You can combine the value of all your IRAs and take it out of one
BUT
for QPs must take out of EVERY one
Qcd
Qcd age is still 70.5
24 limit is $105,000
If mfj and enough money in each area you could both do it
Up to 53k could go to a CRAT/CRUT
Direct transfers only.
Cannot go into a DAF
Watch for one spouse to have a balance of less than 105k
Nua election example
QDRO
Judgment decree or order for a qualified retirement plan to pay
Child support
Alimony
Marital property rights to alternate payee (spouse, ex, child, other dep of participant)
If not rolled over there is no penalty but there would be income tax
If rolled over no tax now
Top heavy qualified plans
What makes it top heavy and what’s the minimum for non key
In DBand DC
If the plan provides more than 60% of the aggregate accrued benefits to key employees - or more than 60% of accrued account balances in a DC
Key employees are one of these
-Earn more than $220,000
-Own more than 5%
-Own >1 %and earn over 150
Plan must use accelerated vesting or 3-year cliff
Provide minimum benefits to non-key employees
B b4 C like 2 B4 3
DB minimum defined benefit of 2% of comp times yrs up to 10 years
DC min cont of 3% of covered
Or if the DC for key is less than 3 non-key must receive at least equal to key
SS survivor my summary
Capital utilization approach
Most used calc for retirement funding
Takes account down to zero at day of death
Like Ed funding
We are using it all up. I eat if we die at exactly our life expectancy our account balance will be zero
ADP for 401k
Average deferral of HCE cannot exceed the greater of
- 125% of nonHCE avg
Or
-Lesser of
-2x non HCE avg
-nonHCE avg +2%
Example non-hce average 4%
Greater of
-5% is 125%
-Lesser of
2x is 8%
nonHCE +2% is 6%
So hce max is 6%
Which plans cannot be integrated with social security
Simples and esops
401K hardship withdrawal
Only available for employEE contributions
Reits
As long as 90% of their taxable income is distributed shareholders annually the income is free from taxation for the reit
At least 75% of their assets income must be derived from real estate equity or mortgages
Mortgage REITs allow investors to receive a stream of income from the mortgage payments
Equity REITs offer investors the potential growth of their investments through realized capital gains as well as the pass through from rental income
Employee coverage simple versus sep
Sep
over 21 and
$750 in 24 and
3 of 5 years employed
Simple
All with compensation over 5,000 in any prior two years
Remember the 25% withdrawal penalty in the first two years
Maximum loan in
Traditional profit sharing plan
401k
Traditional profit sharing
$50,000 or 1/2 of the VESTED balance
401k
Same except if vested is less than 10,000 can borrow 10,000
Company contributions to profit sharing
An employer can contribute more than 25% to an individual’s account. The 25% applies in aggregate to the total covered payroll
