Retirement Flashcards
Basic Concepts of Social Security
Coverage: Nearly every worker is covered under OASDI.
Employment NOT covered by Social Security Include:
* Federal employees who have been continuously since before 1984
* Some Americans working abroad
* Railroad employees
* Members of Tribal Councils
* Student nurses and students working for a college or college club
* A child, under age 18, who is employed by a parent in unincorporated business
* Ministers, members of religious orders and Christian science practitioners if they claim an exemption
Social Security (Reduction of Benefits)
Before FRA (Full Retirement Age): Reduced $1 for every $2 earned over $22,320 (2024)
Year in which you reach FRA: Reduced $1 for every $3 earned over $59,520 (2024)
Social Security (Taxation)
Must include Muni Bond income to calculate MAGI.
If income (MAGI) plus ½ of Social Security Benefit is:
* Above 25K for single taxpayer, then 50% of total S.S included in income
* Above 44K for MFJ, then 85% of total S.S included in income
Types of Qualified Plans/ERISA (Vesting, Admin Costs/Exempt from Creditors/Integrate with S.S)
- Defined Benefit
- Cash Balance
- Money Purchase
- Target Benefit
- Profit Sharing
- Profit Sharing 401K
- Stock Bonus ESOP (Not integrated with S.S or cross-tested)
Types of Retirement Plans (No Vesting/Limited Admin Costs)
- SEP
- SAR-SEP
- SIMPLE
- Thrift or Savings Plans
- 403(b)
Defined Benefit - Qualified Plan
- Meet specific retirement objective
- Company must have very stable cash flow
- Favors older employee/owner (50+)
- Certain Retirement: Max 275K (2024)
- Past Service Credits Allowed
- Forfeitures MUST be applied to reduce employer contributions
- PBGC Insured (along with cash balance plan)
Money Purchase - Qualified Plan
- Up to 25% Employer Deduction
- Fixed Contributions
- Need Stable Cash Flow
- Max Annual Contribution lesser of 100% of salary or 69K (2024)
Target Benefit - Qualified Plan
- Up to 25% Employer Deduction
- Fixed Contributions
- Need Stable Cash Flow
- Max Annual Contribution lesser of 100% of salary or 69K (2024)
- Favors Older Workers
Profit Sharing - Qualified Plan
- Up to 25% Employer Deduction
- Flexible Contributions (Must be recurring and substantial)
- Max Annual Contribution lesser of 100% of salary or 69K (2024)
- Can have 401(k) provision
- SIMPLE 401(k) exempt from creditors
Stock Bonus/ESOP - Qualified Plan
- Up to 25% employer deduction
- Flexible contributions
- Max Annual Contribution less of 100% of salary or 69K (2024)
- 100% contribution can be invested in company stock
- ESOP cannot be integrated with S.S or cross-tested
Section 401(k) Plan
- Qualified Profit sharing or stock bonus plan allows deferred salary to the plan
- Max 23K (2024) deferral (Subject to FICA).
- Additional 7.5K (2024) catch up for 50+
Section 415 Annual Addition’s Limit
- Lesser of 100% of compensation or 69K (2024)
- Includes employer contributions, employee salary reductions and plan forfeitures
Safe Harbor Non-Discrimination
Safe Harbor 401(k) automatically satisfies non-discrimination tests involving highly compensated employees (HCE) with either employer matching or non-elective
Safe Harbor Match/Vesting
- Statutory contribution using match is $1/$1 on first 3% employee deferral and $0.5/$1 on next 2% employee deferral
- If employer chooses non-elective deferral method, employer must contribute 3% of all eligible employees’ compensation regardless of whether employee is deferring or not
- Employer contributions must be immediately vested
Net Unrealized Appreciation (NUA)
Example: Stock contributed to retirement plan with 20K Basis. Stock distributed at retirement with market value of 200K. NUA = 180K is not taxable until employee sell stock, but 20K is taxable now as ordinary income.
* 180K is always LTCG, if sold at 230K, the 30K of extra gain is either STCG or LTCG depending on holding period after distribution at retirement.
Keogh Contribution
- Only for sole proprietor and partnerships
- Self-employment tax must be computed and ½ deduction of self-employment tax must be taken BEFORE determining Keogh deduction
SHORTCUT: 15% Contribution→Multiply by 12.12%, 25% Contribution→Multiply by 18.59%
SIMPLE Plan
- <100 Employees
- Employer cannot maintain any other plan
- Participants fully vested
- East to administer and funded by employee salary reductions and employer match
SEP (Simplified Employee Pension) Plan
- NO Salary Deferrals - Employer contributions ONLY.
- Max of 69K (2024)
- Account immediately vested
- Up to 25% Contributions for Owner (W-2); treated like Keogh Contributions for Self-Employed
- Can be integrated with Social Security
Special Eligibility:21+ years old, paid at least $750 (2024) and worked 3 or prior 5 years
Tax-Deferred Annuity (TDA) / Tax-Sheltered Annuity (TSA) / 403(b)
- For 501(c)(3) organizations and public schools
- Subject to ERISA if employer contributes
- Salary reduction limit of 23K + 7.5K catch-up for 50+ (2024)
Age and Service Rules - Qualified Plans
- Max age and service are age 21 and one year of service (21-and-one-rule)
- Special provision allows up to 2-year service requirements, BUT then employee is immediately vests (2-year/100%)
- Year of service is 100 hours (includes vacation, holidays, and illness time) or 500 hours if worked 3 consecutive years
Highly Compensated Employee (HCE)
- Greater than 5% Owner OR
- Employee earning 155K+ in preceding year
Key Employee
Any time during the current year:
* Greater than 5% Owner
* An officer and compensation >220K (2024)
* Greater than 1% ownership and compensation >155K (2024)
Vesting
Fast
* DB Top-Heavy Plans/All DC Plans
* 3-year cliff or 2-6 year graded or 100% vested after 2-years
Slow
* Non-Top-Heavy DB Plans Only
* 5-year cliff or 3-7 years graded or 100% after 2-years
Defined Contribution Plans (Integrated with S.S)
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
Defined Benefit Plans (Integrated with S.S)
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
Multiple Plans 2024 (Elective Deferral)
Elective Deferrals to multiple plans are always aggregated (2024)
401K/403(b)/SARSEP → 23K + 7.5K catch-up
SIMPLE and other SIMPLE → 16K + 3.5K catch-up
Life Insurance as Funding Vehicle
Benefits must be “incidental” to the primary purpose of plan. “Incidental Tests:”
* Aggregate premiums paid for death benefits are less than % at all times (Ordinary LI → 50%, Term LI → 25%, Universal Life → 25%)
* Insured death benefit must be <= 100 times expected monthly benefit
Rollovers NOT permitted
- Transfers to another 457 plan remain only option for non-governmental tax exempt organizations
- Hardship distributions cannot be rolled into any other qualified plan.
- Required minimum distributions
Qualified Plan Early (59½) -10% Tax Penalty Exceptions
- Death
- Disability
- Substantially equal periodic payments following separation from service
- Medical Expenses >7.5% of AGI
- 5K withdrawal for birth/adoption
- Emergency Personal Expense (1K/year)
- Federal declared Disaster (limited)
- Distributions to Military called for Active Duty
- Distributions following separation from service at age 55
- Distributions in accordance with QDRO (to any alternative payee)
- Terminal Illness
IRA Exceptions to 10% Penalty (59½)
- Death
- Disability
- Substantially equal periodic payments following separation from service
- Medical Expenses >7.5% of AGI
- 5K withdrawal for birth/adoption
- Emergency Personal Expense (1K/year)
- Federal declared Disaster (limited)
- Distributions to Military called for Active Duty
- First House Expense up to 10K
- Qualified Education Expense
- Distributions used to pay insurance premiums after separation from employment (must file unemployment)
Required Beginning Date (RBD) for IRAs/SEPs/SARSETs/SIMPLEs
- April 1st of year following the year in which individuals turns 73
- Subsequent distributions made by Dec 31st of each year thereafter
Required Beginning Date (RBD) for Qualified Plans (403(b), 457)
- Later of April 1st following the year in which individual turned 73 or retired
- Subsequent distributions made by Dec 31st of each year thereafter
- 5% owner RBD is same as IRA/SEP RBD
IRA Deductibility Keys
- If either spouse (or single person) is active participant in employer plan → Deductible
- Employer plans that affect participant status include almost all plans EXCEPT 457
- If one spouse is active, the other spouse (not active) and combined AGI less than 230-240K (2024) → Deductible
- If both spouse active, AGI below 77-87K (single) and 123-143K (Married) (2024) → Deductible
- NOTE: DC account or benefits to DB Plans → ACTIVE
ROTH IRA Ordering Rules for Distributions
1) Any contributions (not conversions)
2) Conversions
3) Earnings
ROTH IRA RMD
- Distributed within 5 years of owner’s death
- Distributed over 10 years (stretch eliminated)
- Sole beneficiary is spouse, may delay distributions until owner would have reached 73 or treat as own ROTH (roll it over)
Non-Qualified Deferred Compensation Plans
Salary Reduction Plan: Uses portion of employee’s current comp. To fund ultimate comp. Benefit (pure deferred)
Salary Continuation Plan: Uses employer contributions to fund ultimate benefit
Incentive Stock Option (ISO) Holding Period
- 1 year from exercise date and 2 years from grant before selling ISOs
- Violating either rule results in Disqualifying Disposition
Section 457 Deferred Compensation Plan
- Non-Qualified Defined Compensation Plans of government agencies and non-church controlled tax exempt organizations
- Deferral limited to 23K or 100% of compensation (2024)
- 7.5K catch up allow to 50+ and ONLY government plans (2024)
- Salary deferrals NOT aggregated with other plans
- Non-governmental plans can ONLY be rolled into another 457 plan
IRA Keys (SIMPLE, SEP, SARSEP)
- No Loans
- No Life Insurance
- Immediate Vesting
- May not be Creditor Protected (State Specific)
- 59½ for no 10% Penalty
- Must take RMDs at 73 (even if not owner)
