Retirement Flashcards
Basic Concepts of Social Security (+Disability Definition)
Coverage: Nearly every worker is covered under OASDI (Old-Age, Survivors, and Disability Insurance)
Disability: No gainful activity medically determined last 12 month or death (5-month waiting period)
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 Benefits in Specific Cases
-Working - Reduction of Benefits: >FRA ($22,320), FRA ($59,520)
-Marriage
-Divorce
-Death
-Windfall Elimination Provision
-Parental Benefit
Amount of SS benefits you receive depends on age at retirement, earnings, and year of birth
* Before FRA (As early as 62 - 30% reduction): Reduced $1 for every $2 earned over $22,320 (2024)
* Year in which you reach FRA (67): Reduced $1 for every $3 earned over $59,520 (2024)
* If you wait until 70, you get an 8% increase per year (24% total)
Marriage: Get 50% of Spouse Benefit or OWN
* Whichever is higher and reduce if before FRA
* Must be married for 12 months
Divorce: Get 50% of Spouse Benefit or OWN
* Whichever is higher and reduce if before FRA
* Must be married 10 yrs, wait 2 yrs, >=62
Death: Get 100% of Spouse Benefit or OWN
* Whichever is higher and reduce if before FRA
* Must be 60 (50 disabled) even if Marry after (Not before)
* Get full Spouse Benefit even if they died before FRA
* Child Care Benefit until age 16!
Windfall Elimination Provision (WEP): Prevents receiving full retirement benefits from employment not covered under Social Security AND simultaneously receiving Social Security benefits
Parental Beneft: Get 50% of CHILD BENEFIT or OWN
* Whichever is higher and reduce if before FRA
* Child provide 50%+ of support, >=62
Social Security (Taxation)
Must include Muni Bond income to calculate MAGI.
Provisional Income: MAGI plus 50% of Social Security Benefit:
* Single/HoH/Widower: 25K-34K → Lesser of 50% total S.S OR 50% excess above 25K
* Single/HoH/Widower: 34K+ → Lesser of 85% total S.S OR 50% excess above 34K + 4.5K
* MFJ: 32K-44K → Lesser of 50% total S.S OR 50% excess above 32K
* MFJ: 44K+ → Lesser of 85% total S.S OR 50% excess above 44K + 6K
Types of Qualified Plans/ERISA (Vesting, Admin Costs/Exempt from Creditors/Integrate with S.S)
Employer gets tax deduction, Employee contributions and gains tax-deferred (Gains taxed as OI)
Defined Benefit (DB)→Guarantee Employees a payout after retirement (Risk on Employer) - PBGC COVERS
* Defined Benefit Plan→ Annuity Based on Formula (2% x final salary x years) → Pension
* Cash Balance→ % of pay and a specified rate of interest earnings to be credited to the account each year. Lump Sum Balance AT END; more flexible/portable (
Defined Contribution (DC)→ Employees payout depends on contributions & Investments
* Money Purchase→ Employer MUST contribute fixed % of Salary/yr → Pension
* Target Benefit→ Employers MUST contribute fixed projected retirement benefit→Pension
* Profit Sharing→ Employers CAN contribute flexible contributions (Cash or 401k)→Profit Sharing
* Stock Bonus ESOP (Not integrated with S.S or cross-tested) → Profit Sharing
NOTE 1: Maximum Covered Compensation is 345K (2024) → Only up to this amount included in benefit %
NOTE 2: Qualified plans MUST pass safe harbor OR ratio percentage OR average benefits test. Defined Benefit (DB) must also pass the 50/40 (Lesser of 50 EE or 40% of eligible employees) test.
Features Common to All Defined Contribution (DC) Plans
- Combined EE/ER contributions limit of 69K (25% employer deductible)
- Vesting: 3-year cliff or 2-6 year graded
- Participant-directed account and investments, easy to understand
- Favor younger Employees (Unless “age weighting” is included)
- No PBGC Insurance
Defined Benefit - Qualified Plan
- Meet specific retirement objective
- Company must have very stable cash flow
- ANY % Employer Deduction to hit Benefit Amount
- Favors older employee/owner (50+)
- Certain Retirement: Max 275K ANNUAL BENEFIT (2024)
- Past Service Credits Allowed (EE can purchase to increase years of service and benefit)
- Forfeitures (EE leaves before vesting) MUST be applied to reduce employer contributions
- PBGC Insured (along with cash balance plan)
Money Purchase - Qualified Plan
Employers MUST contribute a set % of employees’ pay. Employee contributions may be allowed.
* Defined Contribution (DC) Pension
* Up to 25% Employer Deduction
* Max Annual Contribution lesser of 100% of salary or 69K (2024)
* Fixed Contributions
* Need Stable Cash Flow
* Tax deferred (Can withdraw funds gradually or lump sum)
Target Benefit - Qualified Plan
Employers MUST contribute set $/% to target monthly retirement benefit (no guarantee)
* Defined Contribution (DC) - Pension
* Up to 25% Employer Deduction
* Max Annual Contribution lesser of 100% of salary or 69K (2024)
* Fixed Contributions to Each Employee (Simple: set %, Comp-Comp: Employee % of ALL Comp)
* Contributions are not the same for all EE; they are determined by age and projected retirement benefit with older employees generally receiving larger contributions
* Need Stable Cash Flow
Profit Sharing - Qualified Plan
Fixed cash /%/ Age-weighted/New comparability (split into two IRS approved groups) bonuses to tax-advantaged retirement accounts
* Defined Contribution (DC) - Profit Sharing
* Up to 25% Employer Deduction
* Flexible Contributions (Must be recurring and substantial and profits not needed)
* Max Annual Contribution lesser of 100% of salary or 69K (2024)
* Can have 401(k) provision (If Salary deferral feature added)
* SIMPLE 401(k) exempt from creditors
Stock Bonus/ESOP - Qualified Plan
Ownership interest in form of shares of stock (Set up as Trust Funds)
* Defined Contribution (DC) - Profit Sharing
* 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
* Generally only possible to redeem share if termination, retire, die, or disabled
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+
- Additional 3K (2024) catch up if worked 15+ years (15K Lifetime Max) → Plan must allow
Section 415 Annual Addition’s Limit
Provides dollar limitations on benefits and contributions under qualified plans
* Lesser of 100% of compensation or 69K (2024)
* Includes employer contributions, employee salary reductions and plan forfeitures
* Catch-up contributions NOT included
* Excess Benefit Plan: Makes up the difference between the qualified plan benefits top executives are allowed under IRC Section 415 and the benefit permitted for rank and file employees
Safe Harbor Non-Discrimination
Nondiscrimination testing (NDT) ensures qualified plans don’t favor HCEs. (Stay tax-qualified)
* HCE: 5%+ Owner or $155K+ in Previous Year and EVERYONE ELSE split into two groups (HCE can’t contribute more than 2% over other group)
* 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
- Non-Elective: Automatic 3% contribution (Regardless of Employee Contribution)
- Contribution Match: $1/$1 on first 3% contribution and $0.5/$1 on next 2% contribution
- Employer contributions must be immediately vested
Age and Service Rules - Qualified Plans
- Max age and service are age 21 and one year of service (21-and-one-rule)
- Special 401(k) provision allows up to 2-year service requirements, BUT then employee is immediately vests (2-year/100%)
- Year of service is 1000 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)
Top-Heavy Qualified Plans
Total value of accounts held by key employees exceeds 60% of the plan assets
* Must provide minimum contributions for non-key employees. (Generally 3% of non-key comp)
Vesting
Employee, Safe Harbor, Rollovers, QNEC, are always 100% vested
Fast: Top-Heavy Defined Benefit (DB) AND All Defined Contribution (DC) Plans
* 3-year cliff (100% after 3-years) or 2-6 year graded or 100% vested after 2-years
Slow: Non-Top-Heavy Defined Benefit (DB) Plans Only
* 5-year cliff (100% after 5-years) or 3-7 years graded or 100% after 2-years
Defined Benefit (DB) Plans (Integrated with S.S)
Allow HCE whose earning exceed SS wage base (168.6K) to get additional retirement compensation
* Excess % = Lesser of 2 X Base % or Base % + 26.25%
* Excess % = Base % + Permitted Disparity
* Excess %: DB Plan contribution for compensation above integration level
* Base %: DB Plan contribution for compensation below integration level
* Permitted Disparity: Lesser of Base % or 26.25%
Defined Contribution (DC) Plans (Integrated with S.S)
Allow HCE whose earning exceed SS wage base (168.6K) to get additional retirement compensation.
* Excess % = Lesser of 2 X Base % or Base % + 5.7%
* Excess % = Base % + Permitted Disparity
* Excess %: DC Plan contribution for compensation above integration level
* Base %: DC Plan contribution for compensation below integration level
* Permitted Disparity: Lesser of Base % or 5.7%
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.
Trigger Points: Separation From Service at 55+, Age 59½, Disability, Death (NO 10% Penalty)
Types of Retirement Plan (No Vesting/Limited Admin Costs)
- SIMPLE (Not integrated with S.S)
- SEP
- SAR-SEP (Old SEP → 50% of employees choose contributions and <=25, 23K contribution limit)
- Thrift or Savings Plan → Federal EE and Military 401(k); pre-tax contributions and match; 23K Max.
- 403 (b)
IRA Keys (SIMPLE, SEP, SARSEP)
- Immediate Vesting
- No Loans
- Cannot hold Life Insurance Investments (or be rolled into)
- May not be Creditor Protected (State Specific)
- Not included in Financial AID calculations
- 59½ for no 10% Penalty
- 70½ for Qualified Charitable Distributions (Up to 105K)
- Must take RMDs at 73 (even if not owner and IRA inherited OTHER THAN SPOUSE below 73)
SIMPLE IRA Plan
Easier/cheaper to administer for smaller business (< 100 Employees required)
* Employer cannot maintain any other plan
* Pre-Tax contributions up to 16K/yr with 3.5K catch-up (2024)
* Employer Contributions MUST DO 2% Automatic Contribution or 3% Match
* Participants fully vested (Distribution within first two years may incur 25% penalty in addition to standard 10% for IRAs)
* Can have any investment options
* No integration with S.S
SEP IRA (Simplified Employee Pension Individual Retirement Arrangement) Plan
Typically used by self-employed or small business
* Employer contribute Max of 25% of compensation or 69K (2024) –> CAN MAKE CONTRIBUTIONS UNTIL EXTENSIONS DEADLINE
* NO Salary Deferrals - Employer contributions ONLY
* Account immediately vested
* No catch-up, ROTH contributions, and contributions MUST BE EQUAL percentages to all owners
* Can be integrated with Social Security
* Deduct to 25% Contributions for Owner (W-2); Treated like Keogh Contributions for Self-Employed
* Calculation: (x%/1+x%) x (Profit -1/2 SE Tax)
* Special Eligibility: 21+ years old, paid at least $750 (2024) and worked 3 or prior 5 years
IRA Deductibility Keys
- If both spouse (or single person) is NOT 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), 123-143K (MFJ), < 10K (MFS) (2024) → Deductible
- NOTE: DC account or benefits to DB Plans → ACTIVE
Qualified Plan Early (59½) -10% Tax Penalty Exceptions
- Death
- Disability (Permanent & Long-Term preventing Any Occupation)
- Terminal illness
- Substantially equal periodic payments following separation from service (SEPP) - 72(t) (Amortization, Annuitization, Required Minimum Distributions)
- 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 (Rule 55)
- Distributions in accordance with QDRO (to any alternative payee) → Court ordered for 401(K), Alimony/Child Support
IRA Exceptions to 10% Penalty (59½)
- Death
- Disability (Permanent & Long-Term preventing Any Occupation)
- Substantially equal periodic payments following separation from service (SEPP) - 72(t) (Amortization, Annuitization, Required Minimum Distributions)
- 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 (Buy, Build, Rebuild new house for you)
- Qualified Education Expense (For you, spouse, kids, ect)
- Distributions used to pay insurance premiums after separation from employment (must file unemployment and received for 12 weeks)
ROTH IRA Ordering Rules for Distributions
Absolute Requirement for “qualified” ROTH IRA distribution is 5-year holding period (STARTS FIRST DAY OF YEAR YOU MADE CONTRIBUTION – JAN 1st even if contributed on Dec 31st)
1. Any contributions (not conversions)
2. Conversions (5 years OR 59½)
3. Earnings (5 years AND 59½)
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)
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
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
Keogh Contribution
-Example 1: 168K Net Profit (Max Contribution)
-Example 2: 168K Net Profit (10% Contribution)
-Example 3: 200K Net Profit (Max Contribtuion)
For self-employed (Sole Proprietor and Partnerships)
- Offers both Defined Benefit (DB) & Defined Contribution (DC) Plans
- Max Annual Contribution lesser of 25% of salary or 69K (2024) —> Catch-up Eligible –> CAN MAKE CONTRIBUTIONS UNTIL EXTENSIONS DEADLINE
- Self-employment tax must be computed and ½ deduction of self-employment tax must be taken BEFORE determining Keogh deduction (20% for max)
- Tax Deferred Growth
- Require Annual Reporting
Example 1: $155148 (0.25/1.25) = $31,029.60
Example 2: $155148 (0.10/1.10) = $14,104.36
Example 3: $186634 (0.25/1.25) = $37,326.88
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)
Multiple Plans 2024 (Elective Deferral)
-Max EE Contribution if 401(k) and 403(b)?
-Max EE Contribution if 401(k) and SIMPLE IRA?
- 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 (457 Plans)
- 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
Non-Qualified Retirement Plans (Salary Reduction, Salary Continuation, Stock Appreciation, Excess Benefit)
Depends only on the employer’s unsecured promise to pay and can be DC or DB
Salary Reduction Plan: Uses portion of employee’s current comp. To fund ultimate comp. Benefit (pure deferred)
Salary Continuation Plan: Refers to a type of non-elective nonqualified deferred compensation plan that provides deferred amount payable in the future.Uses employer contributions to fund ultimate benefit
Stock Appreciation Rights: Generally, no actual shares are set aside, nor are shares of stock necessarily actually distributed. The value of employer stock is measured by which benefits are valued.
Excess Benefit Plan: Makes up the difference between the qualified plan benefits top executives are allowed under IRC Section 415 and the benefit permitted for rank and file employees
NOTE: Earnings of plan assets set aside in currently taxable investments to informally fund a nonqualified deferred compensation plan DO NOT provide the employer with an offsetting tax deduction (deductible when amount is includible in the EE’s income)
Incentive Stock Option (ISO) Holding Period & Benefits
- 2 years from grant and 1 year from exercise date before selling ISOs → LTCG: BASIS GIVEN - Sold
- Violating either rule results in Disqualifying Disposition (NSO)
- Non-qualified stock option (NSO): OI: BASIS GIVEN - Exercised; LTGC: Exercised - Sold
Section 457 Deferred Compensation Plan
Non-Qualified Defined Compensation Plans of Government Agencies, States, Cities, Towns, and Controlled Tax Exempt Organizations (NOT CHURCHES)
* * Deferral limited to 23K or 100% of compensation (2024)
* 7.5K catch up allow to 50+ and ONLY government plans (2024) → SPECIAL 3-year CATCH UP BEFORE FRA
* Early distributions from government 457 are NOT subject to penalty
* Salary deferrals NOT aggregated with other plans
* Non-governmental plans can ONLY be rolled into another 457 plan (Government plans rolled into another government 457, tax-advantaged employer-sponsored plan, qualified plan or IRA)
* Non-governmental plans ONLY available to management and HCE
