Retirement Flashcards
Basic Concepts of Social Security
Coverage: Nearly every worker is covered under OASDI
Employment categories not covered by Social Security include:
* Federal employees who have been continuously employed since before 1984.
* Some Americans working abroad
* Student nurses and students working for a college or college club
* Railroad Employees
* A child under age 18 who is employed by a parent in an unincorporated business
* Ministers, members of religious orders and Christian Science practitioners if they claim an exemption
* Members of Tribal Councils
Social Security
Spousal Elegibility and Benefits
Spouse of a retired or disabled worker:
* Age >= 62 or
* has a child in care under age 16 or age 16 and over if disabled
Surviving Spouse:
* age 60 or over
* If there is a kid under age 16 or disabled before age 22, they are able to get benefits
Divorced spouse:
* Married for at least 10 years
* Not remarried
* At least 62 yrs old
* and divorced for at least 2 years
Social Security
Dependent and Disability Elegibility and Benefits
Dependent
* Surviving dependent of deceased insured worker
* Under age 19 and a FT elementary or high schoool student
* Age 18 or over but has a dsability which began before age 22
Disability
* Retired: Age 62 or over
* Not Retired: Under age 65, disabled for 12 months, or disbility expected to lead to death
* 5 month waiting period
Social Security
Benefit amounts
At FRA: 100% of PIA
Spouse:
* Greater of her PIA or 50% of spouse’s PIA
* If spouse dies: Greater of her benefit or 100% of spouse benefit
Social Security
(Reduction of Benefits)
Before FRA (Full Retirement Age): Benefits reduced $1 for every $2 earned over $22,320 (2024 threshhold)
Year in which you reach FRA (Full Retirement Age): Benefits reduced $1 for every $3 earned over $59,520 (2024 threshhold)
Social Security
Retired before FRA Reduction %’es
Reduction %: months early / 180
* 12m: 6.67%
* 24m: 13.34m
* 36m: 20%
* 48m: 25%
* 60m: 30%
Social Security
(Taxation)
- Must include Muni Bond Income to calculate MAGI
- If income (MAGI) plus ½ of Social Security Benefits is:
- Above $25K for a single taxpayer/ 32k MFJ, then 50% of the total Social Security is included in Income.
- Above 34k single / $44k for MFJ, then 85% of the total Social Security is included in Income.
Types of Qualified Plans / ERISA
(Vesting /Admin Costs / Exempt from Creditors / Integrate with Social Security)
- Defined Benefit
- Cash Balance
- Money Purchase
- Target Benefit
- Profit Sharing
- Profit Sharing 401(k)
- Stock Bonus ESOP (NOT integrated with Social Security or cross-tested)
Types of Retirement Plans
(No Vesting / Limited Admin Costs)
- SEP (Can be integrated with SS)
- SIMPLE
- SAR-SEP
- Thrift or Savings Plans
- 403(b)
Defined Benefit - Qualified Plan
- Favors older employee/owner (50+)
- Certain retirement benefit; Max $275K (2024)
- Meet a specific retirement objective
- Company must have very stable cash flow
- Past service credits allowed
- Forfeitures MUST be applied to reduce employer contributions
- PBGC Insured (along with Cash Balance Plan)
Defined Benefit Cash Balance Plan - Qualified Plan
- ER pension plan that provides for annual ER contributions
- Guaranteed minimum rate of return
Money Purchase - Qualified Plan
- Up to 25% Employer Deduction
- Fixed Contributions
- Need stable cash flow
- Maximum 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
- Maximum 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)
- Maximum Annual Contribution lesser of 100% of salary or $69K (2024)
- Can have 401(k) provisions
- SIMPLE 401(k) exempt from creditors
If PSP only ER money
Section 401(k) Plan
Qualified profit sharing or stock bonus plan that allows plan participants to defer salary into the plan.
* Max $23,000 (2024) deferral for participants under 50 (subject to FICA)
* Additional $7,500 catch-up for age 50 and over (2024)
Section 415 Annual Additions Limit
- Lesser of 100% of compensation or $69K (2024)
- Includes employer contributions, employee salary reductions and plan forfeitures
IRA Keys
(Simple, Sep, Sarsep)
- No loans
- No life insurance
- Immediate vesting
- May not be creditor protected (state specific)
- 59.5 for no 10% penalty
- Must take RMDs at 73 even if NOT an owner)
Safe Harbor Non-Discrimination
A Safe Harbor 401(k) plan automatically satisfies the non-discrimination tests involving highly compensated employees (HCEs) with either an employer matching contribution or a non-elective contribution.
Safe Harbor Match / Vesting
The statutory contribution using a match is $1/$1 on the first 3% employee deferral and $0.50/$1 on the next 2% employee deferral.
* If the employer chooses to use the non-elective deferral method, the employer must contribute 3% of all eligible employees’ compensation regardless of whether the employee is deferring or not.
* Employer contributions must be immediately vested.
Stock Bonus / ESOP - Qualified Plan
- Up to 25% employer deduction
- Flexible contributions
- Maximum Annual Contribution lesser of 100% of salary or $69K (2024)
- 100% of contribution can be invested in company stock
- ESOP cannot be integrated with Social Security or cross-tested
Net Unrealized Appreciation (NUA)
- NUA = Stock FMV at distribution - Stock basis at contribution to plan
- NUA will always be LTCG if stock sold
- Excess over NUA can be LTCG if stock held > 1 yr
- Basis taxable as ordinary income on distribution date
NUA Example:
Stock is contributed to the retirement plan with a basis of $20k. The stock is distributed at retirement with a market value of $200k. The NUA, $180k, is not taxable until the employee sells the stock, but the $20k is taxable now as ordinary income.
The $180k is always LTCG. If the client sells the stock for $230k, the $30k of extra gain is either STCG or LTCG depending on the holding period after distributed at retirement.
Keogh Contribution
Only for sole proprietor and partnerships
Self-Employment Tax must be computed and a deduction of one-half of the Self-Employment Tax must be taken before determining the Keogh deduction.
Keogh Contribution SE Tax Calculation
Shortcut below takes into account Self-Employment Taxes:
* If contribution 15%: multiply by 12.12% of net earnings
* If contribution 25%: multiply by 18.59% of net earnings
SIMPLE Plan
- Fewer than 100 employees
- Employer cannot maintain any other plan
- Participants fully vested
- Easy to administer and funded by employee salary reductions and an employer match
- Salary reduction limit: $16k
- Salary cap: $533,333
- For the first 2 years the 10% penalty is increased to 25%
SEP (Simplified Employee Pension)
- Flexible employer contributions only (No salary deferrals)
- Up to 25% contribution for owner (W-2) / treated like Keogh contributions for self-employed
- Maximum of $69K (2024)
- Account immediately vested
- Can be integrated with social security
- Special Eligibility: 21+ years old, paid at least $750 (2024) and worked 3 of the 5 prior years
- Form 5305 Sep
Tax-Deferred Annuity (TDA) / Tax Sheltered Annuity (TSA) / 403(b)
- For 501(c)(3) organizations and public schools
- Subject to ERISA only if employer contributes
- Salary reduction limit up to $23,000 (2024) plus $7,500 catch-up if 50 or over
- Another $3k catch-up if over 15 years of service with same ER
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 requirement, BUT then employee is immediately vested (2-year/100%) Not allowed for 401k
- Year of service is 1,000 hours (includes vacations, holidays and illness time) or 500 hours if worked 3 consecutive years
Ratio Percentage Test
PLan must cover NHCE at least 70% of the percentage of HCE
NHCE Coverage = 70% x HCE PErcentage
Average benefits Test
avg benefits for NHCE must at least be 70% of HCE
Highly Compensated Employee (HCE)
- A greater than 5% owner, OR
- An employee earning in excess of $155,000 during the preceding year
- Remember: Discrimination… Highly Compensated
Siblings don’t count
Key Employee
An individual is a Key Employee if at any time during the current year he/she has been one of the following:
* A greater than 5% owner, or
* An officer and compensation > $220,000 (2024), or
* Greater than 1% ownership and compensation > $155,000 (2024)
* Remember: Vesting… Key Employee
Siblings don’t count
Top Heavy Plan
Rule 1
More than 60% of aggregate accrued benefits or accoutn ablacne are allocated to key employees
Rule 2
* DB Plan: Bene must at least be 2% of comp
* DC Plan: Min. ER contribution >= 3%
Vesting - Fast / Slow
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 year graded or
* 100% vested after 2 years
ADP and ACP Test
- For salary deferral to test nondiscrimination. (All DC plans except ESOP)
- For 401k and 403b
Shortcut: 0-2% is “times 2”; 2-8% is “plus 2”
* NHCE Def = 1% so HCE is 2%
* NHCE Def = 2% so HCE is 4%
* NHCE Def = 3% so HCE is 6%
* NHCE Def = 4% so HCE is 8%
Defined Contribution Plans
(Integration with Social Security)
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
Remember Integration allows for discrimination based on wages
Defined Benefit Plans
(Integration with Social Security)
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
Control Group / Related Employers
- Parent-subsidiary: One entity owns at least 80% of another entity
- Brother-sister: 5 or fewer owners of 2 or more entities own 80% or more of each entity
- Affiliated Service Group: Service organization and a professional organization
Multiple Plans 2024
Elective Deferrals
Elective Deferrals: More than one employer (2024)
* Elective Deferrals to multiple plans are always aggregated (2024)
401k/403(b)/SIMPLE/SARSEP
* $23,000 plus catch up $7,500
SIMPLE and other SIMPLE
* $16,000 plus catch up $3,500
457 Plans are NOT part of aggregated amounts.
Life Insurance as a Funding Vehicle
According to the Treasury Regulations, life insurance benefits must be merely “incidental” to the primary purpose of the plan. If the amount of insurance meets either of the following tests, it is considered incidental:
* The aggregate premiums paid for a participant’s insured death benefit are all times less than the following percentages of the plan cost for that participant:
* Ordinary life insurance 50%
* Term Insurance 25%
* Universal Life 25%
* The participant’s insured death benefit must be no more than 100 times the expected monthly benefit. Defined benefit plans typically use the “100 times” limit.
4123e or 412i
- DB plan
- Funding limited to:
- Life insurance (1oo times rule) or
- Fixed annuities
UBTI
- Taxable income generated by a tax-exempt entity by means of certain passive activities
- Limited Partnership Interest
Rollovers NOT Permitted
- Transfers to another 457 plan remain the only option for non-governmental tax exempt organizations
- Hardship distributions can not be rolled into any other qualified plan
- Required minimum distributions
Hardship Withdrawals
- Limited to elective deferreals and vested profit sharing contirbutions
- For 401k plans
- Plan can’t suspend EE deferral contributions
- Can’t take out max plan loan
- Subject to OI and 10% depending on situations
Qualified Plan Early (age 59½) - 10% Tax Penalty Exceptions
- Death
- Disability
- Substantially equal periodic payments following separation from service
- Distribution following separation from service at age 55
- Distribution in accordance with QDRO (to any alternative payee)
- Medical expenses in excess of 7.5% of AGI or health insurance costs while unemployed
- Distribution used to pay insurance premium after separation from employment (must file for unemployment)
- $5,000 withdrawal for birth/adoption of a child
- Federal declared disaster (limited)
72(t)
Substantially equally payments subcject to special recapture provision
Subject to recap if periodic payments is modified before the later of:
* end of 5 year period
* Attainment of age 59.5
Penalty tax is imposed on all payments received before the TP turns 59.5 plus interest (on all payments recevied) in the year which it was modified
* ExceptionL death or disability
During those 5 years your have the option to take RMDs
10% recap
Required Beginning Date (RBD) for
IRAs / SEPs / SARSEPs / SIMPLEs
The required beginning date is April 1st of the year following the year in which the covered individual attained 73.
Subsequent distributions must be made by December 31st of each year thereafter.
Required Beginning Date (RBD) for
Qualified Plans / 403(b) / 457 plans
The required beginning date, with the exception of 5% owners, is the later of April 1st following the year in which the individual attained 73 or retired.
Subsequent distributions must be made by December 31st of each year thereafter.
5% owner RBD is the same as IRA/SEP RBD.
RMD Penalties
- 25% if distribution in a given year is short of the RMD amount or
- 10% if RMD is taken by the end of the second year following the year it was due
IRA Deductibility Keys
- If neither spouse (or single person) is an active participant in an employer plan, the IRA is deductible.
- Employer plans that affect participant status include almost all plans EXCEPT for 457 plans.
- If one spouse is an active participant, the other spouse (not active) can do a deductible IRA if combined AGI is less than $230-$240K (2024)
- If both spouses are active, AGI limits apply: $77K-$87K (single) and $123K-$143K (Married) (2024)
Note: Activity that results in active status: annual additions to a DC account or benefits accrued to a DB plan.
IRA Exceptions to 10% Penalty for Early Distributions before age 59½
Qualified = (Q)… if meet 5 years and 59.5 yrs earnings withdrawal no OI or penalty
If doesnt meet 5 year period all have OI tax but no penalty
* Death (Q)
* Substantially equal payments
* Disability (Q)
* First home expense up to $10,000 (Q)
* Qualified education expense
* Medical expense greater than 7.5%
* Distribution used to pay insurance premium after separation from employment (must have received unemployment compensation for 12 weeks)
* $5,000 withdrawal for birth/adoption of child
* Federally declared disaster (limited)
IRA can’t be used as collateral for loan… if so dist. in yr made
Roth IRA
Ordering Rules for Distribution
- Any contributions (not conversions) are withdrawn first
- Conversions are withdrawn second
- Earnings are withdrawn last
Inh Roth IRA
Required Minimum Distributions
- Distributed within 5 years of owner’s death, or
- Distributed over 10 years (stretch eliminated)
- Where sole beneficiary is owner’s surviving spouse, the spouse may delay distributions until the Roth owner would have reached age 73, or may treat the Roth as his or her own (roll it to her/her Roth)
Non-Qualified Deferred Compensation Plans
- Salary Reduction Plan: Uses some portion of the employee’s current compensation to fund the ultimate compensation benefit (also called Pure Deferred)
- Salary Continuation Plan: Uses employer contributions to fund ultimate benefit
Unfunded
- Aka informal funding
- Assets are owned by the company and are subj. to company’s creditors
Rabbi Trust
- Key Words: Merger, Acquisition, or Change of Ownership
- Assets in Rabbi Trust available for company’s creditors
- Fear that ownership / management may change before deferred compensation is paid
Incentive Stock Option (ISO)
Holding Period
Remember EGG
Holding Period:
* 1 year from Exercise Date
* 2 years from Grant before selling ISOs
* Violating either rule results in a Disqualifying Disposition
Disqualifying disposition
- ISO sold in the same year they were excercised: bargain element is subj. to FICA/FUTA
- ISO sold within 12m but the following calendar year: Ordinary income not subject to FICA/FUTA
*
NSO Rules and Tax Calcs
At Excercise
* Basis becomes share price at time of excercise
* Taxable OI on Difference between Basis and Share Price at times of exc.
At Selling
* Tax treatment is based on holding period from Excercise date
ISO Rules and Tax Calcs
At Excercise
* No tax
* Bargain Element = Share Price at times of exc. - basis
* Add back on AMT
At Selling
* Tax treatment is based on holding period rules
* Excess above basis is CG
Section 457
Deferred Compensation Plan
- Non-Qualified Deferred Compensation Plans of governmental agencies and non-church controlled tax exempt organizations
- Deferral limited to $23,000 or 100% of compensation (2024)
- Catch-up of $7,500 allowed for those 50 and over ONLY for governmental plans (2024)
- Salary deferrals NOT aggregated with other plans (401k, etc.)
- Non-governmental plans can ONLY be rolled into another 457 plan
- Subject to creditors
- Not subj. to FICA
Age-weighted /Cross-Testing
- Measures DC plans ffor nondiscriminatino
- Provides maximum benefits to HCE
- 69k for HCE or 1/3 of allocation rate of hce with highest allocation rate or 5% of NHCE comp for remaining NHCE
