Retirement Flashcards
SS: A fully insured worker needs how much credits?
40 credits (quarters) of work history
SS: A “currently” insured worker needs how much credits?
6 credits but is only eligible for:
- Lump sum DB ($255)
- Surviving spouse benefits (if children under 16)
- A dependent benefits
Employment categories NOT covered by SS
Some state employees/teachers
Members of tribal councils
Railroad employees
When does a surviving spouse qualify for SS?
Age 60+
Or if they have a child under age 16 (age does not matter)
Or a child who became disabled before age 22.
Divorced spouse SS benefits
- Must have been married for 10 years
- Must not be remarried
- Can claim benefits even if spouse has not claimed their own retirement benefits
SS dependent benefits
Child (dependent) qualifies for benefit if:
- child is under age 19 and a full time student (HS and lower)
- Age 18+ but has a disability which began before age 22.
What is the lump sum SS death benefit?
$255
SS PIA means what?
PIA = Primary insurance amount
(100% of benefit at RTA)
Calculation for taking SS before RTA
Reduced benefit amount = (X of months before FRA / 180 )
Working after retirement limits
Given on exam
Pre FRA = $1 deducted for every $2 earned over $22,320
In year of FRA = $1 deducted for every $3 earned over $59,520
Taxation of SS benefits
(Draw chart)
50% of it is taxed if provisional income is:
Single: $25,000
JT: $32,000
85% of it is taxed if provisional income is:
Single: $34,000
JT: $44,000
How is provisional income calculated?
AGI + tax exempt interest + 1/2 social security income
Types of “qualified” retirement plans
1) Trad DB Plan
2) Cash Balance Plan
3) Money Purchase
4) Target Benefit
5) Profit sharing (w/401k)
6) Stock Bonus Plan
DB plans (1 & 2)
- Stuff it like a pig. Limit = benefit amount.
- Investment risk = employER
DC Plans (3-6)
- Limit = contribution amount ($69k)
- Investment risk = employee
Pension plans (1 - 4)
- Mandatory annual contribution requirements
Profit Sharing (5 & 6)
- Substantial and recurring
Limits for DC contributions
Employee deferrals =$23k (total between all plans even if participant has multiple jobs.
**Plus $7,500 catch up for 50+
(Except 457 plans! Can max out a 457 AND another qualified plan)
TOTAL contribution = $69k or 100% of comp.
(Total per PLAN)
**Max income use = $345k
Limits on DB plans
$275,000 maximum annual BENEFIT or 100% of comp for the highest 3 earning consecutive years
**Max income used = $345k
DB Unit benefit formula
% of earnings/year x yrs of service = annual pension amount
What is PBGC?
“Insurance” for DB plans.
The monthly benefit (not lump sum) is guaranteed by the PBGC.
DB plans may be terminated (voluntarily/involuntarily) by the PBGC
Which plans allow for employee deferrals?
“444S”
401k
403b
457
Simple IRA
What does Cross Testing plans (age-weighted test) do?
Measures DC plans for nondiscrimination on the basis of benefits and DB plans on the basis of contributions.
What is the definition of a HCE vs key employee?
HCE if either:
- 5%+ owner
or
- $155k earnings in prior year
Key Employee if ANY:
- 5%+ owner
- An officer AND comp over $220k (current yr)
- A greater than 1% owner AND comp over $155k (current year)
What is a 412(i) plan?
A DB plan funded entirely with insurance products.
Age and service maximum requirements for “Qualified” plans
21 and one rule
- Age 21
- One year of service
**1,000 hrs or 500 hrs for 3 consecutives years
OR a special 2 year rule.
- 2 years of service to get in but 100% vested.
Ratio % test and average benefits test
Ratio %:
- The plan must cover a % of NHCE that is at least 70% of the HCEs.
IF this fails - must meet the avg benefit test:
- benefit all NHCE must be at least 70% of the benefit for the HCE
DB plans: Minimum participation
Lesser of:
50 employees
OR
The greater of:
- 40% of all eligible employees
or
- 2 employees (or if just 1, then 1)
Vesting Schedule for non-top heavy DB plans
5 yr cliff
or
3-7 year graded
or 100% vested with 2 yr eligibility
Vesting Schedule for all DC plans and Top heavy DB plans
3 yr cliff
2-6 year graded
- 0% yr 1
- 20% yr 2
- 40% yr 3
- etc…
100% vested with 2 yr eligibility
ADP/ACP Testing
HCE’s contributions must be BOTH of the following:
- Not more than 125% of the NHCE rate
- Not more than 200% of the NHCE rate and not more than 2% greater than the NHCE
Shorthand:
- If NHCE contribute 0-2% then HCE = x2%
- If NHCE contribute 2-8% then HCE = +2%
Integration with SS for DB plans
Base % + Permitted disparity = Excess benefit %
Permitted disparity = lesser of base % or 26.25%
Integration with SS for DC plans
Base % + Permitted disparity = Excess benefit %
Permitted disparity = lesser of base % or 5.7%
Section 415 annual addition limit
$69,000 (including employer contributions, employee salary reductions and forfeitures)
Keogh plans: Contribution limits for self-employed
15% plan = employER contributions limited tof 12.12
25% plan = employER contributions limited to 18.59%
When is a plan TOP HEAVY?
If more than 60% of accrued benefits/acct balances are allocated to key employees
If a plan is top heavy, the plan must provide a minimum benefit amount to non key employees of how much?
DB plans = benefit must be at least 2% of comp multiplied by # of yrs of service (max of 10 yrs)
**B = 2nd letter in alphabet
DC plans = contribution must be no less than 3% of each non-key employees compensation.
**C = 3rd letter in alphabet
Can you use interest from a 401k loan as an itemized deduction?
Key employees = never
Non-key employees: only if loan was FOR a primary residence and is SECURED by the primary residence
Is alimony considered compensation for IRA purposes?
Pre-2019 = YES
Can you delay taking your RMD if you are still working?
YES - but only from a qualified plan (NOT IRA!)
NO if you are the owner (5%+)!
Trad IRA deductibility rules
If neither spouse has a qualified plan at work:
- unlimited income and can deduct
If one spouses has a qualified plan at work:
- Income under $143 - 2 deductions
- Income under $240k - only 1 deduction
- Income over $240k - No deductions
If two spouses have a qualified plan at work:
- Under $143k - 2 deductions
- Over $143k - 0 deductions
Roth Distribution Rules
Distributions taken out in this order:
1) Contributions (always tax & penalty free)
2) Conversions (never taxed - maybe penalty free)
3) Earnings (maybe both)
Roth IRA conversion distribution rules
Penalty exception if:
Held for 5 years
OR
59.5 (or other triggering event)
Roth IRA earnings distribution rules
Penalty exception if:
Held for 5 years
AND
59.5 (or other triggering event)
IRA Distribution penalty exeptions
Same as qualified plan:
- Death
- Disability
- 72T
- Medical expense > 7.5% AGI
- Federally declared disaster
- $5k for qualified birth/adoption
+Different from qualified plan:
- Qualifying Ed expenses
- Medical insurance after separation from employment (>10% AGI limit)
- First home (up to $10k)
NO LOANS
What is an ABLE account?
“Achieving a better life experience”
- Expands the 529 to create tax-advantaged acct for the disabled. $18k annual limit. Distributions are not included in gross income and acct balance is exempt from $2k asset limit for Medicaid and SSI
SEP Eligibility Requirements
21 yrs + 3 years employment (PT employment counts)
SIMPLE Eligibility Requirements
Must cover any employee that earned $5k in any two previous years and expected to earn $5k in current yr
**25% penalty if w/d in first 2 years
**Limit of 100 employees
Special Catch up rules for 403b and 457
403b:
- $23,000 + $7,500 catch up
+ Ind who have 15 years of service can defer an additional $3k
(can use both $7,500 and $3,000)
457:
- Final 3 years the limit is increased to the lesser of 2x normal limit ($23k x 2) or something else
Can 457’s be rolled into an IRA or another qualified plan?
Governmental 457 CAN
Nongovernmental 457 plans can ONLY be rolled into another nongovernmental plan
What does ERISA and the DOL do?
ERISA
- Imposes various duties, standards, and prohibitions on plan fiduciaries
**Protects the interest of participants
DOL:
- Is concerned about the advise given by the broker/dealer
**Enforces ERISA and issues interpretive guidelines on ERISA provisions
Date to establish a SEP vs a SIMPLE
SEP:
- May be established up until tax deadline
SIMPLE:
- Must be established by Oct 1st
Distributions from a qualified plan. Exceptions for under 59.5.
- Hardship (but must have 10% penalty)
- Death
- Disability
- 72T
- Age 55+ with separation of service
- QDRO
- Medical expensive > 7.5% of AGI
- $5k for birth/adoption
- Federally declared disaster
IRA 60 day rule
IRA owner can w/d balance and reinvest it within 60 days but only ONCE per year
Qualified plan: Direct transfer vs direct distribution
Direct transfer:
- Check made out to the receiving plan/IRA
- No 20% w/h
Direct distribution:
- Check is payable to participant and 20% paid to the IRS
First RMD must be taken by what date?
April 1st of following year
By what age can someone do a QCD?
70.5
Up to $100k annually
If IRA owner dies without a beneficiary listed, what happens?
5 year rule:
- The entire acct must be distributed at any time up until 12/31 of the 5th year after the year the acct holder died
NUA taxation
Basis = taxed at ordinary income at time of the rollover.
Then taxed when sold:
- Growth prior to rollover = always LTCG
- Further growth = either ST or LT depending on holding period
Rabbi Trust
Protection against management changes but still available to creditors
Unfunded deferred comp
“naked promise”
Employees are not taxed until they have constructive receipt (and no tax deduction from the employer until that time)
Secular Trust for Deferred Comp
Irrevocable trust that are placed beyond the reach of the employer’s creditor so taxation occurs in the year in which the assets are placed in the trust.
When do stock options qualify for ISO tax treatment?
Remember “EGGS”
One year from Exercise -> Sale
Two years from Grant -> Sale
Only on the first $100k
Then: Excess above basis = LTCG
Tax treatment for NSO
When exercised = excess above basis = ordinary income
When sold = ST or LT cap gain
What are RSU’s?
Restricted stock units - a form of stock-based compensation.
Usually have no financial value when issued but can have great value once vested.
*Value of the shares are taxed as compensation and then taxed at Cap Gain rates upon vesting
What are SAR’s?
SAR’s are rights to be paid an amount of money equal to the difference between the value of a specified number of shares of stock on the date the SAR’s are granted and the value of the stock on the date the SAR’s are exercised.
What is phantom stock?
A right to a cash bonus based on the performance of phantom shares of a corporations common stock over a specified period of time
What is a ESPP (employee stock purchase plan)?
Section 423 - allows the employer to discount the price of the stock up to 15% of the market value
What is UBTI?
“Unrelated business taxable income”
It occurs when a plan invests in a limited partnership and generates taxable income inside a tax-exempt entity.
When can you use RMD joint life tables?
When your spouses age is more than 10 years younger
Does an active employee (still working) have to start taking RMD’s from a SIMPLE at age 73
Yes
But can also contribute!
Tax free withdrawals from the COVERDELL ESA can be taken for what items?
Tutoring
Special needs services
Books
Room and board
Uniforms
Can the AOC be used for both undergraduate and graduate?
No - just undergraduate
If you withdrawal money from a (non-MEC) life policy - how is it taxed?
Contract value over basis = ordinary income rates
Does alimony continue after death?
No
