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
Reduction of Benefits
Age 62 - FRA (Full Retirement Age): Benefits reduced $1 for every $2 earned over $17,640 (2019 threshhold)
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, then 50% of the total Social Security is included in Income.
Above $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 SIMPLE SAR-SEP Thrift or Savings Plans 403(b)
Defined Benefit - Qualified Plan
Favors older employee/owner (50+)
Certain retirement benefit; Max $225k (2019)
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)
Money Purchase - Qualified Plan
Up to 25% Employer Deduction
Fixed Contributions
Need stable cash flow
Maximum Annual Contribution lesser of 100% or salary of $56k (2019)
Target Benefit - Qualified Plan
Up to 25% Employer Deduction Fixed Contributions Need stable cash flow Maximum annual contribution less of 100% of salary or $56K (2019) 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 $56K (2019)
Can have 401(k) provisions
SIMPLE 401(k) exempt from creditors
Section 401(k) Plan
Qualified profit sharing or stock bonus plan that allows plan participants to defer salary into the plan.
Max $19,000 (2019) deferral for participants under 50 (subject to FICA)
Additional $6,000 catch-up for age 50 and over (2019)
Section 415 Annual Additions Limit
Lesser of 100% of compensation or $56,000 (2019)
Includes employer contributions, employee salary reductions and plan forfeitures
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 $56K (2019)
100% of contribution can be invested in company stock ESOP cannot be integrated with Social Security or cross-tested
Net Unrealized Appreciation (NUA)
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.
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 people
employer cannot maintain another plan
participants Fully vested
easy to administer and funded by employee salary reductions and employer match
SEP (Simplified Employee Pension)
NO SALARY DEFERRALS–employer contribution only
Up to 25% contribution for owner (W-2)/ treated like KEOGH contribution for self employed
max of $56k
account immediately vests
can be integrated with Soc. Sec.
special eligibility–21+ years old, paid at least $600/yr and worked 3 of 5 years
Tax-Deferred Annuity (TDA)
Tax Sheltered Annuity (TSA)
403(b)
for 501(c)3 org and schools
Subject to ERISA only if employer contributes
salary reductions limit to 19000 plus $6k catch up over 50
Age and Service Rules - Qualified Plans
max age and service are 21 and 1 year
special provision-2years of service, BUT immediately vests
year of service is 1000 hrs (includes vacation and sick time)
HCE
a greaater that 5% owner OR
an employee earning over 125,000 in PRECEDING year
key employee
individual if at any time during the year is one ofthe following
greater that 5% owner
officer and paid $180,000 or more
greater than 1% owner and paid $150000
vesting–fast/slow
fast
DB Top heavy Plans/ALL DC Plans
3 yr cliff or 2-6 graded or 2yr/100% vest
slow
NON TOp Heavy DB ONLY
5 yr cliff or 3-7 graded or 2 yr/100% VEST
Defined Contribution Plans
Integration with Social Security
Base % + permitted disparity=% excess
base %-DC plan contribution for comp below integration level
Permitted Disparity-Lesser of base% or 5.7%
Excess %-DC plan contribution for compensation above integration level
Defined Benefit Plans
Integration with Social Security
Base % + permitted disparity=% excess
base %-DB plan contribution for comp below integration level
Permitted Disparity-Lesser of base% or 26.25%
Excess %-DB plan contribution for compensation above integration level
Multiple Plans 2019
Elective Deferrals
Elective defferals–More than one employer
ELect defferals to multi plans ALWAYS aggregate
401k/403b/SIMPLE/SARSEP
19000 pplus 6k catch over 50
SIMPLE and other SIMPLE
13000 plus 3,000 catch up over 50
457 plans are NOT pat of aggregate amounts
Life Insurance as a Funding Vehicle
treasury regulations–life ins, benefits must be incidental to the primary purpose of the paln
-aggagate premiums paid for a participants insured death benfit are all time less than the following % of plan cost
Ordinary life insurance–50%
Term–25%
universal life-25%
The participant’s insured death bene must be no more than 100 times the expected Monthly benefit (DB plans–100 times)
Rollovers NOT Permitted
transfer to another 457 plan for NON govt tax exempt organization
hardship distributions can’t roll to another qualified plan
RMD can’t go to another plan
Qualified PlanEarly (age 59½) - 10% Tax Penalty Exceptions
death
disability
substantially equal periodic payment following separation from service
distribution after 55 and sep from service
distribution in accordance with QDRO
Medical expenses in excess of 10% AGI or health insurance while unemployed
pay health insurance after sep from service (must file for unemployment)
Required Beginning Date (RBD) for
IRAs / SEPs / SARSEPs / SIMPLEs
april 1st the year following 70.5 then dec 31
Required Beginning Date (RBD) for
Qualified Plans / 403(b) / 457 plans
april 1st of the following year after 70.5
5% owners must take distribution, but can still contribute to plan
IRA Deductibility Keys
deductible if
neither spouse active participant with empoyer
if one spouse active, the other spouse can deduct if AGI less than 193k
Both active–AGI limit 103k
Single 64K
Employer plans that affect participation include all but 457
IRA Exceptions to 10% Penalty for Early Distributions before age 59½
death substantially equal payment disability 1st home--$10k qualified eduction exp medical expense over 10% AGI insurance premiums if unemployed( received unemployment comp for 12 weeks)
Roth IRA
Ordering Rules for Distribution
comes out–
contributions first
conversions second
earnings last
Roth IRA
Required Minimum Distributions
bene other than spouse–
within 5 years OR over life expectancy o designated bene with distributions starting prior to the end of the calendar year following death
SPouse–delay until orginal owner would have been 70.5 OR roll to their ROTH
Non-Qualified Deferred Compensation Plans
salary reduction plan–uses portion of employee’s current comp to fund the ultimate compensation benefit
salary continuation plan–uses employer contributions to fund ultimate benfit
Rabbi Trust
KEY WORDS–merger, acquisiton, change of ownership
assets in rabbi trust available for creditors
fear that ownership may change before defferred comp is paid
Incentive Stock Option (ISO)
Holding Period
1 year from exercise and 2 years from Grant before sell ISO
if violate either rule–DISQUALFY DISposition
Section 457
Deferred Compensation Plan
non qual deffered comp plans of govt angency and non-chiurch controlled org.
defferal limit $19000 or 100% of comp–catch up of $6k over 50 in GOVT plan only
salary defferal NOT aggregated with other plans
non GOVT plans can only roll to another 457
IRA Keys
SIMPLE, SEP, SARSEP
no loans
no life insurance
immed vesting
may not be creditor protected
59.5 NOT 55 for no 10% penalty
must take RMD at 70.5
