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CFP - my flashcards > Retirement > Flashcards

Retirement Flashcards

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1
Q

What is the Basic Retirement Need Calculation?

A
  1. Inflate the annual need in today’s dollars to the first year of retirement.
  2. Determine what lump sum is needed at the beginning of retirement to fund their expected years of retirement, using the annual amount from step 1 as the Payment and the inflation-adjusted return as the interest rate. USE BEGIN MODE FOR THIS CALCULATION!!
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2
Q

How do you calculate a reduced SS benefit when someone collects before FRA?

A

(number of months early) x (1/180) x FRA benefit

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3
Q

If you collect before FRA and work, what is the most you can earn?

A

$17,640. They will deduct $1 from your benefit for every $2 over that amount that you earn.

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4
Q

During the year you reach FRA, what is the most you can earn?

A

$46,920. They will deduct $1 from your benefit for every $3 over that amount that you earn until the month you reach FRA.

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5
Q

What are the thresholds for taxation of SS benefits?

A

50% if provisional income over $25k or $32k MFJ

85% if provisional income over $34k or $44k MFJ

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6
Q

True or False?
To calculate maximum annual contribution to a money purchase plan, only use the first $280k of compensation, even if the % of the entire contribution would be under $56k.

A

True

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7
Q

What is the difference between a stock bonus plan and an Employee Stock Ownership Plan (ESOP)?

A

A stock bonus plan MAY invest plan assets in employer stock; whereas an ESOP MUST invest plan assets primarily in employer stock. They are both variations of profit-sharing plans.

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8
Q

Cross-testing a defined contribution plan usually benefits older employer Highly Compensated Employees. Optimally, the average of the NHCE’s ages should be about 15 years younger than the average of the HCE’s ages. What is the cross-test?

A

Contributions for NHCEs must be the lesser of at least 1/3 of the percentage of eligible compensation ($280k) contributed to HCE, or 5% of the NHCE’s compensation.

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9
Q

What is the Section 415 limit?

A

The maximum limit on the annual benefit that a defined benefit can provide. For a benefit beginning at age 65, that maximum is the lesser of $225,000 or 100% of the participant’s compensation averaged over his/her three highest earning consecutive years. Can retire at 62 with no decrease in benefits.

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10
Q

What is a 412(i) plan?

A

A defined benefit plan funded entirely with insurance products such as life insurance and annuities. The plan return would typically be lower than those of other DB plans. (May be referred to as a 412(e)(3) insurance contract plan.)

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11
Q

What are the two coverage tests for qualified plans?

A
  1. Ratio percentage test - Plan must cover NHCE that is at least 70% of HCEs that are covered. It not, then:
  2. The average benefits for NCHEs must be at least 70% of those for HCEs.
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12
Q

What is the additional participation requirement for defined benefit plans (in addition to the two coverage tests for qualified plans)?

A

A defined benefit plan must benefit at least the lesser of (1) 50 employees or (2) the greater of (a) 40% of all employees or (b) two employees (or if there is only one employee, that employee).

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13
Q

What do we need to know about ADP/ACT testing??

A

ADP is the Deferral Percentage Test. ACP is the Contribution Percentage Test. For either remember:
0% to 2% for NHCE is times 2 for HCE. 2% to 8% for NHCE is plus 2 for HCE.

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14
Q

When is a qualified plan considered top heavy?

A

If more than 60% of its aggregate accrued benefits or account balances are allocated to key employees.

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15
Q

What do common control rules apply to?

A

Contribution maximums and non-discrimination testing

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16
Q

What is the contribution calculation for a Defined Benefit Plan that integrates with SS?

A

base % + permitted disparity % = excess %

Permitted Disparity = lesser of the base% or 26.25% (flat)

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17
Q

What is the contribution calculation for a Defined Contribution Plan that integrates with SS?

A

base % + permitted disparity % = excess%

Permitted Disparity = lesser of the base% or 5.7%

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18
Q

What types of plans can be integrated with Social Security?

A 
Target benefit pension plan
money purchase plan
profit-sharing plan
stock bonus plan
SEP
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19
Q

Why is SS integration used?

A

To allow highly compensated employees to maximize the company contributions ($56,000) and minimize the non-highly compensated contributions

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20
Q

When dealing with Qualified Plans, what should you be careful of?

A

Age and service eligibility requirements
Coverage requirements (Ratio percentage and average benefit tests)
Minimum participation (for defined benefit plans only)
Permitted Vesting Schedules
Attribution Rules
ADP/ACP Testing
Controlled Groups
Integration with Social Security / Disparity Limits (for defined benefit plans only)

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21
Q

What is a qualified plan that covers sole proprietorships and partnerships?

A

A Keogh plan

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22
Q

What is the shortcut for calculating the contribution to a qualified plan for a self-employed person (a Keogh plan)(since we need to use net earnings and not compensation/wages)? The same calculation is used to calculate a self-employed SEP contribution.

A
  1. Schedule C Net Income
  2. Multiply by 12.12% for a 15% contribution or
  3. Multiply by 18.59% for a 25% contribution
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23
Q

What is the minimum benefit for non-key employees in a top-heavy Defined Benefit plan?

A

The benefit must be at least 2% of compensation multiplied by the number of employee’s years of service in which the plan is top-heavy up to a maximum of ten years. (Note B is the second (2%) letter of the alphabet.)

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24
Q

What is the minimum benefit for non-key employees in a top-heavy Defined Contribution plan?

A

The minimum employer contribution must be no less than 3% of each non-key employee’s compensation. (Note C is the third (3%) letter of the alphabet.)

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25
Q

What is the maximum allowable loan from a qualified plan (or TSA/403(b))?

A

The lesser of 50% of the participant’s vested plan benefit or $50,000.

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26
Q

How soon does a loan from a qualified plan need to be repaid?

A

Over a period not exceeding five years unless the loan is used to acquire the participant’s principal residence or the employee takes a leave of absence (for less than a year).

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27
Q

Can an employee deduct interest paid on a qualified plan loan ?

A

Only if the loan is used to acquire the participant’s primary residence and the loan is secured by the primary residence.

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28
Q

Will participation in a 457 governmental or nongovernmental plan be considered participation in a another plan that could make your IRA contribution nondeductible?

A

No

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29
Q

True or False?
A non-spouse beneficiary of a qualified plan can convert that to an inherited Roth IRA, but if the same beneficiary inherits an IRA they cannot convert it to an inherited Roth IRA.

A

True

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30
Q 
True or False?
Roth 401(k) plans require minimum withdrawals when the account holder reaches the required beginning date.
A

True

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31
Q

What are ABLE accounts?

A

Tax advantaged accounts for the disabled.

  1. Individuals can contribute $15k annually.
  2. Distributions, used for qualified disability expenses are not included in gross income if the beneficiary became disabled before age 26.
  3. The ABLE account is exempt from the $2,000 limit on personal assets for Medicaid and SSI.
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32
Q

What are annual SEP contributions limited to?

A

The lesser of 25% of compensation ($280k maximum) or $56K.

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33
Q

What are the SEP eligibility rules?

A

A SEP must cover all employees who are at least 21 years old and who have worked for the employer during 3 out o the preceding 5 calendar years.
Part-time employment counts in determining years of service.
If someone earns less than $600, a contribution does not need to be made that year.

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34
Q

What are Simple IRA plan eligibility requirements?

A

The plan must cover any employee who earned $5,000 in any two previous years and is reasonably expected to earn $5,000 in the current year.

35
Q

What is a Simple 401(k)?

A

A 401(k) that adopts Simple provisions. It is exempt from both ADP and ACP tests and top-heavy requirements.

36
Q

What are the two 403(b) catch up contributions (in addition to the $19k normal limit)?

A
  1. $6,000 for anyone over 50

2. An employee with 15 years of service (with the same employer) can exclude an additional $3,000.

37
Q

What kinds of investments can be offered through a 403(b)?

A

Annuity contracts or mutual funds. Incidental life insurance protection under annuity contracts is also permitted.

38
Q

What are the deferral limits for 457 plans?

A

$19,000 plus $6,000 catch up, but only if you are a GOVERNMENT employee of a 457 plan sponsor. (There is some other weird catch-up provision also.)

39
Q

What does Section 457 apply to?

A

All nonqualified deferred compensation plans of governmental units, governmental agencies and some non-church controlled tax-exempt organizations.

40
Q

Are Section 457 plans subject to RMDs?

A

Section 457 GOVERNMENTAL plans are and can be rolled over into Roth IRAs. Such rollovers are not allowed for nongovernmental 457s.

41
Q

Are deferrals under a nonqualified plan subject to SS taxes?

A

No. Not until the year in which the employee has constructive receipt or no longer has a substantial risk of forfeiture. Then the deferred compensation is subject to withholding and SS taxes.

42
Q

What is the deadline for establishing a safe harbor 401(k)?

A

Before the beginning of the plan year.

43
Q

What is the deadline for establishing a 401(k)?

A

By the end of the employer’s tax year, but in order for deferrals to be made in the current year, BEFORE the last day of the year.

44
Q

What is the deadline for establishing a Simple 401(k)?

A

Anytime on or after January 1 but not later than October 1 of the year in which it is adopted.

45
Q

When is the deadline for establishing a Simple IRA?

A

On or before the first date by which a contribution is required to be deposited into the employee’s account. In the first year that one is adopted, the effective date can be anytime between January 1st and October 1st. If business is brand new, then asap without regard to October 1 cutoff.

46
Q

What is the deadline for establishing a SEP?

A

The due date of the business tax return, including extensions to establish and make contributions.

47
Q

What is the rule with Unrelated Business Taxable Income (UBTI)?

A

If it exceeds $1,000, a qualified plan’s UBTI is subject to income tax in the current year. Income from a limited partnership (except real estate) or dividends from a margined account are considered UBTI.

48
Q

What are the 3 Reasons for Allowable In-Service Premature Distributions from a qualified plan?

A
  1. Attainment of a Certain Age
  2. Hardship (in a profit-sharing plan) (financial needs test and resources test)
  3. As early as 62 from a DB plan (such distributions will be treated as retirement income)
49
Q

Does a hardship distribution from a qualified plan that is a “safe harbor” distribution mean that it is not subject to the 10% penalty?

A

???

50
Q

What are the rules for substantially equal payments under Section 72(t)?

A
  1. Once payments begin, they may not be increased, decreased or changed in any way prior to age 59.5, or before the end of five years, if longer.
  2. If payments are modified in any way, the 10% additional tax is applied retroactively to all payments received before 59.5.
  3. One exception - a one time election allows switching from annuity or amortization method to RMD method (with no penalty). This greatly reduces the payment amounts.
51
Q

Can a distribution from a 457 GOVERNMENTAL plan be rolled over to a qualified plan or an IRA?

A

Yes

52
Q

Can a distribution from a 457 NON Governmental plan be rolled over to a qualified plan or an IRA?

A

No - the only option is to roll such a distribution over to another 457 plan.

53
Q

Can a SIMPLE accept rollover distributions from a qualified plan, 457 or 403(b)?

A

Yes, but only if the SIMPLE has been open for at least 2 years.

54
Q

When can a 457 account balance be rolled into an IRA?

A

Not until age 70.5 or separation from service.

55
Q

What is the rule to know whether to use age 70 or age 71 distribution period for purposes of first RMD?

A

If both birthdays 70 and 70.5 happen in the same year, use age 70 distribution period. If age 70.5 occurs in the next calendar year, with age 71, use the age 71 distribution period.

56
Q

True or False?

Qualified Public Safety Employees can take penalty-free withdrawals from government plans after age 50.

A

True

57
Q

What rates is NUA always taxed at?

A

Long-term Capital Gains. Taxation on any appreciation after the distribution will depend on holding period before selling.

58
Q

Why does a deferred compensation plan need to be unfunded?

A

To maintain the deferral - so that the employee is not taxed on the compensation.

59
Q

What does it mean for a plan to be unfunded?

A

It can be funded with a mere promise or it can be “informally” funded with life insurance, annuities, mutual funds or other investments.

60
Q

Why is informal funding considered unfunded?

A

Because the assets are owned by the company and subject to the company’s creditors. Employee has no access to those funds, so employer cannot take a deduction for contributions until the employee is taxed - upon constructive receipt or economic benefit.

61
Q

How are deferred compensation payments paid to an employee’s beneficiaries taxed?

A

The present value of payments to the surviving beneficiaries is included in the employee’s gross estate for estate tax purposes.

62
Q

When would an employer use a Rabbi trust?

A

With a deferred compensation plan, when there is concern that a future employer/takeover/management will not honor the deferred compensation plan and litigation to enforce would be too costly.

63
Q

What is a secular trust?

A

It is considered a “funded” nonqualified deferred compensation agreement. It is an irrevocable trust. Employer’s creditors cannot get it. Taxation to employee happens when assets are placed in the trust. Employer takes a deduction when assets are placed in the trust.

64
Q

If an annuity is owned by an entity that is not an individual (a corporation), how is the income on the annuity treated?

A

Taxed as ordinary income received or accrued by the holder during that year.

65
Q

What is the primary difference between an ISO and a NSO?

A

The taxation at the date of exercise.
ISO - (if it meets IRC conditions) then no income tax hen the options are granted or exercised to obtain the shares. Employees are taxed only when they sell the stock (at 15% or 20% if held long term)
NSO - As soon as they are exercised, income tax is due on any gains (the difference between the strike price and the shares’ current market price).

66
Q

Does the employer get a tax deduction for an ISO when the shares are exercised?

A

No

67
Q

What are the two ISO holding periods?

A
  1. Hold exercised shares at least one year from date of exercise before selling them
  2. Hold the shares from an exercise at least two years from the grant (issue) date before selling them
    (If the option is exercised before the plan allows, ISO becomes an NSO - but it is whatever the plan allows_.
68
Q

What ISO exercise holding period (Rule 1) is violated and becomes non-qual?

A

The bargain element is taxed as wages, subject to FICA and FUTA if sold in same calendar year as exercised.
The bargain element is taxed as ordinary income if sold in calendar year after exercise year.
The rest is gain.

69
Q

What if ISO grant period (Rule 2) is violated and becomes non-qual?

A

The bargain element is taxed as ordinary income, but not taxed as wages. The rest is gain.

70
Q

If both Rules 1 and 2 are violated, then what?

A

Bargain element is taxable compensation.

71
Q

What is an 83(b) election?

A

When an employee elects to recognize, at the time of the award of a NSO, the excess of the FMV granted over the employee’s cost as ordinary compensation income. Then when stock is sold, all the gain will be taxed at capital gains rates. Potential for more favorable tax treatment on gains, but immediate tax on grant.

72
Q

What is an ESPP?

A

An Employee Stock Purchase Plan.

Also known as a Section 423 purchase plan.

73
Q

What is the tax treatment of an ESPP?

A

When stock is purchased, there are no tax consequences. Taxes are paid at the time of the sale of stock and similar to ISO treatment.

74
Q

What is a SAR?

A

Stock Appreciation Right

75
Q

Can more than $100k of ISOs vest in a given calendar year?

A

No. If they do, only the first $100k will be treated as ISOs.

76
Q

How do you calculate gross profit percentage (for installment sales)?

A

Profit / Contract Price

77
Q

True or false?

And employer may contribute and deduct up to 25% in addition to the elective deferral?

A

True

78
Q

What are the two types of plans that will allow hardship withdrawals?

A

401(k) and 403(b) plans

79
Q

No matter how many employees, how many shareholders in an S corporation does an ESOP represent?

A

1

80
Q

What kind of business is to Keogh / HR-10 plans cover?

A

Businesses that are not Inc., sole proprietorships and partnerships. A Keogh is a qualified plan with special contribution limits for owner employees. The plans are defined benefit, money purchase, or profit-sharing.

81
Q

When do highly compensated employees matter?

A

When testing for discrimination In a qualified plan.

82
Q

When do you keep employees make a difference?

A

For purposes of vesting, to determine whether a plan is top-heavy.

83
Q

What are the minimum benefits or contributions a top-heavy plant must provide for non-key employees?

A

In a defined benefit plan the benefit must be at least 2% of compensation.
In a defined contribution plan the minimum employer contribution must be no less than 3%
Profit-sharing plans are not subject to the minimum funding standard but are subject to substantial and recurrent contributions

84
Q

What are the three kinds of plans that cannot be integrated with Social Security?

A

ESOP, Simple and Simple 401(k)

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