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Danko + MJG > Retirement > Flashcards

Retirement Flashcards

1
Q

A Basic Concepts of Social Security

A

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
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2
Q

Social Security

(Reduction of Benefits)

A

Before FRA (Full Retirement Age): Benefits reduced $1 for every $2 earned over $18,240 (2020 threshhold)

Year in which you reach FRA (Full Retirement Age): Benefits reduced $1 for every $3 earned over $48,600 (2020 threshhold)

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3
Q

Social Security

(Taxation)

A
  • 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.
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4
Q

Types of Qualified Plans / ERISA

(Vesting /Admin Costs / Exempt from Creditors / Integrate with Social Security)

A
  • 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)
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5
Q

Types of Retirement Plans

(No Vesting / Limited Admin Costs)

A
  • SEP
  • SIMPLE
  • SAR-SEP
  • Thrift or Savings Plans
  • 403(b)
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6
Q

Defined Benefit - Qualified Plan

A
  • Favors older employee/owner (50+)
  • Certain retirement benefit; Max $230K (2020)
  • 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)
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7
Q

Money Purchase - Qualified Plan

A
  • Up to 25% Employer Deduction
  • Fixed Contributions
  • Need stable cash flow
  • Maximum Annual Contribution lesser of 100% or salary of $57K (2020)
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8
Q

Target Benefit - Qualified Plan

A
  • Up to 25% Employer Deduction
  • Fixed Contributions
  • Need stable cash flow
  • Maximum annual contribution less of 100% of salary or $57K (2020)
  • Favors older workers
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9
Q

Profit Sharing - Qualified Plan

A
  • Up to 25% Employer Deduction
  • Flexible contributions (must be recurring and substantial)
  • Maximum Annual Contribution lesser of 100% of salary or $57K (2020)
  • Can have 401(k) provisions
  • SIMPLE 401(k) exempt from creditors
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10
Q

Section 401(k) Plan

A

Qualified profit sharing or stock bonus plan that allows plan participants to defer salary into the plan.

  • Max $19,500 (2020) deferral for participants under 50 (subject to FICA)
  • Additional $6,500 catch-up for age 50 and over (2020)
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11
Q

Section 415 Annual Additions Limit

A
  • Lesser of 100% of compensation or $57K (2020)
  • Includes employer contributions, employee salary reductions and plan forfeitures
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12
Q

Safe Harbor Non-Discrimination

A

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.

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13
Q

Safe Harbor Match / Vesting

A

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.
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14
Q

Stock Bonus / ESOP - Qualified Plan

A
  • Up to 25% employer deduction
  • Flexible contributions
  • Maximum Annual Contribution lesser of 100% of salary or $57K (2020)
  • 100% of contribution can be invested in company stock ESOP cannot be integrated with Social Security or cross-tested
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15
Q

Net Unrealized Appreciation (NUA)

A

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.

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16
Q

Keogh Contribution

A
  • 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
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17
Q

SIMPLE Plan

A
  • 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
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18
Q

SEP (Simplified Employee Pension)

A
  • NO Salary Deferrals - Employer contributions only
  • Up to 25% contribution for owner (W-2) / treated like Keogh contributions for self-employed
  • Maximum of $57K (2020)
  • Account immediately vested
  • Can be integrated with social security
  • Special Eligibility: 21+ years old, paid at least $600 (2020) and worked 3 of the 5 prior years
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19
Q

Tax-Deferred Annuity (TDA)

Tax Sheltered Annuity (TSA)

403(b)

A
  • For 501(c)(3) organizations and public schools
  • Subject to ERISA only if employer contributes
  • Salary reduction limit up to $19,500 (2020) plus $6,500 catch-up if 50 or over
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20
Q

Age and Service Rules - Qualified Plans

A
  • 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%)
  • Year of service is 1,000 hours (includes vacations, holidays and illness time) or 500 hours if worked 3 consecutive years
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21
Q

TKey Employee

A

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 > $185,000 (2020), or
  • Greater than 1% ownership and compensation > $150,000 (2020)
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22
Q

Vesting - Fast / Slow

A

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
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23
Q

Defined Contribution Plans

(Integration with Social Security)

A

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

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24
Q

Multiple Plans 2020

Elective Deferrals

A

Elective Deferrals: More than one employer (2020)

  • Elective Deferrals to multiple plans are always aggregated (2020)

401k/403(b)/SIMPLE/SARSEP

  • $19,500 plus catch up $6,500

SIMPLE and other SIMPLE

  • $13,500 plus catch up $3,000

457 Plans are NOT part of aggregated amounts.

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25
Q

Rollovers NOT Permitted

A
  • 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
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26
Q

Required Beginning Date (RBD) for

IRAs / SEPs / SARSEPs / SIMPLEs

A

The required beginning date is April 1st of the year following the year in which the covered individual attained 72.

Subsequent distributions must be made by December 31st of each year thereafter.

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27
Q

Required Beginning Date (RBD) for

Qualified Plans / 403(b) / 457 plans

A

The required beginning date, with the exception of 5% owners, is the later of April 1st following the year in which the individual attained 72 or retired.

Subsequent distributions must be made by December 31st of each year thereafter.

5% owner RBD is the same as IRA/SEP RBD.

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28
Q

IRA Deductibility Keys

A
  • 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 $196K-$206K (2020)
  • If both spouses are active, AGI limits apply: $65K-$75K (single) and $104K-$124K (Married) (2020)

NOTE: Activity that results in active status: annual additions to a DC account or benefits accrued to a DB plan.

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29
Q

Roth IRA

Ordering Rules for Distribution

A
  • Any contributions (not conversions) are withdrawn first
  • Conversions are withdrawn second
  • Earnings are withdrawn last
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30
Q

Roth IRA

Required Minimum Distributions

A
  • Distributed within 5 years of owner’s death (no named beneficiary), or
  • Distributed over 10 years of the designated beneficiary with distributions commencing prior to the end of the calendar year following death (stretch)
  • Where the sole beneficiary is the owner’s surviving spouse, the spouse may delay distributions until the Roth owner would have reached 72, or may treat the Roth as his or her own (roll it to her/her Roth)
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31
Q

Non-Qualified Deferred Compensation Plans

A
  • 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
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32
Q

Rabbi Trust

A
  • 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
33
Q

Incentive Stock Option (ISO)

Holding Period

A

Holding Period:

  • 1 year from Exercise Date and 2 years from Grant before selling ISOs
  • Violating either rule results in a Disqualifying Disposition
34
Q

Section 457

Deferred Compensation Plan

A
  • Non-Qualified Deferred Compensation Plans of governmental agencies and non-church controlled tax exempt organizations
  • Deferral limited to $19,500 or 100% of compensation (2020)
  • Catch-up of $6,500 allowed for those 50 and over ONLY for governmental plans (2020)
  • Salary deferrals NOT aggregated with other plans (401k, etc.)
  • Non-governmental plans can ONLY be rolled into another 457 plan
35
Q

IRA Keys

(SIMPLE, SEP, SARSEP)

A
  • No Loans
  • No Life Insurance
  • Immediate Vesting
  • May not be creditor protected (state specific)
  • 59½ not 55 for no 10% penalty
  • Must take RMDs at 72 (even if not owner)
36
Q

Notes on qualified vs. non-qualified plans

A
37
Q

ACP Testing

A
38
Q

Safe harbor matching formula

A
39
Q

What are the four qualifying distribution codes for a Roth IRA?

A

Denver Area Fire Department (DAFD)

  • Death
  • Age 59 1/2
  • First time homebuyer
  • Disability

In every scenario, the 5-year rule must be met.

40
Q

What are the steps in doing retirement income or college expense planning?

A
  1. Inflate
  2. Adjust
  3. Invest

END - BEG - END

41
Q

Retirement Plan Selection:

To provide a savings medium that employees perceive as valuable (7 answers)

A
  • ESOP/stock bonus plan
  • Money purchase pension plan
  • Profit-sharing plan
  • Thrift plan
  • 401(k) plan
  • SEP plan
  • Target benefit pension plan
42
Q

Retirement Plan Selection:

To provide adequate replacement income for each employee’s retirement

A

Answer: Defined benefit pension plans

  • It can provide a benefit based on final average compensation, regardless of the employee’s years of service.
  • There is no investment risk assumed by the employee.
  • Employer funding of the benefit is mandatory, subject to underfunding penalties, even if the employer’s profits decline
43
Q

Retirement Plan Selection:

To weight the allocation of plan contributions to older employees

A
  • Defined benefit pension plans
  • Age-based profit-sharing plans and target benefit pension plans are designed to steer benefits toward older employees
44
Q

Retirement Plan Selection:

To create an incentive for employees to maximize performance of the company

A
  • Profit-sharing plan
  • ESOP/stock bonus plan
45
Q

To minimize turnover in defined benefit plans, what should employers use?

A

Graduated vesting program

46
Q

To encourage early retirement, a defined benefit pension plan can do what?

A
  • Allow benefits to fully accrue after a specified period (e.g., 25 years)
  • Relatively easy to design, a subsidized early retirement benefit provides a benefit at age 62 that is more than the actuarial equivalent of what the retiree would receive at normal retirement age.
47
Q

To provide employer with maximum contribution flexibility, the most flexible plans from a contribution standpoint are?

A
  • Traditional profit-sharing plans
  • SEP plans

Amounts contributed each year can be entirely at the employer’s discretion.

48
Q

What are Section 410 eligibility requirements?

A
  • 21 and 1 rule: either 1 year of service or age 21, whichever is later
    • Year of service means a 12-month period during which the employee has worked at least 1,000 hours
  • The service requirement period can be increased to two years if the plan provides immediate 100% vesting of employer contributions upon entry.
  • 401(k) plans may not use the two-year service requirement. NOTE: This restriction applies to all plans containing a 401(k) arrangement
49
Q

Basic rule of eligibility coverage under 410(b)

A

General rule (under Section 410(b)): The employer must cover at least 70% of all nonexcludable, nonhighly compensated employees. The general rule is commonly referred to as the safe harbor test.

50
Q

What is the ratio percentage test?

A

The plan must cover a percentage of nonhighly compensated (NHC) employees that is at least 70% of the percentage of highly compensated (HC) employees covered

%NHC / %HC greather than or equal to 70%

51
Q

What is the average benefits percentage test?

A

The average benefits percentage test—has two components to satisfy annually

  • The nondiscriminatory component
    • Classification is reasonable and based on objective business criteria (e.g., job categories, location, hours, or weeks).
    • The ratio percentage of the plan can be either ≥ 70% or be nondiscrimi-natory based on facts and circumstances.
  • The average benefits percentage test—The average benefits percentage accrued for nonhighly compensated employees as a group must be ≥ 70% of the average benefits percentage accrued for the HC employees as a group.

average benefits percentage test ⇒
average benefits % NHC a
verage benefitsv % HC ≥70%

52
Q

What classifies someone as a Highly Compensated Employee (HCE)?

A
  • Was a greater than 5% owner of the employer at any time during the current year or preceding year (5% exactly is not enough ownership to be an HCE)
  • For the preceding year, had compensation greater than $130,000 (2020) from the employer
    • If the employer makes an election, only persons ranked in the top 20% of compensation and having income greater than $130,000 (2020) are included as HCE. This exception is often for large employers and helps the plan pass the coverage or actual deferral percentage (ADP) test for 401(k) plans.
53
Q

What is the 50/40 rule?

A

All defined benefit pension plans must benefit no fewer than the lesser of the following:

  • 50 employees
  • 40% or more of all nonexcludable employees
54
Q

What is top-heavy plan?

A

A top-heavy plan is one that provides more than 60% of its aggregate accrued benefits or account balances to key employees

  • A defined benefit pension plan is top heavy if the present value of accrued benefits for key employees is greater than 60% of the present value of accrued benefits for all employees.
  • A defined contribution plan is top heavy if the aggregate of account balances of key employees exceeds 60% of the aggregate account balances of all employees
55
Q

What is the remedy if a DB plan is top heavy?

A

If a defined benefit pension plan is top heavy for a given year, it must provide more rapid vesting than is generally required. Such a plan can provide either 100% vesting after three years of service (three-year cliff vesting replaces five-year cliff vesting) or 2–6-year graduated vesting (2–6-year graded vesting replaces 3–7-year graded vesting).

56
Q

What plans do not integrate with Social Security?

A
  • ESOP
  • SIMPLE
  • SARSEP
57
Q

DC plans must vest as rapidity as what?

A
  • 3-year cliff
  • 2-6 year graded vesting
58
Q

What are the DB benefit limits?

A

The benefit paid from a defined benefit plan at retirement or the Social Security retirement age, if later, cannot exceed the lesser of:

  1. 100% of the participant’s covered compensation averaged over the three high-est consecutive years of compensation (covered compensation is compensation up to $285,000 in 2020)
  2. $230,000 (2020)
59
Q

What are the $57,000 DC limit comprised of?

A
  1. Employer contributions
  2. Employee contributions (both pretax and after tax)
  3. Forfeitures reallocated to the employee’s account
60
Q

What defines a Key Employee?

A
  1. An officer with compensation in excess of $185,000 (2020)
  2. A greater than 5% owner
  3. A greater than 1% owner with compensation >$150,000 (not indexed)

The number of officers who may be considered key employees is limited to the lesser of:

  • 50 employees
  • the greater of three employees or 10% of all employees
61
Q

Do Roth 401(k)s have an RMD?

A
  • Yes, starting at age 72 or date of retirement, if later.
  • The option to defer RMDs until retirement is not available to a 5% or greater owner of the company
62
Q

What are the distribution options for retirement plans when decedent dies before/after required beginning date for minimum distributions?

A
63
Q

What are the loan limits from a qualified plan?

A
64
Q

How can an employer get past the ACP/ADP tests?

A
  • The following contributions made by the employer must be 100% vested at all times:
    • Alternative methods
      • Matching contributions for nonhighly compensated employees — 100% match up to 3% of deferred compensation plus 50% match for contributions between 3% and 5% of compensation
      • Matching contribution percentages for the highly compensated employees cannot exceed those for nonhighly compensated em-ployees

OR

  • Elect to match 100% up to 4% of compensation

OR

  • The employer may choose to make contributions of 3% or more of compensation for all employees who are eligible to participate in the plan, including for those who do not make elective deferrals.

The ADP and ACP test will not apply to 401(k) plans with a qualified automatic contribution arrangement (QACA).
Employer

65
Q

What are the remedies if a plan fails the ADP test?

A
  • A corrective distribution can be made, which will decrease the ADP of the highly compensated employees.
    • This distribution is made in the following tax year and will be included in gross income for the taxpayer (highly compensated employee).
    • The excess contribution must be corrected within 21⁄2 months after the end of the year or the employer will be required to pay a 10% penalty (excise tax) on the amount not corrected.
  • An additional contribution can be made for nonhighly compensated employees. This additional contribution can take one of two forms, both of which are required to be 100% vested:
    • Qualified matching contribution—additional contribution for only nonhighly compensated employees who deferred for the plan year
    • Qualified nonelective contribution—additional contribution for all eligible nonhighly compensated employees (even if they had not been participating)
66
Q

What are the basic eligibility requirements of a SEP?

A
  • A SEP plan must cover all employees who are at least age 21 and who have worked for the employer during three of the preceding five calendar years.
  • Part-time employment counts in determining service.
  • Contributions need not be made on behalf of employees whose compensation for the calendar year was less than $600 (2020).
  • The plan can exclude employees who are members of collective bargaining units if retirement benefits have been the subject of good faith bargaining.
  • If an employer maintains a SEP plan and also maintains a regular qualified plan, contributions to the SEP plan reduce the amount that can be deducted for contributions to the regular plan.
67
Q

What are the basic eligibility requirements of a SIMPLE?

A
  • Employers with 100 or fewer employees who earned at least $5,000 during the preceding year and who do not maintain another employer-sponsored retirement plan (there is a two-year grace period to continue to maintain plan when number of employees exceeds 100) are eligible.
  • Employees who earned $5,000 during any two preceding years and are reasonably expected to receive at least $5,000 during the current year are eligible participants.
  • A self-employed person can establish a SIMPLE.
  • Employers cannot maintain another qualified plan, SEP, SARSEP, or 403(b) plan; however, qualified employers can maintain a 457 plan and also have a SIMPLE.
  • SIMPLE IRA withdrawals made within two years of initial participation are subject to a 25% premature distribution penalty tax
68
Q

What is DDDD IRS Child’s MEAL at Home when 59 1/2?

A

These are the rules so the 10% early withdrawal pentalities apply

  • Death
  • Disability
  • Divorce
  • Disaster (up to $100,000)
  • Insurance (health insurance for unemployed)
  • Reservists
  • Substantially equal period payments (72t)
  • Child’s (up to $5,000 per parent per event from IRA/401 for birth or adoption of child, have 3 years to pay it back if so desired)
  • Medical expenses over 7.5%
  • Education expenses for higher expenses
  • Annuitized
  • Levy from IRS
  • at Home = qualified first time homebuyer up to $10,000 per person
  • Age 59 1/2
69
Q

How much will an employer contribute if they do a nonelective contribution in a SIMPLE plan?

A

2% of compensation up to $285,000

70
Q

What is the maximum 415 (a) contribution?

A

LESSER OF:

  • $57,000
  • 100% of employee’s salary
71
Q

New Safe Harbor Rules

A
72
Q

Calculating Keogh contributions

A

When doing a calculation for self-employed contributions, make sure to deduct 1/2 of self-employment tax, THEN multiply by 0.20 to get to the proper amount…

73
Q

DC integration with SS

A

DC integration with SS (excess is a cap; 6% excess cap is 11.7%); 401(k)s cannot integrate with SS, but the PROFIT SHARING PART CAN)

74
Q

What are the two ways employers make SEP contributions?

A
  1. Give same % to each employee
  2. Give same $$$ amount to each employee
75
Q

Name four things that cannot be owned in an IRA?

A
  1. S-corp shares
  2. Foreign coins
  3. Collectibles
  4. Life insurance
76
Q

403(b) special catch-up provision

A
77
Q

Designated Beneficiaries vs. Non-Designated Beneficiaries

A
78
Q

SS Benefits slide

A
79
Q

SS provisional income slide

A

Danko + MJG (7 decks)

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