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CFP EXAM FLASHCARDS > Retirement > Flashcards

Retirement Flashcards

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1
Q

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

Beginning benefits before FRA (Full Retirement Age): Benefits reduced $1 for every $2 earned over $18,240

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

  • *If you work and are FRA or older, you may keep all benefits no matter how much you earn*
  • **This applies to earned income ONLY*
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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/$32k, then 50% of the total Social Security is included in Income.
    • Above $34k/$44k, 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
  • Money Purchase
  • Cash Balance
  • 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+)
  • Guarantees specified amount at retirement
    • Can meet specific retirement objective ​
  • Benefit limit: lesser of $230,000/yr or 100% of participant’s comp average over 3 highest consecutive years
    • Up to $285,000/yr compensation considered
  • 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

Define benefit plan - unit benefit formula

A

benefit % per year of service

x years of service

x average annual compensation

= annual pension benefit

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8
Q

Cash balance pension plan

A
  • annual ER contributions at specified rate to participant accounts
  • ER guarantees contribution level + minimum rate of return on each particiapant account
  • may be appropriate when a company can no longer afford DB plan or small ER with high earners
  • insured by PBGC

(similar to money purchase plan + guaranteed ROR)

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9
Q

Factors that affect the account balance in DC qualified and other retirement plans

A
  • Years to retirement
  • Investment returns
  • Salary levels ($285,000 - 2020 max)
  • Employer contribution (lesser of 100% comp or $57k)
  • forfeitures only affect DC plan participants. DB and CB forfeitures must reduce contribuions. There are no forfeitures with IRA type plans.
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10
Q

Money Purchase - DC Pension Plan

A
  • uses fixed benefit formula to determine ER contribution that is a flat % of each EE compensation
  • Up to 25% Employer Deduction (limited to $285k on comp)
  • Fixed Contributions (lesser of 100% or salary of $57K)
  • Need stable cash flow
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11
Q

When would a money purchase plan be appropriate?

A
  • ER wants stable workforce, wants to retain key YOUNG EEs
  • ER wants a plan simple to administer and explain
  • ER must have stable cashflow and profit to make annual contributions
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12
Q

Target Benefit - Qualified Plan

A
  • Actuary initially determines the amount of funds needed for fixed annual contribution to meet “target” at retirement.
  • Up to 25% ER Deduction
  • EE assumes investment risk (target is not guaranteed by ER)
  • Need stable cash flow
  • Maximum annual contribution lesser of 100% of salary or $57K (2020)
  • Favors older workers
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13
Q

Profit Sharing - Qualified Plan

A
  • Up to 25% Employer Contribution (deductible)
  • Flexible contributions (must be recurring and substantial)
  • Maximum annual additions lesser of 100% of salary or $57,000 (Section 415)
  • Can have 401(k) provisions
  • SIMPLE 401(k) exempt from creditors
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14
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)

**If the question says deferral**, it is $19,500. If it says **contribution, then it includes the deferral + catch-up (max $26,000)

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15
Q

When would a profit-sharing plan be appropriate?

A
  • When an ERs profits vary year to year
  • when an ER wants to adopt a qualified plan with incentive features to motivate EEs to help the company make a profit
  • when the EEs are young, well paid, and have substantial time to accumulate retirement savings
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16
Q

Section 415 Annual Additions Limit

A
  • Lesser of 100% of compensation or $57,000
  • Includes employer contributions, employee salary reductions and plan forfeitures
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17
Q

Solo 401(k)

A
  • plan is not subject to coverage testing or nondiscrimination rules required for typical 401(k) plans
  • Two types of contributions (max $57,000)
    • Elective deferral up to $19,500 (+ $6,500 catch-up 50+)
    • ER contribution
  • “solo” includes You, you + spouse, or 2 partners. PT workers are not “other EEs”
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18
Q

401(k) Hardship withdrawals

A
  • 401(k) may allow for in-service withdrawals for hardship before termination of employment
  • distributions amount = total elective deferrals + vested profit-sharing contributions
  • subject to O/I tax + 10% early withdrawal penalty (may not apply under qualifying exemptions)
  • hardship withdrawals are available for plans with 401(k) provisions only (not available for all profit sharing plans)
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19
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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20
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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21
Q

Stock Bonus / ESOP - Qualified Plan

A
  • Up to 25% employer deduction
  • Flexible contributions
  • Maximum Annual Contribution lesser of 100% of salary or $57,000
  • 100% of contribution can be invested in company stock
  • ESOP cannot be integrated with Social Security or cross-tested
  • S corp can offer an ESOP. No Matter how many EEs, an ESOP is one S shareholder
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22
Q

Net Unrealized Appreciation (NUA)

A

NUA applies to ESOPs or any other qualified plan. It is the difference between ERs cost basis and fair market value at lump sum distribution to the EE

3 parts:

  • Original Cost basis = taxed upon distribution as O/I (phantom income)
  • FMV-Cost Basis = LTCG (not immediately taxed)
  • post-distribution gain or loss* = can be LT or ST dependent on holding period post-distribution__​​*To be a loss it must be below original CB
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23
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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24
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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25
Q

SEP (Simplified Employee Pension)

A
  • NO Salary Deferrals - Employer contributions only
  • Up to 25% contribution of compensation. Contributions can vary Y2Y.
  • Maximum of $57,000
  • 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
  • Contributions can continue past 72 (unlike IRAs)
  • GOOD for ER w/ ST EEs, BAD for ER w/ LT EEs
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26
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)
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27
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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28
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
29
Q

Highly Compensated Employee (HCE)

A
  • A greater than 5% owner, OR ​
  • An employee earning in excess of $130,000 during the preceding year (2019)

Hint: think discrimination with Highly Compensated Employee (affects the ADP/ACP and ratio/average benefits test)

30
Q

ownership attribution rules

(as applies to HCE/Key EE)

A

If EE is HCE or Key EE, then spouses, children, grandchildren, and parents are HCE or Key EE

*ownerhips attribution rules do not apply to siblings

31
Q

Actual deferral percentage & actual contribution percentage tests

(ADP & ACP testing)

A

401(k) & 403(b) elective deferrals are subject to nondiscrimination testing. This is accomplished through ACP and ADP testing.

Shortcut: < 2% = x2 | 2% to 8% = +2

If NHCE defers 1%, then HCE can defer MAX of 2% (1% x 2)

If NHCE defers 2%, then HCE can defer MAX of 4% (2% + 2)

If NHCE defers 4%, then HCE can defer MAX of 6% (4% + 2)

* pay attention to questions asking defer** (above) vs **contribute

($19,500 + $6,500 if 50+)

32
Q

Overall coverage and participation rules

(non-discrimination)

A
  • Ratio percentage test: plan must cover a percentage of NHCE that is at least 70% of all HCE covered
  • Average benefits test: average benefits for all NHCE must be at least 70% of all HCE
33
Q

Key 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)

Hint**: think v_esting with Ke_**y employee (affects whether a plan is top-heavy)

34
Q

Top-heavy plan rules

A
  1. a plan is top-heavy if more than 60% of its aggregate accrued benefits or account balances are allocated to key EEs
  2. a plan that is top-heavy must provide minimum benefits or contributions for non-key employees
    1. DB: benefit must be at least 2% of compensation
    2. DC: ER contribution must be at least 3%

*profit-sharing plans are not subject to Rule #2 but are subject to substantial and recurring contributions

35
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
36
Q

Integrated with Social Security

vs.

age-weighted plan

A

Inegrated with SS

  1. owner’s age is 50 or under
  2. owner’s income is under $200,000/yr
  3. rank-and-file EEs are making under $90,000/yr (+1)

age-weighted plan

  1. owner’s age is 50 or older (+1)
  2. owner’s income is over $200,000/yr (+1)
  3. rank-and-file EEs are younger than owner (+1)
37
Q

Plans that can/cannot be integrated with Social Security

A

Can:

  • Defined Benefit, Money Purchase, Cash Balance, Target Benfit, Profit-Sharing, Stock Bonus, and SEP (Safeharbor 401(k) & 401(k) match only - difficult w/o p-s company contribution)

Cannot:

  • ESOP, SIMPLE, and 401(k) SIMPLE
38
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

39
Q

Defined Benefit Plans

(Integration with Social Security)

A

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

40
Q

Cross-tested plan (new comparability plan)

A
  • contribution % formula for one category of participant is greater than % formula for another.
  • Does not use a fixed age-weighted formula.
  • Designed to provide maximized benefits for HCE (owner/older EEs)

ex. a plan covering 10 EEs might provide max annual contribution ($57,000) to owner (HCE) and flat percentage of 5% of NHCEs comp.

41
Q

Multiple Plans Rule

Elective Deferrals

A

Elective Deferrals: More than one ER

  • Elective Deferrals to multiple plans are always aggregated

401k/403(b)/SIMPLE/SARSEP

  • $19,500 plus catch up $6,500

SIMPLE and another SIMPLE

  • $13,500 plus catch up $3,000

457 Plans are NOT included in aggregated amounts.

42
Q

Life Insurance as a Funding Vehicle

A

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:

  • DC plans use the “percentage” limits. Aggregate premiums paid for participant’s insured death benefit are less than…
    • Ordinary (whole) life insurance 50% of plan cost
    • Term Insurance 25% of plan cost
    • Universal Life 25% of plan cost
  • DB plans factor the “100x” limit [412(e)3 or 412(i)]. Death benefit must be no more than 100x expected monthly benefit.
43
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
44
Q

Qualified Plan Early Withadrawal (age 59½)

(10% Tax Penalty Exceptions)

A
  • Death/Disability
  • Substantially equal periodic payments following separation from service (72t). Longer of 5 years of 59½.
  • Distribution following separation from service after age 55
  • Distribution in accordance with QDRO (to any alternative payee)
  • Medical expenses in excess of 10% of AGI
  • Distribution used to pay insurance premium after separation from employment (must file for unemployment)
45
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.

46
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.

47
Q

Qualified domestic relations order (QDRO)

A
  • A qualified plan must disitrbute money pursuent to QDRO as long as the plan allows for such distributions. If it does not, funds must be set aside in separate account.
  • If a qualified plan provides benefits at age 55 (or later) or at separation from service, then the QDRO distributions to a former spouse ban be schedule to begin at ex’s age 55, whether or not ex retires.
  • QDROs don’t apply to most NQDC, IRAs, not subject to 10% penalty or taxes
  • If the alternate payee is a childr or dependent, then the distribution will be taxed to plan participant.
48
Q

Traditional IRA

A
  • limit is lesser of $6,000 or 100% of EARNED INCOME (+$1,000 catch-up age 50+)
  • Earned income = wages, salaries, tips, professional fees, and bonuses. also includes alimony and separate-maintenance payments
  • Spouse can contribute to a Spousal IRA assuming contributions do not exceed 100% of compensation.
49
Q

IRA contributions

deductible or not?

A

1st rule:

  1. Not Active
  2. Active

2nd rule:

  1. Deductible, no phase out
  2. Single subject to phaseout $65k-$75k
    • Married subject to phaseout $104k-$124k
    • Spousal subject to phasout $196k-$206k
50
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.

51
Q

IRA Exceptions to 10% Penalty for Early Distributions before age 59½

A
  • Death/Disability
  • Substantially equal payments (72t)
  • First home expense up to $10,000
  • Qualified education expense
  • Medical expense greater than 10%
  • Distribution used to pay insurance premium after separation from employment (must have received unemployment compensation for 12 weeks)
52
Q

Qualified plan loans [includes TSA/403(b)]

A

If available, total loans cannot exceed lesser of 50% of the participant’s vested plan benfit or $50,000

Participants with small accounts can borrow up to $10,000 without regard to the percentage limitation.

53
Q

Roth IRA

A
  • not restricted by age (as long as there is earned income contributions can be made past 72)
  • Contribution limits $6,000/yr (+$1,000 catch-up 50+)
  • Eligibility is not affected by participation in an employer-sponsored retirement plan
  • Investments grow tax-deferred and qualified distributions are tax-free
  • no RMD
54
Q

Roth IRA

Ordering Rules for Distribution

A
  1. Any contributions (not conversions) are withdrawn tax-free
  2. Conversions. Not subject to income tax, possibly 10% penalty on premature withdrawals.
    • no 10% penalty if held for 5 years OR age 59½
  3. Earnings are withdrawn last. May be exposed to both income tax and 10% penalty.
    • no 10% penalty if held for 5 years AND 59½
55
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)
56
Q

Roth 401(k)

A
  • Elective deferral limit: $19,500 (plus $6,500 catch-up age 50
  • There are no income restrictions associated with Roth 401(k), 403(b), or 457(b) accounts
  • Roth contributions are inluded in participant’s gross income
  • Employer contributions (including match) must go into traditional pre-tax account
57
Q

Non-Qualified Deferred Compensation Plans

A

NQDC plans are any employer retirement, savings or deferred comp plan for EEs NOT subject to ERISA requirements

  • 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
58
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
59
Q

Substatial Risk of Forfeiture

A
  • Substantial risk of forfeiture exist if the EE’s right to enjoyment of the property depends on the performance of services for a period of time (at least 5 years)
    1. ROF would probably not exist with relatives of owner
  • no taxation occurs as long as a substantial risk of forfeiture exists
60
Q

Taxation at Exercise NSO vs ISO

A

NSO:

  • Difference between grant & exercise price is taxed as O/I (exercise price becomes basis)

ISO:

  • no regular tax, but bargain element (Exercise Price - Grant Price) is add back item for AMT. (grant price is basis)
61
Q

Incentive Stock Option (ISO)

Holding Period

A

Holding Period (hint: EGG):

  • 1 year from Exercise Date and 2 years from Grant before selling ISOs
  • Violating either rule results in a Disqualifying Disposition
62
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
  • Salary deferrals NOT aggregated with other plans (401k, etc.)
  • Non-governmental plans can ONLY be rolled into another 457 plan
63
Q

Life Insurance (deferred comp)

A

ERs obtain life insurance on the life of the EE to fund the deferred compensation arrangement.

Under this arrangement the premiums and benefits are usually taxed as follows:

  • Policy is owned by ER. Premiums are not currently deductible. Death proceeds paid to ER are not taxable.
  • Benefits paid to EE are deductible to ER as long as the represent resonable compensation. Benefits are taxable to EE’s beneficiary when received.
  • PV of death benefits to surviving beneficiaries are _includible in EE’s gross estat_e.
64
Q

Incentive Stock Options (ISO)

(description, limitations, tax deduction)

A
  • ISO or qualified stock option is a tax-favored plan granting EEs option to buy company stock after vesting period.
  • Limited to $100,000 worth of ISOs granted to any EE that vest in one calendar year.
  • Corporation granting an ISO does note receive a tax deduction unless disqualifying disposition occurs (HP<2yrs)
  • Holding period rule, not vesting period, rule triggers a disqualifying disposition.
65
Q

Does the corporation receive a tax deduction for granting an ISO?

A

Corporations do no ordinarily get a tax deduction for granting an ISO nor a deduction when exercised.

Corporation would get deduction when it comes an NSO (participant is taxed at ordinary income tax rate)

66
Q

At the time of exercise, is an ISO subject to withholding, FICA, and FUTA Taxes?

A

Income tax withholding will not be required because no income is recognized.

If the ISO is defined to be compensation (exercise to sale violation) then then ISO is subject to withholding, FICA, and FUTA as compensation.

67
Q

Social Security Eligibility & Benefits

(Spouse)

A
  1. Spouse of a retired or disabled worker qualifies for SS payments if:
    • is a 62 or older OR at any age if
      • has a child in care under age 16
      • has a child age 16 or older and disabled before 22
    • Surviving spouse (or ex-spouse) of a deceased worker is age 60 or over
    • Suriving spouse of a deceased worker and at any age
      • has a child in care under age 16
      • has a child age 16 or older and disabled before 22
68
Q

Social Security Eligibility & Benefits

(Child/dependent)

A
  • Surviving dependent, unmarried child of a deceased, disabled, or retired insured worker, can recieve SS benefits if:
    • under 19 and full-time elementary or secondary school student
    • Age 18 or older but has a disability which began before 22
69
Q

Safe Harbor 401(k)

A
  • automatically satisfies nondiscrimination tests with either:
    • ER matching contribution or
      • $1/$1 on 3% EE deferral
      • $0.50/$1 on next 2% EE deferral
    • non-elective deferral
      • ER must contribute 3% of all eligible EE comp (regardless of EE deferrals)
  • Safe harbor plans are exempt from top heave (Key EEs) rules if only despoits are EE deferals + ER 3% non-elective match

CFP EXAM FLASHCARDS (7 decks)

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