Retirement Flashcards
SARSEP keys
- up to 25 employees, 50% of eligible employees must defer
- existence before 12/31/96 (grandfathered)
- salary deduction limit $19,000 (FICA)
- New employees can participate if the plan was established before 1/1/97
section 415 max limit for DB annual benefit
$225k or 100% of average compensation (highest 3)
280k (if compensation is above, use 280k-even for averaging)
solo 401k (uni 401k)- you, you and spouse, or two partners
not subject to typical 401k rules
- elective deferral up to 19k + employer contribution cap of 56k (max is 56k(including 19k)+6k)
- 6k catch up allowed for 50+
ESOP in S corp
no matter how many employees, an ESOP is ONE S shareholder
NUA (extra)
$20 basis, $100 at distribution -> $20 ordinary, $80 NUA, LTCG due at sale, if $88 6 mon after retirement, $8 is STCG
phantom income…if 72(t) (substantially equal payments) taken to avoid phantom, NUA is lost (must be lump sum)
NUA lost if employer stock is transferred into IRA
ESOP 10% penalty
over 55 ok
basis ordinary + 10%, distribution LT+10%
401(k) SIMPLE
280k salary cap
ERISA, so creditor protected
max employer contribution is $280k x 3%=$8250
Deferral is still $13,000
who can adopt 403(b)?
also called TDA/TSA
501(c)(3) tax exempt-churches, hospitals, private schools, colleges
discriminate against wage vs age
target benefit- age weighted (discriminates against age)
SS integration- discriminates against Wage
ratio percentage test (coverage test)
plan must cover % of NHCE employees that’s at least 70% of % of covered HCEs.
if 100% HCEs are covered and there are 100 NHCEs, 70% must be covered, 30% can be excluded
average benefits test
average benefits for all NHCE must be at least 70% of that for HCE
plans that can be integrated with SS(discriminate against wages)
DB, Cash Balance, Money purchase, target benefit, profit sharing, stock bonus, SEP- yes
ESOP, SIMPLE, 401(k) SIMPLE- no
cross-tested plan=new comparability plan
max benefits to HCE, min required for others
Min benefits/contributions for non-key employees (top-heavy plan)
DB- at least 2% of compensation
DC- min employer contribution no less than 3%
parent-subsidiary
brother-sister
affiliated service group
- one entity (parent co) owns at least 80% of other entities
- 5 (or fewer) owners of 2 or more entities own 80% of each
- a service org and pro org
72(t)
substantially equal payments
you screw up if the amount is changed before:
- end of 5 yrs
- age 59.5 whichever is later
and you have to recapture 10% of total payments received BEFORE 59.5 (so if you start taking payments at 57.5 and cease at 61.5, two years worth of payment is penalized at 10%)
one-time switch to RMD (with no penalty)-will reduce payout and tax
RMDs when 10 yr age difference b/n spouse
joint life table can be used- lower mandatory distributions- the younger has to be beneficiary
stretch IRA (non-spouse individuals)
(-1 method)
take distributions based on the beneficiary’s own life expectancy [owner dies in 2019= use 2020 divisor, then reduced by -1 each year after]
[if bene is decedent’s estate, gotta be taken out in 5 years]
if you are the bene, you take as much/little, but because it’s earning 6% (example), account keeps growing.
qualified plan (includes TSA/403(b)) loans- how much?
less than 50% of vested or $50,000
or $10,000 regardless (if you have it)
loans are allowed in all qualified plans and 403b
qualified joint and survivor annuity(QJSA)/qualified pre-retirement survivor annuity (QPSA) (pension benefit distribution)
pension benefits (like money purchase, target benefit) must be QJSA unless spouse consents to waiver in writing [profit sharing type CAN, but not required]
if married spouse dies before retirement, then QPSA to surviving spouse unless waived
QDRO doesn’t apply to which plans?
doesn’t apply to:
most nonqualified plans- annuities, certain DC, IRAs (SEP, roth, etc)
ONLY applies to QUALIFIED plans, in other words
ex: plan participant’s benefit supposed to start at 55, distributions to former spouse can be scheduled to begin at the participant’s age 55(even if former spouse isn’t retiring)
eligibility for IRA and Roth
IRA- based on active participation
Roth- based on AGI (basically can’t contribute if MFSeparately - $10k phaseout)
3 types of Roths
- Roth IRA- phaseouts AGI
- Roth 401k- no income restriction (ER contribution is pre-tax and goes to traditional 401k account; no income restriction)
- Roth conversion- no income restriction (also no limit to amount of conversion)
unfunded=informally funded
assets owned by company, so subject to creditors
can be life insurance, annuities, mutual funds, etc
412(i) plan
defined benefit plan funded entirely with insurance products like life insurance and annuities, contribution
based on actuarial assumption
for employers that have some need for life insurance, large contribution allowed but lower than typical
non spouse beneficiaries of 401k
transfer to IRA and withdraw over 5 years or their life expectancy
same for 403(b) and 457
IRAs NOT subject to RMD
Roth
Roth inherited by a spouse
Roth 401k subject to RMD (both the employer and employee contribution accounts)
group term life deductibility
if company is owner and beneficiary of policy, they can’t deduct
FSA
- healthcare on FSA money must be spent by 3/15 or forfeited
- typically funded through employee salary reduction (not subject to FICA and FUTA, no withholdings- all pretax)
- dependent care max $5000 (dependent care assistance only to child under 13 or physical/mental care for dependent)
salary reduction to FSA can be elected to split
ex: $7650 –> $5000 to dependent care and $2650 (max) to health FSA
used to pay for med expenses not covered by insurance
can’t pay for: health premiums including LTC, cosmetic items, cosmetic surgery, items for “general health”
(incidental) life insurance use in retirement plan
pure insurance protection is taxed to the participant at the Table 2001 cost
pure death benefit excluded from income
ex:
$40,000 death benefit received, $10,000 was cash value–> $30,000 is tax-free, but $10,000 ordinary tax
$250,000 group policy ($50,000 exemption):
- employee contributes $0.20 per $1000 (for all of $250,000)
- Table 1 rate is$0.43 per $1000 (only for $200,000)
- what is included in employee’s income? (annual)
$0.43 x 200=$86
$0.20 x 250=$50
$86-$50=$36/mon x 12= $432 included in his income
Pension Benefit Guaranty Corporation (PBGC) insures benefit payments to participants (and bene):
only defined benefit plans and cash balance plans
just insures against loss of benefits, oversees plan termination, doesn’t require reporting, etc (–> that’s ERISA)
403(b) funding vehicles
limited to annuity contracts or mutual funds (incidental life insurance under annuity contracts ok)
life insurance and section 162
disability and 162
- life insurance often used as informal funding vehicle
- employer owns policy, is beneficiary, premiums not deductible, so death proceeds to employer tax-free
- benefits paid to covered individual/survivor (cash bonus) is deductible expense as paid, individual has constructive receipt, so it’s taxable (deferred compensation)
individual owns contract and pays premium–> premiums not deductible, benefits tax-free to individual
individual owns contract and employer pays premium as bonus (162 disability)–> premiums deductible by employer (bonus), benefits tax-free to individual
individual owns contract and employer pays premium as salary continuation (group)–> premiums deductible by employer, benefits taxable to employee
UBTI (unrelated business taxable income)
income from limited partnership (except real estate) (like equipment leasing program) or dividends from a margined account
457
governmental 457 can be rolled into Roth IRA after 70.5 or separation (nongovernmental plans can only be rolled into another 457 plan)
not qualified plan, so no mandatory withholding
19,000 deferral limit, $6000 catch up (ONLY GOVERNMENTAL, no non-profit employee, no churches) over age 50 OR special catch-up
doesn’t count toward IRA deductibility active participation (any type of 457)
keogh in “which plan is best?” type of question
Keogh by itself is never enough of an answer!
qualified plans can hold disability insurance
ex: DB pension, ESOP, 401k
can take loan from qualified plan tax-free if:
- there is repayment agreement
- no more than 50% vested/$50,000 max or $10,000 minimum
- principal residence loans are allowed, but interest is only deductible under 2 conditions: it’s for primary residence, and secured by primary residence
stock bonus and ESOP plans
- don’t need to be based on company profits
- -distributions in employer stock not required, just option
- employer contributions typically in cash, not stock, and then cash used to buy shares from company to fund company operations
forfeitures- effects on account balance
DB and cash balance- forfeitures reduced plan costs/contributions
money purchase- forfeitures may (not must) be allocated to employee account balances
profit-sharing- forfeitures normally allocated to plan participants
ISO question where more than $100,000 ISOs are granted
look for answer that includes both income tax liability and AMT bargain element
watch out for when $100,000+ ISO granted- no violation if not more than $100k VESTED at the same time (like $200,000 granted but vests 50% and then 50% is ok)
“who else’s eligible for SS benefits”
disabled before 21, also if you care for this person (the disabled kid is not getting her own disability benefits- she’s getting dependent’s benefit)
18 yr old high schooler covered
– watch out for (survivor) parent who is younger than 60*–he/she’s covered!!!
pension max (pension maximization application)
Elect single life annuity and use part of the higher payout to purchase life insurance on employees life (get max payment out of the plan without leaving spouse with nothing )
payout can be based on older spouse (if other spouse 10 years younger and pulling payout down, but she has to agree to waive her rights)
which qualified plans can hold second-to-die insurance?
which plans allowed purchase life insurance?
only profit-sharing, pension plans can’t
qualified plans (ESOP, profit sharing 401k, etc), 403b are only plans allowed to purchase life insurance (IRAs can’t)
how much can you contribute to Keogh plan?
SHORTCUT: (the 1/2 SE tax considered)
multiply by either 12.12% or 18.59%
12.12% for 15% contribution (non-owner)
18.59% for 25% contribution (non-owner)
which plan contributions are subject to FICA and FUTA?
employee contribution is subject to FICA and FUTA in deferral-type plans
(so SEP isn’t)
IRA active participation (no addition in 401k that year)
if your company doesn’t make “annual addition” to your account under the plan, you’re not an active participant (even though still covered), you can make a DEDUCTIBLE contribution of $6000 to IRA (or up to $12,000 spousal)
Roth 401k rollover
only to another Roth account or Roth IRA
NOT to traditional IRA, governmental 457 or another plan without a Roth 401(k) option
buying life insurance using split dollar policy
for example:
you can buy your policy from your company (endorsement method) by paying higher of cash value or premiums paid (with no interest)
secular trust
-assets beyond reach of creditors, so taxation occurs 1) when funds are deposited, 2) when there is no risk of forfeiture
- irrevocable (funded)
- current taxation of funds (when contribution is made)
HSA vs MSA vs FSA
use it or lose it for FSA
HSA for HDHP, MSA for small employers etc.
cash balance
hypothetical individual account for each participant, funded by employer once a year with “interest credit” (the guarantee)
so the actual return can lower or increase employer contributions
rabbi and bankruptcy
rabbi
available to creditors, so you’d have to stand in line with (unsecured) creditors if company goes bankrupt
- employer can fund from general assets
- contributions not subject to payroll taxes
- distributions subject to withholding and FICA
Roth recharacterization
2018-
the only circumstance when Roth recharacterization is permitted is when AGI exceeds the contribution threshold for that year (got a bonus and AGI increased, so recharacterize Roth to traditional IRA or face 6% penalty)
deadline October 15 (even if not extended in April)-> as if Roth contribution never happened
contribution to IRA (age)
can’t contribute to IRA or non-deductible IRA after 70.5
roth contributions ok past 70.5
SIMPLE ok (even when distributions are also being taken)
Uniform Lifetime Table (divisor to calculate RMD)
if he turns 70 and 70.5 in same year, use age 70; 27.4
if he turns 70 in July- and 70.5 the next year, use 71; 26.5
162 “double bonus” arrangement
first bonus goes into annuity and second pays the phantom tax
S-corp and non-qualified deferred compensation plan
S corps can offer (so can other pass through like partnerships) but nondeductible at time contribution
Not effective
SEP (IRA)
- no salary deferral (ER contribution only)
- easy to adopt
- 56k max
- immediate vesting
- can be integrated with SS
sole proprietor contribution to SEP:
like Keogh! - 12.12% or 18.59%
which vesting schedule? type of question
GRADED if employer wants RETENTION
conduit IRA
to move employer’s qualified plan into another qualified plan- for subsequent transfer
Gift tax and GSTT example
$5,0150,000 gift from grandfather ($11.4 exemption used up)
Gift tax is $5 mil x 40%= $2 mil (reduces the taxable gift for GSTT purposes)
GSTT: ($3,015,000-$15,000) x 40%= $1,200,000
$3,200,000 due now for grandfather
social security taxation of benefit (50% or 85%)
50%: $25k** for single; $32k for married
85%: $34k for single; $44k** for married
part time emp counts for COBRA?
yes!
qualified plan that can be part of a cafeteria plan
ONLY 401k
ISO disqualification from transferring (gifting ISO before exercise)
owner pays for entire income- (iso disqualified)
$15 grant, transferred when $19, then that person sells for $25= $10 income to the original owner
(if he dies before he can exercise, then ISO status maintained thru transfer)
Social Security:
taking SS benefits before FRA
working after retirement
taxation of benefits
(1/180) x # of months= % reduced
- if you take benefits BEFORE FRA and work, $1 of $2 ($17,640 or over) or $1 of $3 ($46,920 or over) reduction of benefit rule applies (FRA- no reduction)
- benefits are taxed 50% for $25,000+ single/$32,000 joint provisional income (MAGI) or 85% for $34,000 single/$44,000+ joint MAGI
employer contribution 100% vested plans
SIMPLE, SIMPLE 401k, SEP, SARSEP
employee deferrals in any plan always 100% vested
SS integration- what does it do
equalizes ER contribution for higher and lower paid employees– higher paid employees like owners benefit from this
“qualified 60 day” and “60 day IRA distribution”
first distribution from 401k reinvested in IRA within 60 days doesn’t count as a 60 day IRA distribution, so you can do a 60 day IRA distribution that year
how to ensure tax-deferred treatment on entire rollover amount? (no 20% withholding)
direct transfer/ direct rollover/ trustee-to-trustee transfer
there is mandatory 20% withholding of direct distribution from QUALIFIED PLAN (so 457 isn’t subject to this)
50% excise tax penalty if you don’t take RMD
if you’re required to take $19,000 and only take $9000, you’ll pay penalty for 50% of $10,000
IRA beneficiary vs inherited (no beneficiary designation) IRA
difference is that the beneficiary may treat the IRA distributions as his own (-1 method) but the inherited IRA must be depleted within 5 years (12/31 of fifth anniversay of death)
separate account for IRA applicable distribution based on oldest child’s age?????
multiple designated beneficiaries
separate accounts must be established by 12/31 of year following death (or else! oldest child’s life expectancy is used for req’d distributions)
if charity is one of beneficiaries- interest must be cashed out before 9/30 for other individual beneficiaries life expectancies to count
401k, 403b, 457 non-spouse beneficiaries- what to do
DIRECT TRANSFER into INHERITED IRA, or it’ll be taxed in entirety
pension plan beneficiary
pension plans require spouse to be beneficiary
IRA can be anyone
careful with RMD questions-
Which year’s rmd has to be taken by which year?
you can wait until april 1 of next year to take the previous year’s RMD, but it’s still that previous year’s distribution!!!
NSO (nonqualified stock options)- 83(b) election
NSOs subject to ordinary income tax at exercise, but you can elect to pay ordinary income tax at GRANT if you think stock will appreciate (no taxation at exercise, then LTCG at sale)
nonqualified deferred compensation- who can’t offer?
non-profits can’t offer, premium can’t be deducted as business expense
not for sole-proprietorships either, corporations only(?)
IRA- only earned income
king IRA’s guard, Ernie income lol
earnings from wages, salaries, tips, professional fees, bonuses….and
alimony and separate-maintenance payments (Amounts paid to one spouse by the other spouse under a court order or agreement while they live apart) count!
junior stock plan
right to purchase newly issued shares with later conversion into company’s common stock
hardship withdrawals
401k and 403b (only loans are available for other plans)
subject to ordinary income tax and 10% early w/d penalty (if it doesn’t qualify under certain exemptions)
distributable amount is your total elective deferrals (why it has to have 401k provision) and vested profit-sharing contribution
Roth conversion and RMD
if you have to take RMD from IRA, conversion to Roth doesn’t satisfy it- you have to take RMD and then convert
