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CFP > Retirement and Income Planning > Flashcards

Retirement and Income Planning Flashcards

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CFP® flashcards
1
Q

defined benefit pension plans

A

traditional DB plan

Cash Balance pension plan

DBk

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2
Q

Defined contribution pension plans

A

Money Purchase plan

Target benefit plan

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3
Q

defined contribution profit sharing plan

A

traditional Profit sharing plan

Stock bonus plan

401k/SIMPLE 401k

New comparability plans

Age based profit sharing plan

Thrift

ESOP

HINT: PS4 NATE

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4
Q

tax advantaged plans

A

SEP

SARSEP

IRA

Roth IRA

403b

SIMPLE IRA

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5
Q

Non qualified plans

A

Deffered comp plan

Section 457

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6
Q

Highly compensated employee

A

greater than 5% owner

OR

compensation greater than $130k

can make a “top-paid” group election - 20% of compensation earners are considered HC, 5% owners would still be considered HC

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7
Q

key employee

A

greater than 5% owner

OR

officer with more than $185k compensation

OR

greater than 1% owner with more than $150k compensation

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8
Q

SS integration wage base

A

$142,800

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9
Q

qualified plans testing

A

50/40 defined beenfit

ratio test

average benefits test

ACP

ADP

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10
Q

qualified plan eligibility

A

age 21 and 1 year of service (1,000 hrs)

exception: can require two years of service if 100% vested upon entry (cannot be used by 401ks)

two entrance dates per year

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11
Q

safe harbor test (ERISA coverage req)

A

70% of eligible NHC must be covered by the plan

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12
Q

Ratio test (ERISA coverage req)

A

% of NHC covered / % of HC covered >= 70%

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13
Q

average benefits test (ERISA coverage req)

A

average benefits % of NHC/ average benefits % HC >= 70%

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14
Q

50/40 test

A

additional coverage test for DB plans

must benefit at least 50 employees or 40% or more of all eligibile employees

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15
Q

defined benefit plan vesting

A

5 year cliff or 3-7 year graded

EEs always vested in thier own contributions

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16
Q

defined contribution vesting

A

3 year cliff or 2-6 year graded

EEs full vested in their own contributions/earnings associated with those contributions

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17
Q

top heavy

A

top heavy = when more than 60% of its aggregate accrued benefits or account balances to go key employees

when a plan is top heavy, must provide non-key emplyees with minimum contributions

  • DB plans - minimum benefit of 2% x number of years of service up to 10 yrs
  • DC plans - 3% contribution of total compensation
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18
Q

ADP testing (actual deferral percentage)

A

for 401k plans

ADP = actual deferrals/eligible employee compensation

deferrals = employee contributions (includes Roth)

if ADP for NHC…

  • Less than or = to 2%, then max ADP for HC is 2 x ADP of NHC
  • More than 2%, but less than or = 8%, then max ADP for HC is 2% + ADP of NHC
  • More than 8% then max ADP for HC is 1.25 x ADP of NHC
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19
Q

ACP testing (actual contribution percentage)

A

applies to all qualified DC plans

ACP = actual contributions/eligibile EE compensation

contributions = ER match, EE contributions (excludes Roth)

if ACP for NHC…

  • Less than or = to 2%, then max ACP for HC is 2 x ACP of NHC
  • More than 2%, but less than or = 8%, then max ACP for HC is 2% + ACP of NHC
  • More than 8% then max ADP for HC is 1.25 x ACP of NHC
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20
Q

Safe Harbor Rule

A

can avoid ACP/ADP testing if the plan meets the safe harbor provisions

safe harbor contributions are 100% vested at all times

methods:

  • Matching contributions for NHC: 100% match up to 3% contribution + 50% for contributuions 3%-5% of compensation (matching % of HC cannot exceed those for NHC)
  • non elective contribution: 3% or more of comp for all eleigible NHC participants
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21
Q

annual additions limit for DC plans

A

$58k

includes:

  • ER: $19,500 + catchup (may be over $58k if catchup available)
  • EE: 25% limit: profit sharing, match, QNEC/QMC
  • forfeitures
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22
Q

Defined benefit pension plan

A

DB pension plan

mandatory ER contributions

ER assumes risk

actuarial assumptions

benefits older employees

costly to administer

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23
Q

cash balance pension plan

A

DB pension plan

mandatory ER contributions

ER assumes risk

benefits younger employees

quasi-seperate accuoints

benefit - certain % plus guaranteed interest rate credit

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24
Q

target benefit pension plan

A

DC

mandatory ER contributions

EE assumes risk

age weighted

actuary needed at inception

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25
Q

money purchase pension plan

A

DC pension plan

mandatory ER contributions

EE asumes risk

fixed % between 0-25%

used to retain key employees and when EEs are young with higher income

easy administration

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26
Q

thrift plan

A

after tax EE contribution

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27
Q

profit sharing plan

A

profit sharing DC

EE assumes risk

funding flexibility

used to attract and retian EEs

contributions may be made with company stock

can be integrated with SS

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28
Q

stock bonus plan

A

profit sharing DC plan

EE assumes risk

deduction for noncash contribution

EEs can vote stock in plan

distributions generally in stock

valuation issues

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29
Q

ESOP

A

stock bonus

EE assumes risk

ER can sell stock to plan with no tax

leverage

no integration

put option

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30
Q

401k plan

A

ADP/ACP testing

EE assumes risk

CODA

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31
Q

SEP

A

nonqualified plan

discretionary ER contributions, NO EE contributions. contributions are not subject to FICA and FUTA

contributions 100% vested

can be adopted and funded up until taxes are due including extensions

employer can deduct contributions

  • eligibility: must cover all EEs (including part time) who are 21+ and worked during 3 out of the 5 prior calender years and have at leas $650 in compensation
  • contribution limit: 25% of comp (covered comp $290), MAX contribution $58k
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32
Q

Qualified plans

A

subject to ERISA

subject to non discrimination

tax benefits: EE deferral, ER deduction

funding: due by date of return (including extensions)

must be established by end of annual tax filing (including extensions)

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33
Q

nonqualified plans

A

not subject to ERISA or nondiscrimination testing

tax benefits: EE deferral only, EE gets deduction when deferral ends

can be established and funded at any time

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34
Q

IRAs

A

individuals at any age with earned inome can make contributions (income limits, and limitations if you are covered by a plan)

earned income = wages, tips/bonus/fees, alimony(pre 2019 divorce), separate maintenace accounts

distributions before 59.5 are subject to 10% penalty

exceptions to penalty:

  • Medical expenses in excess of 7.5% AGI
  • Equal payments
  • Age 59.5
  • Death
  • Disability
  • Heath insurance premiums (if unemployed)
  • Education expenses
  • first time Home buyer (max $10k)
  • Birth or adoption (up to $5k per parent
  • Qualified disaster (up to $100k)

HINT: ME ADD HE HBQ

cannot have: collectibles, life insurance, S corp stock, or foreign coins in an IRA

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35
Q

Roth IRA

and Roth IRA qualified distribution

A

no age restrictions, must have earned income (limitations)

nondeductible contributions, funds accumulate tax free (if qualified distribution)

qualified distribution requirements:

  • distribution is after 5 year period (clock starts during tax year account is opened)
  • AND one of the following:
    • Death
    • Age 59.5
    • First time home purchase ($10k cap)
    • Disabled

HINT: DAFD (Denver Area Fire Department)

36
Q

Roth IRA nonqualified distribution

A

ordering rules:

  1. contributions → not taxed to penalized
  2. conversions → not taxed, penalized if before 5 year mark (each contribution has its own 5 year clock)
  3. earnings → taxed and penalized (same IRA exception rules will apply)
37
Q

TSAs/Section 403b plans

and special catch up provision

A

for tax exempt organization or public school

nonqualified, but cannot discriminate

limited to annuity contracts and mutual funds

special catch up provision: when EE has completed 15 years of service for the employer:

  • can increase contribution by the least of:
    • $3,000
    • $15,000 (aggregate lifetime max for special catch up - reduced by amounts previously under catch up)
    • $5,000 x years of service - sum of all prior salary deferrals

additional 50+ catch up would still be allowed

38
Q

SIMPLE IRAs

A

for employers with 100 or fewer EEs earning at least $5k

employer and employee contributions

  • ER contributions
    • dollar for dollar 3% match of EEs compenstion (can make as little as 1% of comp for no more than 2 out of 5 years)
    • 2% of comp nonelective contribution

all contributions are fully vested to the employee

cannot be integrated with SS

39
Q

457 plans

A

deferred comp plans for governmental or non church controlled tax exempt organizations

can discriminate

special 3 year catch up: doubles allowable contribution limit in the last 3 years of employment prior to normal retirment date (cannot also use 50+ catch up during these years)

participation in 457 is not considered an active particpant for IR contributions

40
Q

qualified plan loans

A
  • Vested balance:
    • Below $10k: entire balance available for loan
    • $10-$20k: $10k loan
    • $20k-$100k: 50% of balalance, max $50k loan
  • loan amount reduced by highest ourstanding balance within the past 12 months
  • payback - generally 5 years, for principal residence: reasonable amount of time (generally 10-30 years)
41
Q

qualified preretirement survivor annuity (QPSA)

qualified joint and survivor annuity (QJSA)

A

required for all pension plans

42
Q

indirect rollover

VS

direct rollover

A
  • indirect: called a rollover
    • participant takes possession of the funds and then redeposits in 60 days
    • tax will still be deferred
    • one rollover per year
    • 20% mandatory income tax withholding
  • direct: trustee to trustee direct rollover
    • funds go from one plan to another
    • not subject to 20% income tax withholding
    • not limited per year
43
Q

penalty for failure to take an RMD

A

50%

44
Q

RBD

vs

trigger year

A

RBD: April 1 of the year following the year you turn 72 (2020 and later)

trigger year: year you trun 72/first year you start RMDs (even though actual distribution may be delayed to April 1 of the following year)

exception: if you are still working at age 72 and you are not a 5% or greater owner of the company you do not have to take an RMD from your current employer qualified plan

45
Q

SECURE ACT: beneficiary definition

A

no designated beneficiary - ususally an estate or charity

  • death before RBD: 5 year rule
  • deth after RBD: remaing distribution period of decendent
46
Q

SECURE ACT: designated beneficiary definition

A

10 year rule - must distribute account by Dec 31 on the 10th anniversary of the owners death

(most beneficiaries fall in this category)

47
Q

SECURE ACT: eligible designated beneficiary (EBD) definition

A
  • surviving spouse
  • non-surviving spouse
    • beneficiary not more than 10 years younger (ex: sister 8 yrs younger or friend two years older)
    • person with disability or chronically ill
    • decedents minor child (until they reach age of majority - then 10 yr rule kicks in)
48
Q

EBD nonspouse distribution options

A
  • transfer to inherited IRA
  • death before RBD:
    • take over the reamining life expectancy of the beneficiary (start in year following death)
    • elect 5 year rule if allowed
  • death after RBD:
    • take of life expectancy of deceased or beneficiary (whichever is longer) starting in year after death
49
Q

EBD spouse distribution options

A
  • Roll to your own account and treat as your own
  • death before RBD:
    • distributions over spouses life expectancy beginning year the decedent would have attained 72
    • 5 year rule if allowed
  • death after RBD:
    • distributions over spouses life expectancy beginning year following death
    • distribute based on deceased owners age as of the birthdya in the year of death reduced by 1 for each year
50
Q

early withdrawal penalty (EWP) exceptions: qualified plans, 403bs, and IRAs

A
  • substantially equal payments: 5 years or until age 59.5
  • medical expenses over 7.5% AGI
  • $5k for birth or adoption
51
Q

early withdrawal penalty exceptions for qualified plans and 403bs

A
  • after seperation of service after age 55
  • QDROs, IRA uses divrrce decree
52
Q

early withdrawal penaly exceptions for IRAs ONLY

A
  • higher education costs for taxpayer, spouse, child, or grandchild
  • $10k for first time home buyer
  • health insurance premiums if unemployed
53
Q

Social Security eligibility:

fully insured vs currently insured

A
  • fully insured:
    • 40 credits for retirement
    • age - 22 = fully insured pre retirement (minimum of 6)
54
Q

Social Security: benefits for the fully insured worker

A
  • retirement benefits
  • spousal retirement benefits
  • surviving spouse benefit for window (age 60+)
  • surviving spouse benefit for caring for dependent if child is under age 16
  • dependent benefit
  • dependent parent benefit (if age 62+)
  • lump sum death benefit of $255
55
Q

Social Security: currently insured benefits

A

currently insured = 6 credits of coverage during 13 calendar quarters ending with calender quarter of death

benefits:

  • surviing spoue caring for depndent child
  • dependent benefit
  • lump sum death benefit of $255
56
Q

SS disability benefits: qualification

A

unable to perform substantially gainful activitiy

impairment will be permanent or result in death

not payable if disabled soley due to alcohol or drug addiction

57
Q

SS benefits before FRA

A

36 months or less before FRA: 5/9 x 1% x months before FRA (36 max) = % reducition

more than 36 months before FRA: 5/12 x 1% x additional months = % reduction

58
Q

OASDI taxes

A

6.2% (portion of the FICA tax) capped at $142,800

fund social security

59
Q

SS retirement benefits after FRA

A

8% increase per year after FRA until age 70

60
Q

SS Spousal Benefits

also the same for divorced spouse (if married to the worker for at least 10 years)

A

* all based on spouses FRA/age

  • Retirement:
    • spouse FRA: 50%
    • age 62: 32.5%-25%
  • Disability:
    • FRA: 50%
    • age 62: 35%
  • Survivorship insurance (fully insured):
    • FRA: 100%
    • age 62: 82.9%
    • age 60: 71.5%
61
Q

SS benefits: child under 18 benefits

A
  • Retirement: 50%
  • Disability: 50%
  • Survivor (fully or currently) insured: 75%

or age 18 and still in high school

62
Q

SS benefits: spouse if caretaker of child under age 16 or disabled

A
  • Retirement: 50%
  • Disability: 50%
  • Survivorship benefits (currently or fully insured): 75%
63
Q

SS benefits: dependent parents over age 62

A

ONLY survivorship benefits: 75%-82.5%

64
Q

taxation of SS benefits thresholds

A

if provisional income is above $25k S/ $32k MFJ then 50% of SS benefit is taxable

if provisional income is above $34k S / $44k MFJ then 85% of benefit is taxable

65
Q

SS summary general benefits

A

worker: retirement/disability: 100%

spouses/children/et: retirement/disability: 50%

survivorship benefits: 75%

66
Q

Provisional income (for calculating taxable SS)

A

AGI + tax exempt intersest + amount excluded under adoption assistance program + foreign earned income or foreign housing allowance + 50% of SS or teir 1 railroad benefits

67
Q

impact of earned income on SS benefits before FRA

A

age 62, but before FRA: can earn $18,960/yr, anything over this is subject to $1 withheld for every $2 over the limit

_year you attain FRA (_time between begining of year and actual date you turn FRA): can earn $50,520/yr, anything over this is subject to $1 withheld for every $3 over limit

68
Q

wealth preservation approach vs capital preservation approach

A
  • wealth preservation approach: (purchasing power preservation model):
    • retains the pruchasing power of the money in the fund at the assumed retirement date (most conservative approach)
    • uses an inflation adjused interest rate
  • captial preservation approach:
    • maintains the original balance needed at retirment under the pure annuity model
    • uses gross interest rate
69
Q

self employment retirement contribution calculation

A

Schedule C income

  • dedcutible SS tax

= adjusted net SE income

x 20% → (25%/1.25)

= max contribution

only applies to self employed person and not their employees

70
Q

Plans with mandatory EMPLOYER contributions

A

DB pension

Money purchase plan pension plan

Cash balance pension

target benefit pension

SIMPLE

71
Q

plans that can invest an unlimited amount in employer securities

A

profit sharing plan

stock bonus plan

thrift plan

401k plan

ESOP

72
Q

plans that are NOT integrated with SS

A

ESOP

SARSEP

SIMPLE

73
Q

plans that allow EMPLOYEE contributions

A

profit sharing

401k

SIMPLE

74
Q

plans that have PBGC insurance

A

defined benefit pension plan

cash balance pension plan

75
Q

plans that require actuarial costs

A

defined benefit plan

cash balance pension plan

target benefit pension plan

76
Q

plans that favor older employees

A

defined benefit plan

target benefit pension plan

77
Q

plans where the EMPLOYER assumes the investment risk

A

defined benefit pension plans

cash balance pension plan

78
Q

integration with social security: offset method

A
  • used in defined benefit plans
  • fixed amount or a formula amount that is designed to represent the existance of social security benefits reduces the plan formula
  • maximum permitted disparity: 3/4 x 1% x years of service
    • maximum 35 years or 3/4 x 1% x 35 = 26.25%
79
Q

integration with social security: excess method

A
  • can be used with DC or DB plans
  • allows for higher contributions above integration level
  • limited to lesser
    • 2 x base %
    • base % + 5.7%
80
Q

NUA taxation

A
  1. Basis = taxed as ordinary income at distribution
  2. NUA amount
    • = FMV at lump sum distribution - basis
    • taxed at LT cap gains (always long term)
  3. further appreciation taxed at LT or ST cap gains (holding period starts at lump sum distribution)
81
Q

lump sum distrbutions from a qualified plan

A
  • types:
    • NUA
    • if born before Jan 2 1936: 10 yr forward averaging and pre 1974 cap gain treatment
  • election must be made by participant or estate within 1 year of distribution
  • must have one of the following to take distribution:
    • death
    • age 59.5
    • separation from service
    • disability
82
Q

inherited NUA basis

A

no step up, treated as IRD

Basis = FMV at DOD - NUA portion

NUA portion = basis - distribution

83
Q

Hardship withdrawals (qualified PS plans)

A

limited to workers contributions

will be taxed and 10% penalized

  • must be due to an immediate and heavy financial need
  • must not have any other sufficient financial recources
  • reasons
    • unreimbused medical or funeral costs
    • purchase of primary residence
    • higher education expenses
    • payment necessary to prevent forclosure
84
Q

multiple employers: plan contributions

A

if two companies are not part of a controlled group - then each company can contribute the max up to the annual additions limit

employee can only contribute the total elective deferral - $19,500 total across both accounts

85
Q

Government Pension Offest

A

spousal SS benefits are reduced 2/3 of state/local gov pension amount

CFP (7 decks)

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