Retirement and Income Planning Flashcards
1
Q
defined benefit pension plans
A
traditional DB plan
Cash Balance pension plan
DBk
2
Q
Defined contribution pension plans
A
Money Purchase plan
Target benefit plan
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
4
Q
tax advantaged plans
A
SEP
SARSEP
IRA
Roth IRA
403b
SIMPLE IRA
5
Q
Non qualified plans
A
Deffered comp plan
Section 457
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
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
8
Q
SS integration wage base
A
$142,800
9
Q
qualified plans testing
A
50/40 defined beenfit
ratio test
average benefits test
ACP
ADP
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
11
Q
safe harbor test (ERISA coverage req)
A
70% of eligible NHC must be covered by the plan
12
Q
Ratio test (ERISA coverage req)
A
% of NHC covered / % of HC covered >= 70%
13
Q
average benefits test (ERISA coverage req)
A
average benefits % of NHC/ average benefits % HC >= 70%
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
15
Q
defined benefit plan vesting
A
5 year cliff or 3-7 year graded
EEs always vested in thier own contributions
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
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
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
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
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
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
22
Q
Defined benefit pension plan
A
DB pension plan
mandatory ER contributions
ER assumes risk
actuarial assumptions
benefits older employees
costly to administer
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
24
Q
target benefit pension plan
A
DC
mandatory ER contributions
EE assumes risk
age weighted
actuary needed at inception
25
money purchase pension plan
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
26
thrift plan
after tax EE contribution
27
profit sharing plan
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
28
stock bonus plan
profit sharing DC plan
EE assumes risk
deduction for noncash contribution
EEs can vote stock in plan
distributions generally in stock
valuation issues
29
ESOP
stock bonus
EE assumes risk
ER can sell stock to plan with no tax
leverage
no integration
put option
30
401k plan
ADP/ACP testing
EE assumes risk
CODA
31
SEP
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
32
Qualified plans
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)
33
nonqualified plans
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
34
IRAs
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:
* **M**edical expenses in excess of 7.5% AGI
* **E**qual payments
* **A**ge 59.5
* **D**eath
* **D**isability
* **H**eath insurance premiums (if unemployed)
* **E**ducation expenses
* first time **H**ome buyer (max $10k)
* **B**irth or adoption (up to $5k per parent
* **Q**ualified disaster (up to $100k)
HINT: ME ADD HE HBQ
cannot have: collectibles, life insurance, S corp stock, or foreign coins in an IRA
35
Roth IRA
and Roth IRA qualified distribution
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:
* **D**eath
* **A**ge 59.5
* **F**irst time home purchase ($10k cap)
* **D**isabled
HINT: DAFD (Denver Area Fire Department)
36
Roth IRA nonqualified distribution
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
TSAs/Section 403b plans
and special catch up provision
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
SIMPLE IRAs
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
457 plans
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
qualified plan loans
* 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
qualified preretirement survivor annuity (QPSA)
qualified joint and survivor annuity (QJSA)
required for all pension plans
42
indirect rollover
VS
direct rollover
* 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
penalty for failure to take an RMD
50%
44
RBD
vs
trigger year
**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
SECURE ACT: beneficiary definition
no designated beneficiary - ususally an estate or charity
* death before RBD: 5 year rule
* deth after RBD: remaing distribution period of decendent
46
SECURE ACT: designated beneficiary definition
10 year rule - must distribute account by Dec 31 on the 10th anniversary of the owners death
(most beneficiaries fall in this category)
47
SECURE ACT: eligible designated beneficiary (EBD) definition
* 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
EBD nonspouse distribution options
* 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
EBD spouse distribution options
* 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
early withdrawal penalty (EWP) exceptions: qualified plans, 403bs, and IRAs
* substantially equal payments: 5 years or until age 59.5
* medical expenses over 7.5% AGI
* $5k for birth or adoption
51
early withdrawal penalty exceptions for qualified plans and 403bs
* after seperation of service after age 55
* QDROs, IRA uses divrrce decree
52
early withdrawal penaly exceptions for IRAs ONLY
* higher education costs for taxpayer, spouse, child, or grandchild
* $10k for first time home buyer
* health insurance premiums if unemployed
53
Social Security eligibility:
fully insured vs currently insured
* fully insured:
* 40 credits for retirement
* age - 22 = fully insured pre retirement (minimum of 6)
54
Social Security: benefits for the fully insured worker
* 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
Social Security: currently insured benefits
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
SS disability benefits: qualification
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
SS benefits before FRA
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
OASDI taxes
6.2% (portion of the FICA tax) capped at $142,800
fund social security
59
SS retirement benefits after FRA
8% increase per year after FRA until age 70
60
SS Spousal Benefits
also the same for divorced spouse (if married to the worker for at least 10 years)
\* 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
SS benefits: child under 18 benefits
* Retirement: 50%
* Disability: 50%
* Survivor (fully or currently) insured: 75%
or age 18 and still in high school
62
SS benefits: spouse if caretaker of child under age 16 or disabled
* Retirement: 50%
* Disability: 50%
* Survivorship benefits (currently or fully insured): 75%
63
SS benefits: dependent parents over age 62
ONLY survivorship benefits: 75%-82.5%
64
taxation of SS benefits thresholds
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
SS summary general benefits
worker: retirement/disability: **100%**
spouses/children/et: retirement/disability: **50%**
survivorship benefits: **75%**
66
Provisional income (for calculating taxable SS)
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
impact of earned income on SS benefits before FRA
_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
wealth preservation approach vs capital preservation approach
* **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
self employment retirement contribution calculation
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
Plans with mandatory EMPLOYER contributions
DB pension
Money purchase plan pension plan
Cash balance pension
target benefit pension
SIMPLE
71
plans that can invest an unlimited amount in employer securities
profit sharing plan
stock bonus plan
thrift plan
401k plan
ESOP
72
plans that are NOT integrated with SS
ESOP
SARSEP
SIMPLE
73
plans that allow EMPLOYEE contributions
profit sharing
401k
SIMPLE
74
plans that have PBGC insurance
defined benefit pension plan
cash balance pension plan
75
plans that require actuarial costs
defined benefit plan
cash balance pension plan
target benefit pension plan
76
plans that favor older employees
defined benefit plan
target benefit pension plan
77
plans where the EMPLOYER assumes the investment risk
defined benefit pension plans
cash balance pension plan
78
integration with social security: offset method
* 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
integration with social security: excess method
* 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
NUA taxation
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
lump sum distrbutions from a qualified plan
* 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
inherited NUA basis
no step up, treated as IRD
Basis = FMV at DOD - NUA portion
*NUA portion = basis - distribution*
83
Hardship withdrawals (qualified PS plans)
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
multiple employers: plan contributions
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
Government Pension Offest
spousal SS benefits are reduced 2/3 of state/local gov pension amount
