Retirement Concepts

Question 1

How do you do the Needs Analysis calculation two-stepper?

Example: Assume the client wants to accumulate retirement funds to maintain his lifestyle (50K income) with a 4% inflation rate and a 8% growth rate. He is 40 and anticipates retiring in 20 years. He expects to live for 25 years.

Answer 1

Step 1: Inflate the annual need in today’s dollars. This determines the funds needed for the first year of retirement.
PV = -50,000
n = 20
i = 4
Solve for FV.
FV = 109,556. This is the amount needed for the first year of retirement.

Step 2: Determine what lump sum is needed at the beginning of retirement. This is the amount needed to fund the presumed years of retirement. MAKE SURE YOU ENTER INTO BEGIN MODE.
n = 25
i = REAL RATE OF RETURN DURING RETIREMENT. 1.08 / 1.04 - 1 x 100
PMT = FV from Step 1, so 109,556
Solve for PV.

Question 2

Taxation of Social Security benefits

Answer 2

If a person’s income plus half their SS benefits is more than
25,000 Single Taxpayer, 32,000 Married Filing Jointly
Up to 50% of benefits will be included in taxable income.

If their income plus half SS benefits is greater than
34,000 Single Taxpayer, 44,000 Married Filing Jointly
Up to 85% of benefits will be included in taxable income.

NOTE: Municipal bond interest counts! MAGI!

Question 3

Working After Retirement - social security benefits

Answer 3

Workers who have reached FRA (67) may keep all benefits, no matter how much is earned.

Workers younger than FRA will have $1 deducted from benefits per $2 earned over $19,560.

Workers who reach FRA during the current year will have $1 deducted from benefits for each $3 of earned income above $51,960.

Question 4

SSDI Facts

Answer 4

Workers are entitled to SSDI if:
1. They are insured for disability benefits and are under age 65.
2. Has been disabled for 12 months, expected to be disabled for at least 12 months, or suffered from a disability which is expected to result in death.
3. Has filed for disability benefits and has completed a FIVE MONTH waiting period.

Question 5

When is a cash benefit plan most appropriate?

Answer 5

A cash balance plan may be appropriate when a company can no longer afford benefit guarantees under a defined benefit plan, or for a small employer with high earners.

Question 6

What is the PBGC and what does it do?

Answer 6

The PBGC (Pension Benefit Guaranty Corporation) insures DB and CB plans. It does not insure defined contribution plans.

Question 7

When would a money purchase plan be appropriate?

Answer 7

1. The employer wants a stable work force (wants to retain key young employees)
2. The employer wants a plan that is simple to administer and explain.
3. The employer must have stable cash flow and profit to make the annual fixed contributions.

Question 8

When would a profit-sharing plan be appropriate?

Answer 8

1. when an employer’s profits vary from year to year
2. when an employer wants to adopt a qualified plan with an incentive feature to motivate employees to help the company make a profit
3. when the employees are young, well paid, and have substantial time to accumulate retirement savings

Question 9

What is the formula to calculate a SEP or Keogh (sole proprietorship and partnership) contribution? 15% and 25% plan.

Example: Andy’s Anvils produces a net profit of $50,000.

Answer 9

15% plan - multiply business profit by 12.12%
Andy’s max plan contribution is $6,060
25% plan - multiply business profit by 18.59%
Andy’s max plan contribution is $9,295

Question 10

What kind of business can use a SIMPLE?

Answer 10

SIMPLEs are available for (100 or LESS employees)
1. sole-proprietorships
2. tax-exempt organizations
3. government entites

Question 11

When would a SEP be appropriate?

Answer 11

A SEP would be appropriate when an employer is looking for an alternative to a qualified profit-sharing plan that is easier and less expensive to install (adopted by completing Form 5305-SEP).

Question 12

What percentage can employers contribute to an employee’s SIMPLE?

Answer 12

dollar for dollar matching contributions up to 3%

Question 13

What is the difference between DEFERRAL and CONTRIBUTION?

Answer 13

deferral = normal amount
contribution = normal amount plus catch up

Question 14

Who is a fiduciary under ERISA?

Answer 14

A person who controls plan assets (or administration) who renders investment advice for a fee.

Question 15

What can a trustee be held liable for under ERISA rules?

Answer 15

All losses.

Question 16

What is the ratio percentage test?

Answer 16

A qualified plan must cover a percentage of non-highly compensated (NHCE) employees that is at least 70% of the percentage of highly compensated (HCE) employees covered.

Question 17

What is the average benefits test?

Answer 17

The average benefits for all non-highly compensated (NHCE) employees must be at least 70% of that for highly compensated (HCE) employees?

Question 18

Who are Highly Compensated Employees and Key Employees?

Answer 18

Highly Compensated Employees: A greater than 5% owner or someone earning more than $135,000.

Key employee: Greater than 5% owner.

Question 19

When is a plan top-heavy?

Answer 19

A plan is top-heavy if more than 60% of its aggregate accrued benefits or account balance are allocated to key employees.

Question 20

Permitted vesting schedules?

Answer 20

Top heavy DB plans and ALL defined contribution plans:
3 year cliff or
2 to 6 year graded or
100% vested with 2-year eligibility

Non-top-heavy defined benefit plans:
5 year cliff or
3 to 7 year graded or
100% vested with 2 year eligibility

When in doubt, use Graded.

Question 21

Nondiscrimination testing. 401K and 403b elective deferrals are subject to it.

Example: ABC has a 401K where the NHCEs’ average deferral is 5%. What is the maximum amount that Hal (age 50/HCE) can defer if he earns $200,000 in 2022?

Answer 21

0 to 2% is TIMES 2, 2% to 8% is PLUS 2.

Example: 7%. 5% PLUS 2%.

Question 22

The account balance in almost any type of plan can be rolled into another type of retirement plan EXCEPT:

Answer 22

457s can only go to 457s for NONGOVERNMENTAL 457s
hardship distributions
RMDs

Question 23

What is the withholding percentage when a qualified plan issues a check to the recipient?

Answer 23

20%.

Exceptions are distributions that are part of a series of substantially equal payments or distributions that are made to comply with minimum distribution requirements.

Question 24

When can you do a QCD?

Answer 24

Age 70 and 1/2. Up to $100,000. This satisfies RMD requirements without causing the dollars to be taxed, although no charitable income tax deduction is available.

Question 25

What are qualified plan loan limits?

Answer 25

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

Question 26

What are the phase-outs for Traditional IRA contributions and Roth IRA contributions for Single and Married Filing Jointly?

Answer 26

Traditional IRA phaseouts:
Single: 68,000
MFJ: 109,000

Roth IRA Phaseouts:
Single: 129,000
MFJ: 204,000
MFS: 0

Question 27

What is considered an early IRA distribution, and what is the penalty?

Answer 27

Anything distributed before age 59 and 1/2 is considered an early distribution and is subject to a 10% penalty.

Exceptions are death, substantially equal payments, disability, first home expense up to $10,000, qualified education expense, $5,000 for birth or adoption of child, medical expense >10% AGI

Question 28

What is a rabbi trust?

Answer 28

A rabbi trust is an irrevocable trust holding a promissory note. The assets within must be available to all general creditors of the employer. Key words: merger, acquisition, or change of company ownership.

Question 29

ISO vs NSO

Answer 29

ISOs are qualified stock options, NSOs are non-qualified stock options. ISOs are not subject to regular tax when exercised but NSOs are.

Remember EGG for ISOs.
sale must be 1 year from exercise and 2 years from grant. Otherwise it’s an NSO and subject to ordinary income tax.

Question 30

Which plans cannot be integrated with social security?

Answer 30

ESOP, SIMPLE, and 401(k) SIMPLE.