Retirement & Objective Based Plans Flashcards
On what basis is a partial withdrawal from a non-qualified annuity taxed?
LIFO
To get the safe harbor, the employer must
agree to make annual matching payments into the plan of either:
4% of salary of participating employees
OR
3% of salary of all eligible employees
(it is not mandatory that each eligible employee participate)
A Supplemental Executive Retirement Plan (SERP)…
is a non-qualified plan designed to provide additional retirement benefits limited to a select group of management or highly compensated employees
In order to qualify for the safe harbor under 404(c)…
the portfolio selections must include at least 3 different asset classes (equity, debt, cash equivalent)
What would you expect to see in the investment policy statement (IPS) of a qualified plan?
- how the investment performance of the plan is measured
- investment parameters and limitations to be followed by the portfolio managers
All funds within a Coverdell ESA must be used before the student reaches __ years of age
30
LIFO means
Last money (the earnings) In is the First Out (withdrawn)
Defined-contribution plan
A retirement plan that’s typically tax-deferred in which employee’s contribute a fixed amount or a % of their paychecks to an account that is intended to fund their retirement
Examples of a defined-contribution plan?
- 401(k)
- 403(b)
- 457(b)
A 61 year old wanting to take a lump-sum distribution from his Keogh will…
be taxed at ordinary income rates
Keogh plan
- a tax-deferred pension plan available to self-employed individuals or unincorporated businesses for retirement purposes
- can be set up as a defined-benefit or defined-contribution plan (most set up as DC)
defined-benefit plan
- an employer-sponsored retirement plan where employee benefits are computed using a formula that considers several factors, such as:
- length of employment
- salary history
- the company is responsible for managing the plans investments & risk
- typically employees cannot just withdraw funds
- pays a specific benefit to participants at their normal retirement age
Qualified expenses under 529 plans include…
tuition for attendance at a foreign university
Examples of defined benefit plans?
- Pension Plans
- Cash balance plans
Required minimum distributions (RMDs) from a traditional IRA must begin by…
April 1 the year after the owner turns 70 and a half
Section 529 plans & taxes
- after tax going in
- tax deferred while in
- tax free on the way out
Donors contributing to a 529 plan can…
- Make a 1 time lump sum contribution to a 529 plan equal to 5 years of contributions based on the annual gift tax exclusion
- Each parent may contribute 5x the annual maximum ($15,000 x 5 or $75,000); a couple could double that amount ($150,000) without gift tax consequences
IPS is generally found…
in corporate qualified plans, such as the defined benefit or contribution plan
When an employer makes a contribution to a SEP IRA…
the employer gets the tax deduction & the employee’s account is enriched by that contribution
401(k) plans are…
- defined contribution plans
- primarily funded by salary reduction employee contributions
3 features of a Safe Harbor 401(k) plan?
- mandatory annual employer matching contributions
- no annual “top heavy” benefits testing
- immediate 100% vesting of employer-paid benefits
Max amount of loans for 401(k) plans?
Max amount to be borrowed from a 401(k) plan:
$10,000 or 50% of the account asset value, whichever is greater
Loans capped at $50,000
IR for loans of 401(k) plans?
the loan must have an IR that is based on current market rates & must be repaid within 5 years
401(k) & loan repayment?
loan repayment must be made in quarterly installments of “substantially equal amounts”
if a portion is not repaid, the unpaid amount becomes taxable income; if the account owner is under 59 and a half, the 10% penalty tax applies
An individual may withdraw from an IRA before age 59 and a half without a penalty tax…
- in the case of death or disability
- for qualified education expenses for immediate family members
457 Plan
a non-qualified plan that is discriminatory
- generally only available as an added benefit to higher earning government employees
- amount contributed is salary reduction
- earnings build tax deferred
- when distributions are taken, they are 100% taxable
A QDRO (Qualified Domestic Relations Order) applies…
only to assets in a qualified employer plan
“Rule of 55”
applies to 401(k) and 403(b) plans
- if an employee quits or is terminated between ages 55 & 59 and a half, the employee can take payments in equal installments over their life expectancy & avoid the 10% penalty tax
- regular income tax must still be paid
When someone withdraws early from a tax-deductible IRA…
income tax is due
When someone withdraws early from a Roth IRA that is less than 5 years old…
income tax is due on earnings only
What are allowable distributions from the benefit of the minor under UTMA & UGMAs?
optional expenses:
- summer camp
- vacation
- sports league registrations
The earnings in an IRA accrue on a…
tax-deferred basis
403(b) plans are permitted to invest in…
- mutual funds
- fixed annuities
- variable annuities
When an IRA is left to a non-spouse…
the assets are transferred to an “inherited IRA” (IRA BDA) account, and must be depleted over the following 10 years
Under what 2 circumstances can a non-taxable distribution be made from a 529?
- beneficiary gets a full scholarship
- beneficiary goes to vocational school
What are the 3 options for the surviving spouse upon the death of an IRA holder?
- Transfer the assets into an inherited IRA account
- Roll over the assets into the beneficiaries IRA
- Disclaim the IRA
Regarding changing the beneficiary of a 529?
the beneficiary can be changed to another family member without tax consequences once every 12 months
The first $10,000 of a first time home purchase expense can be…
withdrawn from an IRA prior to age 59 and a half without having to pay the 10% penalty tax
403(b) retirement plans…
- are for employees of non-profit institutions such as hospitals & universities
- contributions are excluded from taxable income & must be used to purchase “tax sheltered” annuities or MFs
- employees contribute via salary deduction
What are precious metal investment that is permitted in an IRA?
- Gold
- Silver
- Platinum
- Palladium bullion
Employee contributions to 401(k) plans…
- reduce taxable income in the year contributed
- are made w/ pre-tax dollars
- are not taxed until distributed
Retirement plan contributions…
do not reduce FICA (ever)
FICA
Social security contribution and medicare tax
Catch-up contributions are allowed to participants who are…
age 50 & over
ERISA rule 404(c) requires…
- the ability for employees to change their investments
- the ability for employees to diversify their investments
- a minimum of 3 different investment strategies with different risk & return characteristics
Custodial accounts such as UTMA / UGMAs do not receive…
beneficial treatment when applying for financial aid
A Safe Harbor 401(k) relieves the employer of…
having to perform annual benefits testing to show that the plan does not favor highly compensated employees
Grantor Retained Annuity Trust (GRAT)
used in estate planning to minimize taxes on large financial gifts to family members
> irrevocable trust is created for a certain term or period of time
individual who established the trust pays a tax when the trust is established
assets placed under trust & annuity paid out yearly
when the trust expires the beneficiary receives the assets tax free
What is the maximum annual limit of a Coverdell ESA?
$2000 & offers tax free growth
For purposes of the maximum allowable annual contribution, an individual would have to aggregate contributions to…
a 401(k) & 403(b)
Excess contributions to an IRA are subject to a __% penalty tax
6%
Private Placements
Transactions resulting from offers to no more than 10 non-institutional persons (retail clients) in 12 months for investment purposes only
A traditional IRA can be converted to a…
and what is the benefit & caveat?
Roth IRA
Benefit: to provide tax-free income in retirement
Caveat: immediately tax deductible at ordinary interest rates at conversion
Coverdell Education Savings Account (ESA)
a tax-deferred trust account created by the US Government to assist families in funding educational expenses for beneficiaries who must be 18 years or younger when the account is established
Advantages of 401(k) plans?
- employees & employer may reduce current taxes
- tax deferral on plan earnings for employees
- employer may participate in the plan
Health Savings Accounts (HSAs)
are only available to individuals who are covered by high-deductive health insurance plans
Noncontributory Money Purchase Pension Plan
- This plan has mandatory contributions of the employer
- No employee contributions
Spousal IRA
an IRA established for a nonworking spouse with the permitted contribution being the same as for the working spouse
Loans from 401(k) plans must be repaid within…
5 years
does not apply to loans taken for a home purchase
Matching employer contributions in 401(k) plans…
- are not taxable to the employee
- are deductible to the employer (pre-tax)
An account balance in a Coverdell ESA that is not used by the beneficiary to pay for qualified educational expenses…
may be transferred to a Coverdell ESA for a qualifying sibling without any tax liability
A distribution from an IRA taken in equal annual amounts over the owner’s life is…
not subject to the 10% premature distribution penalty even if started before age 59 and a half
Contributions for both college savings & UTMA accounts are made with…
after-tax dollars
Earnings in UTMA accounts are…
taxed each year
What are the rules around making contributions & taking distributions regarding Roth IRAs?
Contributions: Can continue after age 72
Distributions: Are not required to be taken started at age 72
Pension Benefit Guaranty Corporation (PBGC)
provides insurance for defined benefit plans formed under ERISA that are terminated that have an unfunded pension liability
TIAA-CREF
Teachers Insurance Annuity Association - College Retirement Equity Fund
- administers retirement plans for not-for-profits including school systems, universities, and hospitals
- permits life insurance, fixed & variable annuities, mutual funds
- must be managed by a professional managers
Trust
has a fixed life - specified # of years in documents, or ends when the grantor dies
Foundation
has an indefinite life - goes on until all of its assets are distributed
Maximum income limits that reduce permitted contributions apply to…
Roth IRAs & Coverdell ESAs
a 457 plan is unique in that…
it is the only tax-qualified retirement plan permitting withdrawal for any reason before age 59 and a half without penalty
IRA contributions allowed?
$6,000 - Singles
$12,000 - Couples
a 401(k) is a type of…
defined contribution plan
