Retirement Plan Selection

Question 1

What are 4 guiding considerations as to the type of retirement plan to recommend a business owner implement?

Answer 1

1) the business owners savings need
2) the owners current age
3) the owners outlook toward investment risk
4) the current financial situation of the business

Question 2

What retirement plans are limited in the type of business that can adopt them?

Answer 2

1) ESOP/LESOP: no sole pro or unincorporated entities
2) Section 403(b): only 501(c)(3)
3) Section 457: private tax-exempt

Question 3

What type of plans can only have a maximum of 10% ER stock in them?

Answer 3

Be My Cash Target and SEP/SARSEPs

Question 4

What are the four mandatory ER contribution plans?

Answer 4

Be My Cash Target

Question 5

What is a significant differentiator between SEPs and SIMPLE IRAs?

Answer 5

SEPs must include EEs who make $650 per year
SIMPLE IRAs must include EEs who make $5000 per year

Question 6

What is a significant difference between SIMPLE IRAs and SIMPLE 401(k)s?

Answer 6

SIMPLE IRA offer a 3% match (max) contribution that doesn’t have a total compensation maximum. The ER can also lower contribution to 1%.
SIMPLE plans all have lower contribution limits.

Question 7

What plan cannot be integrated with SS?

Answer 7

ESOP

Question 8

What are the plans where the ER assumes the investment risk?

Answer 8

Traditional DB and cash balance DB

Question 9

What is unrelated business taxable income (UBTI)?

Answer 9

Any income earned by a tax-exempt entity or qualified plan that’s not related to the purpose of the entity or plan. Stock purchase on margin is an example

Question 10

What is the purpose of UBTI?

Answer 10

Discourages a qualified plan from doing anything other than providing retirement benefits. A qualified plan should not be operating its own business or taking on debt (REITs are exemption).

Question 11

What is the tax on UBTI?

Answer 11

21% on income above $1000

Question 12

What plans cannot have life insurance in it?

Answer 12

IRAs, including SEPs

Question 13

What are the two purposes of life insurance in a retirement plan?

Answer 13

1) satisfies need for additional life insurance for the owner of small business
2) generates an instant tax deduction for payment of life insurance premiums

Question 14

For insurance in a plan, what is the percentage test?

Answer 14

Used by a DC plan, it is the aggregate contributions for a type of policy
-Whole life: no more than 50%
-Other (term): no more than 25%

Question 15

For insurance in a plan, what is the 100 times test?

Answer 15

Used by a DB plan, the death benefit payable cannot exceed 100 times the expected monthly benefit for the EE

Question 16

What is a Qualified Longevity Annuity Contract (QLAC)?

Answer 16

For IRA and 401(k) owners, it allows an allocation of the lesser of $145k or 25% into an annuity which are not counted in RMD and start much older (~85)

Question 17

What are the three retirement plan assumptions?

Answer 17

The anticipated annual inflation rate
The projected rate of return
The client’s age at retirement / life expectancy

Question 18

What is the wage replacement ratio (WRR)?

Answer 18

Approximately 60-80% of pre-retirement income now needed for retirement

Question 19

What is the difference between capital utilization and preservation approaches?

Answer 19

Utilization is designed to use all capital by the death. Preservation is intended to have leftover at death which means more needed in savings rate.

Question 20

What is the formula for capital utilization?

Answer 20

Steps 1 and 2 of the education time value calculation

Question 21

What is the formula for capital preservation?

Answer 21

Step 3 of the education time value; solve for PV
Add resulting PV to step 3 FV

Question 22

What is the formula for wealth preservation?

Answer 22

Step 3 of the education time value
N= years of retirement
I/YR= INF ADJ rate of return
FV= PV from step 2; solve for PV
Add resulting PV to step 3 FV

Question 23

What are the 5 alternatives to not retiring (if not savings accumulated)?

Answer 23

Retire later
Save more
Reduce retirement needs
Change risk/investment allocation
A combination or any of the alternatives

Question 24

How do you do serial payments?

Answer 24

Steps 1 and 2 of the education time value
Step 3 - remove inflation
N=years to retirement
I/YR= inf rate (have to deflate)
FV= PV from step 2
Solve for PV
Step 4
N=years to retirement
I/YR=INF ADJ rate of return
FV= PV from step 3
Solve for PMT x inf rate = first years payment

Question 25

What plans have unrestricted stock options?

Answer 25

ESOPs, SBP, and traditional PS plans

Question 26

What can’t a 403(b) be invested in?

Answer 26

Stocks and bonds