Retirement Planning Flashcards
Non-Qualified Deferral Plan Features
- Defined benefit or contribution.
- For Key Employees
- Employer contributions only.
- Deductible by employer when they’re distributed to the employee.
Key / Highly Compensated Employee Definition
- Owns >5% of the business.
- Owns >1% and has income >$150k.
- Officer with income >$185k.
- Spouse, child, grandchild, or parent of a Key Employee
Simple IRA Features
- Fewer than 100 employees who earned at least $5k who aren’t already covered by similar plans.
- Must be established by Oct. 1st.
- Employee directed w/ required 3% employer match.
- Immediate vesting.
- Not required to perform discrimination testing or file Form 5500.
- Distributions in the first 2 years result in a 25% penalty unless TX to another SIMPLE plan.
Non-deductible IRA Features
- Same as Traditional IRA but contributions are after tax and distribution of non-deductible basis is tax-free.
- May be rolled into a “back-door” Roth.
Vesting Schedules
- Immediate
- 401k/SEP/SARSEP/SIMPLE
- Cliff (6 Year Max)
- 3 to 5 Year for QDIPs
- 1 Year for SIPs
- 5 or 6 Year Graded
- 2 to 6 Year
- 3 to 7 Year
Top Heavy Rules
- Triggers when >60% of plan assets belong to key employees at the EOY.
- Employer must contribute the greater of 3% to non-key employees or equivalent of key employees.
- Mandatory 3 year cliff or 2 - 6 year graded.
Rule of 50 / 55 for Retirement Plans
401k and 403b owners may begin distributions if you quit your job at >=55yo.
Some 403(b)s can even begin at >=50yo.
What effect does ERISA Sec. 404 election have on a company’s retirement plan?
This allows the employee to select their investments and assume complete liability for any losses.
SS Child-in-Care Rules, Child Must:
- Be entitled to child’s benefits.
- Meet relationship requirements.
- Be under age 16 unless disabled.
Rabbi Trust Features
- A non-qualified employee trust created for the benefit of both the employer and employee.
- Removes employer control of assets and is irrevocable.
- Does not protect assets from bankruptcy or creditors.
- Secular trusts are the same but cannot be attached by creditors.
Tax treatment of business interest in funding a GRAT.
- IRS assesses value of businesses using Sec. 7520 and irrevocably TX to GRAT.
- Gift tax is assessed upon funding with a deduction up to the maximum lifetime exemption.
- Annuity income is paid period certain and taxed to recipient.
- Remainder interest is passed to beneficiaries gift and estate tax free.
- If annuitant doesn’t survive the term, the remainder is included in their gross estate.
Difference between a GRAT, GRUT, and GRIT.
- GRAT asset are valued at the beginning of the contract and establish fixed annuity payments.
- GRUT assets are valued annually and the payments are based on a percentage of FMV.
- GRIT assets create investment income which is paid out over a term or until death. No remainder is left in gross estate. Family members cannot be beneficiaries.
(T/F) Deferrals to multiple employer or individual retirement plans or must be combined for annual limitations on each type.
True, combined contributions cannot exceed annual limits. 457(b) plans have separate limits. For example, you can contribute $19.5k to both a 403(b) and a 457(b).
Social Security Benefit Types
- Retirement - Worked 10 years, starting at 67 w/ early at 62.
- Disability - Qualifying work based on age, monthly benefit depends on your pre-disabled salary.
- Survivor Benefits:
- Widow/er
- Divorced
- Children
Social Security Early/Late Formula
Up or down, adjust 6.7% for the first 3 years (20%) and 5% for the next 2 years (10%).
Social Security Living Beneficiaries
- Spouse - must be married for one year and either have child under 16 or be over age 62.
- Divorced Spouse - same as spouse but must have been married for 10 years.
- Child - Under age 18, disabled under 22, high-school under 19.
Social Security Survivor Beneficiaries
- Aged Widow/er - must be 60yo and not remarried before that age.
- Young Widow/er - must have child under age 16 or disabled.
- Disabled Widow/er - must be disabled and 50.
- Parent of Insured - must have been dependent of decedent and at least 62.
- Child - Under age 18, disabled under 22, high-school under 19.
Employee Stock Ownership Plan (ESOP) Features
- Qualified defined-contribution plan.
- Set up as trust funds with new issues of company stock.
- Awards high-performing employees with shares of company stock.
- Subject to vesting schedules.
- Upon separation, shares are “bought back” as a lump sum or periodic payments.
- Payouts are taxed at capital gains rates unless rolled over into another retirement plan within 1 year.
Qualified Incentive Stock Option (ISO) Plan Features
- Offered to key employees.
- Offering period is 10 years and is subject to vesting schedules.
- Often offered at a discount up to a maximum of $100k/year.
- Must be exercised 2 years after grant and held for another year before sale.
- Exercise is considered non-taxable (but bargain element can trigger AMT)
- Sale proceeds are taxed as LTCG/LTCL.
- If not held for the required period, exercise and sale is treated as an NSO (ESO)
Restricted Stock Features
- Unregistered shares issued to key employees.
- Subject to vesting.
- Vested balance subject to income tax.
- 83(b) election locks the FMV at grant date and not the vesting date for taxes.
- Appreciation subject to capital gains at time of sale.
(T/F) Married couple’s income is aggregated for the purpose of calculating Medicaid benefits.
False. The non-institutionalized spouse’s income is non-countable when applying for Medicaid.
