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CFP Exam Review > Retirement Planning > Flashcards

Retirement Planning Flashcards

1
Q

Basic Concepts of Social Security

A

Coverage - Nearly every worker is covered under OASDI. Employment categories not covered by social security include:

  1. Federal employees who have been continuously employed since before 1984
  2. Some Americans working abroad
  3. Student nurses and students working for a college or college club
  4. Railroad employees
  5. A child, under age 18, who is employed by a parent in an unincorporated business
  6. Ministers, members of religious orders and Christian Science practitioners if they claim an exemption
  7. Members of tribal councils
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2
Q

Social Security

reduction of benefits

A

Age 62 through FRA: benefits reduced by $1 for every $2 earned over $19,560 (2022 threshold)

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3
Q

Social Security

Taxation

A
  • must include muni bond income to calculate MAGI
  • if income (MAGI) plus 1/2 of social security benefits is:
    1. above $25K for a single taxpayer, then 50% of the total social security is included in income
    2. above $44K for MFJ, then 85% of the total social security is included in income
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4
Q

Types of Qualified Plans / ERISA

vesting / admin costs / exempt from creditors / integrate with Social Security

A
  1. Defined Benefit
  2. Cash Balance
  3. Money Purchase
  4. Target Benefit
  5. Profit Sharing
  6. Profit Sharing 401(k)
  7. Stock Bonus
  8. ESOP (NOT integrated with social security or cross tested)
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5
Q

Types of Retirement Plans

no vesting / limited admin costs

A
  1. SEP
  2. SIMPLE
  3. SAR-SEP
  4. Thrift or saving plans
  5. 403(b)
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6
Q

Defined Benefit - qualified plan

A
  • Favors older employee/owner (50+)
  • Certain retirement benefit; max $245K (2022). Meets a specific retirement objective.
  • Company must have a very stable cash flow.
  • Past service credits allowed
  • Forfeitures MUST be applied to reduce employer contributions
  • PBGC insured (along with Cash Balance plan)
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7
Q

Money Purchase - qualified plan

A
  • Up to 25% employer deduction
  • Fixed contributions - need stable cash flow
  • Maximum annual contribution: lesser of 25% of salary or $61K (2022)
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8
Q

Target Benefit - qualified plan

A
  • Up to 25% employer deduction
  • Fixed contributions - need stable cash flow
  • Maximum annual contribution: lesser of 25% of salary or $61K (2022)
  • Favors OLDER workers
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9
Q

Profit Sharing - qualified plan

A
  • Up to 25% employer deduction
  • Flexible contributions (must be recurring and substantial)
  • Maximum annual contribution: lesser of 100% of salary or $61K (2022)
  • Can have 401(k) provisions
  • SIMPLE 401(k) exempt from creditors
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10
Q

Section 401(k) Plan

A
  • Qualified profit sharing or stock bonus plan that allows plan participants to defere salary into the plan
  • Max $20,500 (2022) deferral for participants under 50 (subject to FICA)
  • Additional $6,500 catch-up for age 50 and over (2022)
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11
Q

Section 415 annual additions limit

A
  • Lesser of 100% of compensation or $61K (2022)

* Includes employer contributions, employee salary reductions, AND plan forfeitures

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12
Q

Safe Harbor - Nondiscrimination

A

A safe harbor 401(k) plan automatically satisfies the nondiscrimination tests involving highly compensated employees (HCEs) with either an employer matching contribution or a nonelective contribution.

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13
Q

Safe Harbor - Match/Vesting

A

The statutory contribution using a match is $1/$1 on the first 3% employee deferral AND $0.50/$1 on the next 2% employee deferral.

If the employer chooses to use the nonelective deferral method, the employer must contribute 3% of all eligible employees’ compensation regardless of whether the employee is deferring or not.

Employer contributions must be immediately vested.

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14
Q

Stock Bonus / ESOP - qualified plan

A
  • Up to 25% employer deduction
  • Flexible contributions
  • Maximum annual contribution lesser of 100% of salary or $61K (2022)
  • 100% of contribution can be invested in company stock
  • ESOP CANNOT be integrated with Social Security or cross-tested
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15
Q

Net Unrealized Appreciation (NUA)

A

NUA Example:
Stock is contributed to the retirement plan with a basis of $20,000. Stock is distributed at retirement with a market value of $200,000. The NUA, $180,000 is not taxable until the employee sells the stock, but the $20,000 (the basis) is taxable NOW as ordinary income.

The $180,000 is always LTCG. If the client sells the stock for $230,000, the $30,000 of extra gain is either STCG or LTCG depending on the holding period after being distributed at retirement.

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16
Q

Keogh Contribution

A
  • Only for sole proprietor and partnerships
  • Self employment tax must be computed and a deduction of one-half of the self-employment tax must be taken before determining the Keogh deduction.

Shortcut that takes into account self-employment taxes:

  • if contribution 15% - multiply by 12.12% of net earnings
  • if contribution 25% - multiply by 18.59% of net earnings
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17
Q

SIMPLE Plan

A
  • Fewer than 100 employees
  • Employer cannot maintain any other plan
  • Participants fully vested
  • Easy to administer and funded by employee salary reductions and an employer match.
18
Q

SEP (Simplified Employee Pension)

A
  • NO salary deferrals - employer contributions only
  • Up to 25% contribution for owner (W-2) - treated like Keogh contributions for self-employed
  • Maximum of $61K (2022)
  • Account immediately vested
  • CAN be integrated with Social Security
  • Special eligibility: 21+ years old, paid at least $650 (2022), and worked 3 of the 5 prior years
19
Q

Tax-deferred annuity (TDA) / Tax sheltered annuity (TSA) / 403(b)

A
  • For 501(c)(3) organizations and public schools
  • Subject to ERISA only if the employer contributes
  • Salary reduction limit up to $20,500 (2022) (plus $6,500 catch-up if 50 or over)
20
Q

IRA Keys (SIMPLE, SEP, SARSEP)

A
  1. no loans
  2. no life insurance
  3. immediate vesting
  4. may not be creditor protected (state specific)
  5. 59 1/2 not 55 for no 10% penalty
  6. must take RMDs at 72 (even if not an owner)
21
Q

Age and service rules - qualified plans

A
  • Max age and service are age 21 and one yaer of service (21-and-one rule)
  • Special provision allows up to 2-year service requirement, BUT then employee is immediately vested (2-year/100%)
  • Year of service is 1,000 hours (includes vacations, holidays and illness time) or 500 hours and worked for the company for 3 years
22
Q

Highly Compensated Employee (HCE)

A
  • A greater than 5% owner, OR

* An employee earning in excess of $135,000 during the preceding year (2022)

23
Q

Key Employee

A

An individual is a key employee if at any time during the current year he/she has been one of the following:

  • A greater than 5% owner, or
  • An officer AND compensation > $200,000 (2022), or
  • Greater than 1% ownership AND compensation > $150,000 (2022)
24
Q

Vesting - Fast / Slow

A

Fast: DB Top-heavy plans / ALL DC Plans
* 3-year cliff or 2-6 year graded or 100% vested after 2 years

Slow: Non-top-heavy DB plans only
* 5-year cliff or 3-7 graded or 100% vested after 2 years

25
Defined Contribution Plans | Integration with Social Security
Base % + Permitted Disparity = Excess % * Base % - DC plan contribution for compensation below integration level * Permitted Disparity - lesser of base % or 5.7% * Excess % - DC Plan contribution for compensation above integration level
26
Defined Benefit Plans | Integration with Social Security
Base % + Permitted Disparity = Excess % * Base % - DB Plan contribution for compensation below integration level * Permitted Disparity - lesser of base % or 26.25% * Excess % - DB Plan contribution for compensation above integration level
27
Multiple Plans 2023 Elective Deferrals
Elective deferrals - more than one employer (2023) Elective deferrals to multiple plans are always aggregated* 401(k)/403(b)/SIMPLE/SARSEP: $22,500 plus catch up ($7,500) SIMPLE and other SIMPLE: $15,500 plus catch up ($3,500) *457 plans are NOT part of aggregated amounts.
28
Life Insurance as a Funding Vehicle
According to Treasury Regulations, life insurance benefits must be merely "incidental" to the primary purpose of the plan. If the amount of insurance meets either of the following tests, it is considered incidental: 1. The aggregate premiums paid for a participant's insured death benefit are all times less than the following percentages of the plan cost for that participant: * Ordinary life insurance: 50% * Term insurance: 25% * Universal life: 25% 2. The participant's insured death benefit must be no more than 100 times the expected monthly benefit. Defined benefit plans typically use the "100 times" limit.
29
Rollovers NOT Permitted
* Transfers to another 457 plan remain the only option for NON-GOVERNMENTAL tax exempt organizations * Hardship distributions cannot be rolled into any other qualified plan * Require minimum distributions
30
Qualified Plan | Early (age 59 1/2) 10% Tax Penalty Exceptions
1. Death 2. Disability 3. Substantially equal periodic payments following separation from service 4. Distribution following separation from service at age 55 5. Distribution in accordance with QDRO (to any alternative payee) 6. Medical expenses in excess of 10% of AGI or health insurance costs while unemployed 7. Distribution used to pay insurance premium after separation from employment (must file for unemployment) 8. $5,000 withdrawal for birth/adoption of a child
31
Required Beginning Date (RBD) for: | IRAs / SEPs / SARSEPs / SIMPLEs
The required beginning date is April 1st of the year following the year in which the covered individual attained age 73. Increases to age 75 in 2033. Subsequent distributions must be made by December 31st of each year thereafter.
32
Required Beginning Date (RBD) for: | Qualified plans / 403(b) plans / 457 plans
The required beginning date, with the EXCEPTION of 5% owners: The later of April 1st following the year in which the individual attained age 73 OR retired. Increases to age 75 in 2033. Subsequent distributions must be made by December 31st of each year thereafter. 5% owner RBD is the same as IRA/SEP RBD.
33
IRA Deductibility Keys
* If neither spouse (nor single person) is an active participant in an employee plan, the IRA is deductible. Employer plans that affect participant status include almost all plans EXCEPT for 457 plans. * If one spouse is an active participant, the other spouse (not active) can do a deductible IRA if combined AGI is less than $218K-$228K (2023) * If both spouses are active, AGI limits apply - $73K-83K (single) and $116K-136K (married) (2023) NOTE: Activity that results in active status: annual additions to a DC account or benefits accrued to a DB plan
34
IRA - Exceptions to 10% Penalty for Early Distributions before Age 59 1/2
1. Death 2. Substantially equal payments 3. Disability 4. First home expense up to $10,000 5. Qualified education expense 6. Medical expense greater than 10% 7. Distribution used to pay insurance premium after separation from employment (must have received unemployment compensation for 12 weeks) 8. $5,000 withdrawal for birth/adoption of child
35
Roth IRA - Ordering rules for distribution
1. Any contributions (not conversions) are withdrawn first 2. Conversions are withdrawn second 3. Earnings are withdrawn last
36
Roth IRA - Required Minimum Distributions
* Distributed within five years of owner's death, or * Distributed over 10 years (stretch eliminated) * Where sole beneficiary is owner's surviving spouse, the spouse may delay distributions until the Roth owner would have reached age 72, or may treat the Roth as his or her own (roll it into his/her Roth)
37
Non-qualified Deferred Compensation Plans
* Salary reduction plan - uses some portion of employee's current compensation to fund the ultimate compensation benefit (also called pure deferred) * Salary continuation plan - uses employer contributions to fund ultimate benefit
38
Rabbi Trust
* Key words - merger, acquisition or change of ownership * Assets in rabbi trust available for company's creditors * Fear that ownership / management may change before deferred compensation is paid
39
Incentive Stock Option (ISO) Holding period
Holding period: * 1 year from exercise date AND 2 years from grant before selling ISOs * Violating either rule results in a disqualifying disposition
40
Section 457 Deferred Compensation Plan
* Nonqualified deferred compensation plans of governmental agencies and non-church controlled tax-exempt organizations * Deferral limited to $22,500 or 100% of compensation (2023) * Catch-up of $7,500 allowed for those aged 50 and over ONLY for governmental plans (2023) * Salary deferrals NOT aggregated with other plans (401k, etc) * Non-governmental plans can ONLY be rolled into another 457 plan

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