Retirement Planning Flashcards
Basic Concepts of Social Security
Coverage - Nearly every worker is covered under OASDI. Employment categories not covered by SS include:
- Federal employees who have been continuously employed since before 1984
- Some Americans working abroad
- Student nurses and students working for a college club
- Railroad employees
- A child, under age 18 who is employed by a parent in an unincorporated business
- Ministers, members of religious organizations
- Members of tribal councils
Social Security (Reduction of Benefits)
Age 62 through FRA: benefits reduced 1$ for every 2$ earned over $18,960
Social Security (Taxation)
- Must include muni bond incomee to calculate MAGI
- If income (MAGI) plus 1/2 of SS benefits is;
1. Above 25k for a single taxpayer, then 50% of the total social security is included in income
2. Above 44k for married filing jointly, then 85% of the total social security is included in income
Types of Qualified Plans/ERISA (Vesting/ admin costs/exempt from creditors/ integrate with ss)
- Defined Benefit
- Cash Balance
- Money Purchase
- Target Benefit
- Profit sharing
- Profit sharing 401k
- Stock bonus
- ESOP (doesn’t integrate with ss)
Types of Retirement plans (no vesting/limited admin costs)
- SEP
- SIMPLE
- SAR-SEP
- Thrift or savings plan
- 403 (b)
Defined Benefit- Qualified plan
- Favors older Employee/owner (50+)
- Certain retirement benefit ; Max $230k
- Meet a specific objective
- Company must have very stable cash flow
- Past service credits allowed
- Forfeitures MUST be applied to reduce employer contributions
- PBGC insured (along with Cash balance plan)
Money Purchase - Qualified plan
- Up to 25% employer deduction
- fixed contributions
- Maximum annual contributions lesser of 100% of salary or 58k
Target Benefit - Qualified plan
- Up to 25% employer reduction
- Fixed contributions - need stable cash flow
- Maximum annual contribution lesser of 100% of salary or 58k
- Favors older workers
Profit Sharing - qualified plan
- Up to 25% employer deduction
- Flexible contributions (must be recurring and substantial)
- Maximum annual contribution lesser of 100% of salary or 58k
- Can have 401k provisions
- SIMPLE 401k exempt from creditors
Section 401(k) Plan
Qualified profit sharing or stock bonus plan that allows plan participants to defer salary into the plan
- Max 19,500$ deferral for participants under 50 (subject to FICA)
- additional 6,500$ catch up for age 50 and over
Section 415 Annual additions limit
- Lesser of 100% of compensation or 58k
- includes employer contributions, employee salary reductions and plan forfeitures
Safe Harbor Nondiscrimination
a safe harbor 401k plan automatically satisfies the nondiscrimination tests involving highly compensated employees (HCEs) with either an employer matching contribution or a nonelective contribution
Safe Harbor Match/Vesting
The stationary contribution using a match is 1$/1$ on the first 3% employee deferral and .50/$1 on the next 2% employee deferral. If the employer choses to use the nonelective deferral method , the employer must contribtute 3% of all eligible employees compensation regardless of whether the employee is differing or not.
Employer contributions must be immediately vested.
Stock Bonus/ ESOP - qualified plan
- Up to 25% employer deduction
- Flexible Contributions
- Maximum annual contribution lesser of 100% of salary or 58k
- 100% of contribution can be invested in company stock
- ESOP cannot be integrated with social security or cross tested
Net unrealized Appreciation (NUA)
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, $180,000 is not taxable until the employee sells the stock, but the 20,000 (the basis) is taxable now as ordinary income.
The 180,000 is always LTCG. if the client sells the stock for 230,000, the extra 30,000 of extra gain is either STCG or LTCG depending on the holding period after distributed at retirement
Keogh Contribtuion
Only for sole proprietor and partnerships
self- employment tax must be computed and a deduction of one half of the self employment tax must be taken before determining the Keogh deduction. Shortcut below takes into account self- employment taxes:
- if contribution 15% - multiply by 12.12% of net earnings
- if contribution 25% - multiply by 18.59% of net earnings
Simple Plan
- Fewer than 100 employees
- employer cannot maintain any other plan
- participants fully vested
- easy to administer and funded by employee salary reductions and an employer match
SEP (simplified employee pension)
- no salary deferrals- employer contributions only
-up to 25% contribution for owner (w2)/ treated like Keogh contributions for self-employed
-maximim of 58k
account immediately vested
-can be integrated with SS
-special eligibility: 21+ years old, paid at least 650$ and worked 3 of the last 5 years
Tax-deferred annuity (TDA)/ Tax sheltered annuity (TSA)/ 403(b)
- For 501(c)(3) organizations and public schools
- Subject to ERISA only if employer contributions
- Salary reduction limit up to 19,500 plus 6500 catch up for over 50 years old
IRA Keys (Simple, SEP, SARSEP)
- No loans
- No life insurance
- Immediate Vesting
- May not be creditor protected (state specific)
- 59.5 for no 10% penalty
- Must take RMD at 72 (even if not an owner)
Age and service rules - qualified plans
- Max age and service are age 21 and one year service (21 and one rule)
- Special provision allows up to 2 year service requirement, BUT then employee is immediately vested (2year/100%)
- Year of service is 1,000 hours (including vacations holidays and illness time) or 500 hours and worked for the company for 3 years.
Highly Compensated (HC) Employee
- a greater than 5% owner or
- An employee earning in excess of 130,000 during the proceeding year
Key Employee
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 greater then 185,000 or greater than aa 1% ownership and compensation greater then 150,000
Vesting - Fast / Slow
Fast: DB Top-heavy plans/ All plans
-3 year cliff or 2- year graded or 100% vested after 2 years
Slow: Non-top-heavy DB plans only
-5 year cliff or 3-7 year graded or 100% vested after 2 years
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
Defined Benefit Plans (integration with SS)
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
Multiple Plans 2021 Elective Deferrals
Elective Deferrals - more than one employer (2021) Elective deferrals to multiple plans are always integrated
401k/403b/simple/sarsep (19500 plus catch up of 6500)
SIMPLE and other SIMPLE (13500 plus 3000 catch up)
457 plans are not part of aggregated amounts!
Life Insurance as a Funding Vehicle
According to the 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
- The aggregate premiums paid for a participants insured death benefit are all times less then the following percentages of the plan cost for the participant: Ordinary Life Insurance 50% Term Insurance 25% Universal 25%
- The participants insured death benefit must be no more than 100 times he expected monthly benefit. Defined benefit plans typically use the ‘100 times’ limit
Rollovers NOT Permitted
- Transfer to another 457 plan remain the only option for non-governmental tax exempt organizations
- Hardship distributions cannot be rolled into any other qualified plan
- Required minimum distributions
Qualified Plan Early (age 59.5) 10% Tax Penalty Exceptions
- Death
- Disability
- Substantially equal periodic payments following separation from service
- Distribution following from service at age 55
- Distribution in accordance with QDRO (to any alternative payee)
- Medical Expenses in excess of 10% of AGI or health insurance costs while unemployed
- Distributions used to pay insurance premium after separation from employment (Must file for unemployment)
- 5000 withdrawal for birth/adoption of a child
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 72. Subsequent distributions must be made by December 31st of each year thereafter.
Required Beginning Date (RBD) for Qualified plans/ 403b plans / 457 plans
The required Beginning date, date, with exception of 5% owners, is the later of April 1st following the year in which the individual attained 72 or retired. Subsequent distributions must be made by December 31st of each year thereafter.
5% owner RBD is the same as IRA/SEP RBD
IRA Deductibility Keys
- If neither spouse (nor single person) is an active participant in an employee plan, the RIA is deductible. Employer plans that affect participants status include almost all plans Except for 457 plans
- If one spouse is an active participants, the other spouse (not active) can do a deductible IRA if combined AGI is less than 198k-208k
- If both spouses are active, AGI limits apply 66k-76k (single) and 105k-125 (married)
Note: activity that results in active status: annual additions to a DC account or benefits accrued to a DB plan
IRA Exceptions to 10% penalty for Early distributions before age 59.5
- death
- substantially equal payments
- Disability
- first home expense up to 10k
- qualified education expense
- medical expense greater then 10%
- Distribution used to pay insurance premium after separation from employment (must have received unemployment compensation for 12 weeks)
- 5,000 withdrawal for birth/adoption of child
Roth IRA ordering rules for distribution
- any contributions (not conversions) are withdrawn first
- Conversions are withdrawn second
- Earnings are withdrawals last
Roth IRA Required Minimum Distributions
- Distributed within five years of owners death or
- Distributed over 10 years (stretch eliminated)
- Whole sole beneficiary is owners surviving spouse the spouse may delay distributions until the Roth owner would have reached 72 or may treat the Roth as his or her own (roll it to his/her Roth)
Non- qualified Deferred Compensation Plans
Salary Reduction Plan - uses some portion of employees current compensation to fund the ultimate compensating benefit (Pure deferred)
Salary continuation plan- uses employer contributions to fund ultimate benefit
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
Incentive Stock Option (ISO) holding Period
Holding Period:
1 year from exercise date and 2 years from grant date before selling ISO’s Violating either rule results in a disqualifying disposition
Section 457 Deferred Compensation Plan
- Nonqualified deferred compensation plans of governmental agencies and non-church controlled tax exempt organizations
- Deferred limited to 19,500 or 100% of compensation
- catch up of 6500 allowed for those aged 50 or over (non governmental plans only)
- Salary deferrals NOT aggregated with other plans
- non governmental plans can only be rolled into another 457 plan
