Retirement Planning Flashcards

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1
Q

Retirement needs analysis:
Step 1:
Step 2:

A

Step 1: Inflate the need by the inflation rate. Straight forward FV calculation to see what the inflated need will be.

Step 2: BEG mode. Use the real rate of return to see the full amount needed to fund all retirement years. Step 1 becomes PMT. Solve for PV.

Same first two steps as education!

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2
Q

What does “In todays dollars” mean?

A

Inflation adjusted interest rate (real rate).

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3
Q

Calculator steps to follow: WRITE THIS OUT. DONT MISS THESE.

A

periods I BEG/END // N, I/YR, PV, PMT, FV

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4
Q

Should a financial planner over estimate a clients’ retirement period?

A

Yes. Add 5-10 years. This is because of poor health, or lengthened retirement periods.

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5
Q

What is an alternative to buying health LTC?

A

Selling residence and buying into a life-care community.

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6
Q

Monte carlo

A
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7
Q

What is a Pension max?

A

Typically used when one’s spouse is younger.

Pure life payout provides for highest payout, but payout ends at death with nothing to spouse.

Pension max application is taking the pure life rather than the lower JT and survivor payout, and then using the difference to fund life insurance to provide for the surviving spouse.

Wicked Smaht.

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8
Q

Alternatives to compensate for retirement cash-flow shortfalls

A
  • Save more
  • Increase risk for higher returns
  • Retire later, this also allows to save more*
  • Work part-time in retirement years
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9
Q

What is Social Security?

A

Old Age Survivor and Disability Insurance

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10
Q

What does the Social Security Act cover?

A

Social Security, Medicare, Federal Unemployment, Supplemental Security Income

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11
Q

Fully Insured vs Currently Insured

A

40 quarters of coverage vs. 6 quarters of coverage.

No more than 4 credits per calendar year.

Fully insured workers are eligible for both survivor benefits and retirement benefits.

Currently insured workers are eligible for lump sum DB of $255 (spouse or dependent), surviving spouse benefit if caring for a child under 16, and a Dependent benefit.

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12
Q

RBD for Qualified plan/403(b)/457

A

Later of April 1st following attainment of 73, or RETIRED.

If GREATER than 5% owner, must begin distributions by April 1st following attainment of 73. Same as IRA.

Although greater than 5% owners must take RMDs the year after turning 73, they may continue to contribute to their plan until they retire.

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13
Q

IRA exceptions to 10% penalty for early distributions before 59.5 (9)

A
  • Death
  • Disability
  • SUBSTANTIALLY EQUAL PAYMENTS
  • FIRST HOME PURCHASE expense up to $10,000 (not primary)
  • QUALIFIED EDUCATION EXPENSE
  • Medical expense greater than 10% AGI
  • Distribution used to pay insurance premium after separation from employment (subject to 10% AGI unless received unemployment comp for 12 weeks)
  • $5,000 withdrawal for birth/adoption of child
  • Federally declared disaster (limited)

Main differences from QP:
- SUBSTANTIALLY EQUAL PAYMENTS
- FIRST home purchase expense up to $10,000 (not primary)
- Qualified education expense

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14
Q

QUALIFIED PLAN exceptions to 10% penalty for early distributions before 59.5 (9)

A
  • Death
  • Disability
  • Substantially equal periodic payments FOLLOWING SEPARATION FROM SERVICE
  • DISTRIBUTION FOLLOWING SEPARATION FROM SERVICE AT AGE 55.
  • DISTRIBUTION IN ACCORDANCE WITH A QDRO.
  • Medical expenses in excess of 7.5% AGI OR health insurance costs while unemployed
  • Distribution used to pay insurance premium after separation from employment (must file for unemployment)
  • $5,000 withdrawal for birth/adoption of a child
  • Federal declared disaster (limited)

Main differences from IRA:
- Substantially equal periodic payments FOLLOWING SEPARATION FROM SERVICE
- Distribution following separation from service at age 55
- Distribution in accordance with QDRO

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15
Q

Types of retirement plans (Right side of roadmap) 6

A
  • SIMPLE
  • SEP
  • SARSEP
  • 403(b)/TSA/TDA
  • 457 (operates as NQ deferred comp)
  • Thrift or saving plan
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16
Q

SEP:
- Fixed or flexible contributions?
- Contribution percentages?
- Max contribution?
- Integrated with Social Security?

A

Employer sponsored plan where only the employer makes contributions to each participating employees IRA. Super easy to adopt. 5305-SEP.

  • No employee salary deferrals - EMPLOYER CONTRIBUTIONS ONLY.
  • Easy to adopt, flexible contributions.
  • Contributions for employees must be the same percentage as the owners contribution percentage, but the “recurring and substantial” requirement does not apply.
  • 25% contribution for Owner under a W-2.
  • 18.59% contribution for self-employed under a 1099 (Keogh). Take net Sched. C which is less deductions, and then multiply by 18.59%.
  • Maximum contribution of $66,000 of compensation ($330k max).
  • Immediately vested.
  • CAN BE INTEGRATED WITH SOCIAL SECURITY
  • Special eligibility: 21 years old, paid at least $750, worked 3 out of 5 prior years. (Christmas tree story).

Employer that provides a SEP gains simplicity, but loses flexibility with regard to the participation requirement. Contributions for employees who qualify must be the same percentage as the owners contribution percentage.

A business of any size, even self employed can set up a SEP.

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17
Q

SIMPLE:

  • For what type of employers?
  • contribution required? If so, how is it satisfied?
  • Salary reduction limit?
  • Pros and Cons
A
  • For small employers with fewer than 100 employees.
  • REQUIRES mandatory employer contribution ie. employer match (immediate vesting)
  • Salary reduction limit up to $15,500 (FICA) + $3,500.
  • Employer cannot maintain any other plan.
  • Easy to administer and funded by employee salary reductions and an employer match.
  • Employer can EITHER match up to 3% of compensation, or can make a nonelective contribution of 2% of compensation for all eligible employees.
  • An employer can elect a lower percentage match, not less than 1% in no more than 2 out of the 5 years ending with the current year.
  • SIMPLE plans must cover any employee who earned $5,000 in any two previous years and is reasonably expected to earn $5,000 in the current year. The employee has a 60-day election period.
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18
Q

403(b)/TSA/TDA:
- Who’re they for?
- Can employer contribute?
- Max salary reduction and catch up?
- What are the eligible investments?

A
  • For 501(c)(3) organizations and public schools.
  • Employer can make matching contributions, employee salary deductions are subject to FICA and FUTA.
  • Subject to ERISA only if EMPLOYER contributes, but if employer contributes, there could be possible vesting.
  • Salary reduction limit of $22,500 + $7,500 catch-up if 50+. If employee has 15+ years of service with the same employer, can defer an additional $3,000.
  • Investments are limited to annuity contracts, mutual funds and incidental life insurance. NO INDIVIDUAL SECURITIES.
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19
Q

Section 457 Deferred Comp Plan:
- What are they
- What is the deferral limit and catch-up?
- Can they be rolled-over?

A
  • NQ deferred comp plans of governmental agencies and non-church controlled tax-exempt organizations (United Way).
  • Deferral limit of $22,500 or 100% of comp + $7,500 catch-up if 50+ FOR GOVERNMENTAL PLANS ONLY, NOT NON-PROFITS.
  • Salary deferrals NOT aggregated with 401(k), 403(b), or a SARSEP.
  • Non-governmental plans can ONLY be rolled over to another 457 plan.
  • Subject to QDROs

Special catch-up during the final 3 years before NRA, but cannot be used in the final year of employment. For those eligible years, the limit of deferrals is increased to the LESSER of 2 times the normal limit ($45,000) OR the sum of the otherwise applicable limit for the year + the amount by which the applicable limit in preceding years exceeded the participants actual deferral for those years.

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20
Q

IRA Keys:
- Loans?
- Restrictions on investments?
- Vesting?
- Early withdrawal penalty?
- RMD?

A
  • No loans
  • No life insurance
  • Immediate vesting
  • 59.5 not 55 for no 10% penalty
  • Must take RMDs by April first after 73!
  • May or may not be creditor protected depending on state.
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21
Q

What makes a QP a QP? (5)

A
  • ERISA
  • Vesting
  • Admin costs
  • Exempt from creditors
  • Integrate with Social Security
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22
Q

Types of Qualified Plans (Top and left side of roadmap)

A
  • Defined BEnefit Pension Plan
  • MoneY Purchase Pension Plan
  • CASH balance Pension Plan
  • TARGET benefit Pension Plan
  • Profit Sharing Plan
  • Profit Sharing 401(k)
  • PF SIMPLE
  • Stock Bonus
  • ESOP (NOT integrated with SS or cross-tested)
  • KEOGH

Check roadmap on this

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23
Q

Defined BEnefit Pension Plan - QP:
- What is it?
- Older or younger?
- Fixed or flexible?
- Past service credits?
- Forfeitures?
- max benefit
- What else?

A
  • Specific retirement benefit, Max $265,000.
  • Favors older employee/owner.
  • Fixed contribution. Company needs stable cash flow.
  • Past service credits allowed.
  • Forfeitures MUST be applied to reduce employer contributions.
  • PBGC insured. Integrated with SS.
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24
Q

Cash Balance Pension Plan - QP

A
  • Type of DB plan that provides for annual employer contributions at a specified rate to Hypothetical individual accounts for each participant.
  • Employer guarantees contribution level and minimum rate of return.
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25
Q

MoneY Purchase Pension Plan - QP:
- How do these work?
- Max ER deduction?
- Max consideration? Max contribution?
- Fixed or flexible?

A

Follows a benefit formula requiring an annual employer contribution that is a flat percentage of each eligible employees comp. Only the first $330k is taken into consideration, but the max contribution is $66,000.

  • Up to 25% employer deduction.
  • Fixed contribution. Company needs stable cash flow.
  • Maximum annual contribution is LESSOR of 100% of salary or $66,000.
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26
Q

Target Benefit Pension Plan - QP:
- What is it?
- Max ER deduction?
- Max contribution?
- older or younger?
- Who assumes investment risk?

A

DC plan where the final retirement benefit is determined by ACCOUNT BALANCE. Employee assumes investment risk like all DC plans.

  • Up to 25% employer deduction.
  • Fixed contribution. Company needs stable cash flow.
  • Maximum annual contribution is LESSOR of 100% of salary or $66,000.
  • Favors older workers.
  • Employee assumes investment risk like all other DC plans.
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27
Q

Profit Sharing Plan - QP:
- What is it?
- Max ER deduction?
- Max contribution?
- Provisions?

A
  • Up to 25% employer deduction.
  • Flexible contributions (substantial and recurring).
  • Max annual contribution is LESSOR of 100% of salary or $66,000.
  • Can have 401(k) provisions. $22,500.
  • Can have SIMPLE provisions (exempt from creditors).

Traditional profit sharing plans consist of employer contributions, investment returns and forfeitures. Only when a PS plan adopts 401k provisions will the employee be able to defer comp into the plan.

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28
Q

Stock Bonus/ESOP - QP:
- Max employer deduction?
- Fixed or flexible?
- Max contribution?
- What else?

A
  • Up to 25% employer deduction
  • Flexible contributions.
  • Max annual contribution lesser of 100% of Salary or $66,000.
  • 100% of contribution can be invested in company stock.
  • ESOP CANNOT be integrated with Social Security or cross-tested.
  • ESOP: E for Entirely invested in employer stock (almost).
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29
Q

Section 401(k) plan:
- What is it?
- Max deferral and ER contribution? Catch up?

A
  • Max $22,500 deferral for participants under 50 (subject to FICA and FUTA but not federal withholding).
  • Additional $7,500 catch-up for age 50 and over.
  • The above limits only pertain to employee deferrals. The Employer can also contribute to the plan, but combined contributions between EE and ER are capped at $66K.

401(k), also known as a CODA, is a provision that is added to a qualified profit sharing or stock bonus plan. Participants have the option to defer compensation into the plan, or to receive the same amount as taxable cash compensation.

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30
Q

Keogh - QP:
- Who is it for?
- How do they function?
- What are contributions based on?
- Shortcut?

A
  • QP only for sole proprietor and partnerships.
  • May operate as a defined benefit, money purchase or profit-sharing type plan for sole props or partnerships.
  • The owner employee contribution is based on net earnings ( after all deductions, including the deduction for non0owner employee plan contributions. Net Schedule C).
  • Self-employment tax must be computed and a deduction of one-half of the self-employment tax must be taken before determining the Keogh deductible contribution. Shortcut below:
  • If contribution 15% - multiply by 12.12% of net earnings.
  • If contribution 25% - multiply by 18.59% of net earnings.
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31
Q

Highly Compensated Employee

A
  • > 5%, >$150k

> 5% owner, or,

An employee earning >$150,000 in the previous year.

Second letter in highly is i, second letter in discrimination is i. The concept of HCEs relates to discrimination (ADP/ACP tests).

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32
Q

Key Employee: If at any time during the year.

A
  • > 5% / Officer >$215k / >1% >$150k

If at any time during the year:
- >5% owner
- Officer with compensation of >$215,000
- >1% owner with compensation of >$150,000

Second letter in key is e, second letter in vesting is e. The concept of key employees relates to plan vesting.

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33
Q

Vesting: Fast / Slow

A

Top-heavy DB & All DC plans:
- 3 year cliff,
- 2-6 year graded
- 100% vested after 2 years participation

Non top-heavy DB plans:
- 5 year cliff,
- 3-7 year graded
- 100% vested after 2 years participation

When you see the word “retained” select a graded schedule. Employees will perceive that it is economically desirable to stay with the company at least until fully vested.

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34
Q

Defined Contribution Plans (Integration with Social Security)

A

Base % + Permitted Disparity = Excess %

  • Integration level- Any dollar amount up to Social Security wage base ($160,200)
  • Base % - DC plan contribution for compensation below integration level
  • Permitted Disparity = LESSOR of Base OR 5.7%
  • Excess % - DC plan contribution for compensation above integration level.
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35
Q

Defined Benefit Plans (Integration with Social Security)

A

Base % + Permitted Disparity = Excess %

  • Integration level- Level of comp above which the excess contribution is made. Any dollar amount up to Social Security wage base ($160,200)
  • Base % - DB plan contribution for compensation below integration level
  • Permitted Disparity = LESSOR of Base OR 26.25% (B for Bigger)
  • Excess % - DB plan contribution for compensation above integration level.
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36
Q

Multiple Plans 2023 Elective Deferrals

A

Elective deferrals to multiple plans with more than one employer are aggregated.

  • 401(k)/403(b)/SIMPLE/SARSEP = $22,500 + $7,500
  • SIMPLE and other SIMPLE = $15,500 + $3,500

Note than 457 plans are NOT part of aggregated amounts. Operate as NQ deferred comp.

Also note that for unrelated employers that offer Pension plans, the contributions are not aggregate. Can have 2+ with full limits

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37
Q

Life Insurance as a Funding Vehicle:
- What are the two tests?

A
  • Must be incidental to the primary purpose of the plan, and must meet either of the following to pass that test:
    • Ordinary Whole Life: 50%
    • Term: 25%
    • Universal: 25%
  1. The participants insured death benefit must be no more than 100 times the expected monthly benefit. DB plans typically use the 100 times limit.

DC plans normally use % test
DB plans normally use 100 times test

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38
Q

RBD for IRA / SEP / SIMPLE / SARSEP

A

April 1st of the year following the attainment of age 73

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39
Q

Social Security (reduction of benefits)

A

Age 62-FRA: benefits reduced $1 for every $2 earned over $21,240.

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40
Q

Social Security (Taxation)

A
  • Must include muni bond income to calculate MAGI.
  • If income plus 1/2 of social security benefits is:
    1. Above $25k for Single, then 50% of the total social security is included in income
    2. Above $44k for MFJ, then 85% of the social security is included in income.
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41
Q

Net Unrealized Appreciation (NUA):
- When and how is cost basis taxed?
- When and how is NUA taxed?
- What happens if theres a gain after distribution?

A
  • Cost basis is taxable as ordinary income WHEN DISTRIBUTED!
  • NUA (market value at lump-sum distribution MINUS employer cost basis) is NOT SUBJECT TO TAXATION UNTIL THE EMPLOYEE SELLS THE STOCK.
  • NUA is always taxed at LTCG regardless of holding period.
  • If stock appreciates after the distribution, the gain not attributable to NUA is either LTCG or STCG depending on holding.
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42
Q

Age and service rules - QP

A
  • 21 & 1.
  • 2 years service, but then immediately vested.

One year of service is 1,000 hours (includes vacations, holidays and illness time) or 500 hours and worked for the company for 3 years.

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43
Q

Non-qualified Deferred Compensation Plans (2)

A

Salary reduction plan - Uses portion of employee’s current compensation to fund the ultimate benefit.

Salary continuation - Uses employer contributions to fund the ultimate benefit.

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44
Q

Employment categories not covered by social security: There are 7 categories.

A
  • Federal employees continuously employed since 1984.
  • Some Americans working abroad.
  • Student nurses and students working for a college or college club.
  • Railroad employees.
  • Child under 18, employed by a parent in an unincorporated business.
  • Ministers, members of religious orders and Christian Science practitioners if they claim an exemption.
  • Members of tribal council.
  • Some state employees and teachers.

Members of the armed services ARE covered under OASDI.

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45
Q

Section 415 annual additions limit: Limit and whats included

A
  • Maximum annual contribution is the LESSER of 100% of compensation, or $66,000.
  • Includes employer contributions, employee salary reductions, and plan forfeitures.
  • Applies to all defined contribution plans.
  • Only time can exceed limit is for 50+ catch-up.
  • An individual with two unrelated employers can have two accounts, both having their own $66k limits (not aggregate).
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46
Q

Safe Harbor Nondiscrimination: What two things satisfy nondiscrimination tests?

A

A safe harbor 401(k) plan automatically satisfies the nondiscrimination tests involving HCEs with EITHER an:
- Employer match, or,
- nonelective contribution

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47
Q

Safe Harbor Match/Vesting

A
  • $1/$1 match on the first 3% employee deferral AND $.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 (nonelective).

Employer contributions must be immediately vested.

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48
Q

Rollovers NOT Permitted

A
  • 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.
  • RMDs are not eligible to be rolled over. Obviously.
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49
Q

IRA Deductibility Keys:
- If neither spouse is an active participant in an employer plan.
- If one spouse is an active participant in an employer plan.
- If both spouses are active participants in an employer plan.
- What plans affect active participant status?

A
  • If NEITHER spouse, or single person, is an active participant in an employer plan, the IRA is deductible. Virtually all employer plans affect participation status, EXCEPT 457 plans (NQDC).
  • 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.
  • If BOTH spouses are active participants, AGI limits apply (given):
    - $73k-83k Single
    - $116k-$136k MFJ
  • Qualified plans, SEP, SIMPLE, 403(b)/TSA/TDA, Union Plans (NOT457)
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50
Q

Roth IRA Ordering rules for Distribution

A
  1. Contributions
  2. Conversions
  3. Earnings
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51
Q

Roth IRA RMD

A

There is no RMDs for Roth IRAs, only must be distributed after death in accordance to the following:

  • Owners surviving spouse can delay distributions until the Roth owner would have reached 73, or may roll it over and treat it as their own.
  • Distributed over 10 years to designated beneficiary.
  • Distributed within 5 years of owners death if there’s no designated beneficiary.
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52
Q

Rabbi Trust

A
  • Key words: merger, acquisition, or change of ownership
  • Assets in trust available for creditors
  • Fear that ownership/management may change before deferred compensation is paid.
  • Plan must provide clear rules describing when the benefits will be paid
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53
Q

Incentive Stock Option (ISO) Holding Period

A
  • 2 years from Grant to Sale
  • 1 year from Ex to Sale
  • If either are not met, it results in a disqualifying disposition (NSO).
  • First $100k granted is entitled to favorable treatment.
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54
Q

A retired, fully insured worker age _________ is entitled to SS retirement benefits.

A worker is entitled to disability benefits if he/she is under _____ and has been disabled for ____ or is expected to be disabled for at least ____, or has a disability which is expected to result in death, and has completed a _______ waiting period

A

62

65, 12 months, 12 months, 5 month.

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55
Q

The spouse of a retired or disabled worker qualifies for Social Security if he/she meets any of the following:

A
  • 62 or over
  • or any age and has a child under 16, or child disabled before 22.
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56
Q

Divorced spouse benefits: ex-spouse must have been married to the worker for at least _____ and generally must_______..

A

10 year. not have been remarried.

If at least age 62 and divorced for 2 years, ex-spouse can get retirement benefits based on the workers earnings even if the worker claims no retirement benefits.

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57
Q

The surviving dependent, UNMARRIED child of a DECEASED, DISABLED OR RETIRED insured worker, qualifies for Social Security payments if either of the following:

A
  • Under 19 and a full-time elementary/secondary school student.
  • Age 18 or over, but has a disability before age 22.
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58
Q

A spouse/ex-spouse may be entitled to a PIA that is _____ or more of the workers PIA unless his/her own benefit is________

A

50%. Greator.

10 years, not remarried.

62 divorced for 2 years can receive retirement benefits.

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59
Q

PIA reduced benefit calculation:

A

PIA - [(#months before FRA/180) x PIA]

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60
Q

T or F:

Workers who have attained their full retirement age may keep all benefits, no matter how much is earned, but there may be taxation if above threshold.

If a worker is younger than FRA, there is a limit to how much that worker can earn and still receive full SS benefits.

Working after retirement: If reach FRA, there is no reduction of benefits if over threshold, but taxation will come into play. If LESS THAN FRA, there is a reduction of benefits if over threshold.

A

T

Even if the worker has reached FRA, SS benefits are subject to federal income tax if the taxpayer’s provisional income exceeds the applicable threshold.

Working after retirement: If you take benefits and continue working BEFORE FRA, then you can lose benefits if your workplace earnings exceed a threshold.

Income tax of benefits: If you take benefits, you may have to pay income tax on those benefits if provisional income exceeds a threshold.

Dont confuse these

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61
Q

For workers younger than FRA during all of 2023, the government will deduct __________ earned above_____________.

Workers who reach FRA DURING 2023 (or in questions, “during the current year”), will deduct _____________ earned above_______________ UNTIL the month FRA is reached.

A

$1 from benefits for every $2 earned above $21,240

$1 from benefits for every $3 earned above $56,520

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62
Q

Social Security: Taxation of Benefits

A

(Earned + Unearned income) + 50% of Social Security + Tax-exempt income

50%
S: If >$25,000 50% of FULL benefit is included in gross income.
MFJ: If >$32,000 50% of FULL benefit is included in gross income.

85%
S: If >$34,000 85% of FULL benefit is included in gross income.
MFJ: If >$44,000 85% of FULL benefit is included in gross income.

Even though 50% of Social Security is included in provisional income, the FULL benefit is taxed at the applicable amount if over the threshold.

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63
Q

Workers are entitled to disability benefits if they meet ALL the following:

A
  • Insured for disability benefits, and under age 65.
  • Been disabled for 12 months, expected to be disabled for at least 12 month, or disability expected to result in death.
  • Filed for disability, and has completed 5-month waiting period.
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64
Q

When considering the 5 month waiting period on SS disability, when do benefits start?

A

Its paid in the month following, the 6th month, not on the 5th month.

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65
Q

What is a DB plan?

A

Qualified plan subject to ERISA, and covered by PBGC.

Vesting schedule, admin costs, exempt from creditors, integrates with Social Security.

DB and Cash Balance.

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66
Q

What is a DC plan?

A

Qualified plan subject to ERISA.

Vesting schedule, admin costs, exempt from creditors, integrates with Social Security (except ESOP)

Money Purchase, Target Benefit, Profit Sharing, Stock Bonus, Keogh

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67
Q

What is an “other” retirement plan?

A

A nonqualified plan exempt from most ERISA requirements.

No vesting schedule, LOWER admin costs.

SEP, SIMPLE, SARSEP, 403(b)/TSA/TDA, 457.

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68
Q

SARSEP

A
  • Must have been in existence before 12/31/96.
  • May have up to 25 employees, and 50% of the eligible employees must defer.
  • Salary deduction limit is $22,500 (FICA).
  • New employees may participate if established before ‘97.
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69
Q

Are BE MY CASH TARGET plans fixed/mandatory contributions?

A

YES.

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70
Q

Factors effecting employees’ benefits in a DC plan:

A

Years to retirement (older more, younger less)

Investment returns (lower assumptions more, higher assumptions less)

salary levels

employer contributions

Forfeitures (MAY be applied to reduce employer contributions)

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71
Q

Selecting a money purchase pension plan:

A
  • Wants stable work force
  • Simple to administer and explain
  • Young/well-paid employees
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72
Q

Selecting target benefit plan:

A

Alternative to a DB plan that provides adequate retirement benefits to older employees but has the lower cost and simplicity of a DC plan.

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73
Q

T or F: Only way an employer can contribute more than the $66,000 is for DB plans

A

T

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74
Q

Selecting a profit sharing plan:

A
  • Employer has varying cash flow from year to year.
  • Provides incentive for employees to make the company profitable.
  • Employees are young, well-paid, and have substantial time to accumulate savings.
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75
Q

What is the 2023 limit on elective deferrals?

A

$22,500

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76
Q

Selecting a 401(k) plan:

A
  • Employer wants to provide a qualified plan but can only afford minimal extra expense beyond the costs of existing salary and benefit costs.
  • Employees want to increase their savings on a tax-deductible basis.
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77
Q

Solo 401(k)

A
  • Not subject to coverage testing and nondiscrimination rules like typical 401(k) plans.
  • Allows for two different contributions: $22,500 elective deferral + Employer contribution with a cap of $66,000 + $7,500 catch up if 50+. This differs from Keogh and SEP.
  • Generally permitted when only owner and spouse or two partners. “Solo no employees”
  • Can take a policy loan.
  • Allows for more to be put away than Keogh/SEP because of above.
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78
Q

Safe Harbor 401(k)

A
  • Safe harbor 401(k) plans automatically satisfy the nondiscrimination tests which involve HCEs with either an:
  • employer matching contribution, or
  • non-elective contribution
  • Employer matching contribution would be $1/$1 on the first 3% employee deferral AND $0.50/$1 on the next 2% employee deferral
  • Non-elective deferral would be 3% of all eligible employee’s comp REGARDLESS of whether the employee is deferring.
  • Employer would pick one to satisfy the safe harbor.
  • Immediately vested.
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79
Q

ESOP keys:

A
  • If you use it to borrow money, its a LESOP
  • You can’t integrate it with Social Security or cross-test it.
  • Primarily in employer stock
  • Cannot use it in a partnership
  • 55 or older with 10+ years of PARTICIPATION can diversify up to 50% of account balance.
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80
Q

Stock Bonus and ESOP

A

Variations of profit-sharing plans. Stock bonus may invest assets in employer stock, ESOP MUST invest plan assets primarily in employer stock.

Employers may deduct dividends with respect to stock held in an ESOP. Deductible if paid in cash, distributed as cash no later than 90 days after the close of the plan year, used to make payments on loans to acquire employer stock, or reinvested in employer stock.

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81
Q

New comparability plan

A

Contribution percentage formula for one category of participants is greater than the contribution percentage for other categories of participants.

Tested under cross-testing rules.

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82
Q

Cross-testing (except ESOPs)

A

Measures DC plans for nondiscrimination on the basis of benefits, and DB plans on the basis for contributions.

Creates max benefit for HCEs

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83
Q

Selecting a DB plan

A
  • Employer wants to max plan contributions to older employees.
  • An older controlling employee wants to max tax-deferred retirement savings for their own benefit.
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84
Q

Section 415 Limit: DB plans

A
  • For a benefit beginning at age 65, the max annual life annuity benefit is the LESSOR of:
  • $265,000, or
  • 100% of comp averaged over the employees three highest consecutive earnings years.
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85
Q

What is the most frequently used defined benefit formula?

A

Unit-benefit. Rewards long-service employees.

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86
Q

T or F: Traditional DB and Cash balance plans are the only plans that can consider past service

A

T

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87
Q

Selecting a cash balance plan:

A
  • Less expensive and simpler DB plan.
  • May allow past service credits, which means the plan may cover periods of employment prior to the plan’s inception date.
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88
Q

412(i) plan

A

DB plan funded entirely with insurance products like Life insurance and annuities. Avoids minimum funding standard.

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89
Q

T or F: Defined contribution plans are based on the account balance at retirement

A

T

90
Q

If forfeitures are not reallocated to remaining money purchase plan participants, what effect would that have on employer contributions?

A

Employer contributions would decrease.

If the forfeiture in a money purchase plan is not reallocated to the remaining participants, then they must be used to reduce company contributions.

91
Q

Forfeitures for DB, DC and Profit-sharing plans:

A

Forfeitures in defined benefit plans and cash balance plans must reduce plan costs or contributions. Money purchase plan forfeitures may (not must) be allocated to employee account balances. Forfeitures in a profit- sharing plan normally are allocated to the plan participants.

92
Q

Cynthia’s final-average monthly salary is $4,800. To arrive at her benefit, multiply 1.25% by the $4,800 final- average monthly salary by 25 (the number of years of service). Cynthia’s monthly retirement benefit will be equal to $1,500 paid in the form of a life annuity. This is an example of what type of defined benefit formula?

A

Unit-benefit, also known as, Percentage-of-earnings-per-year of service.

93
Q

For qualified plans: What are the nondiscrimination and eligibility requirements?

A
  1. Age and service:
    - 21 and 1 year of service
    - 2 years of service, 100% vested

After meeting the above, employee must be able to participate at the earlier of 1st day of 1st plan year after meeting age and service, or, the date 6 months after these conditions are met.

One year of service is 1,000 hours in a 12 month span, or 500 hours for 3 consecutive years will also suffice.

  1. Coverage
    - Ratio % test- Must cover a % of NHCE that is at least 70% of the HCE whom are covered. IF THIS TEST FAILS, THE NEXT TEST MUST PASS.
    - Average benefit test- Avg benefit for NHCE must be at least 70% of those for HCE.
94
Q

DB Plans ONLY: What are the minimum participation requirements?

A

Lesser of:
- 50 Employees, or
- The greater of 40% of all employees, or, two employees.

95
Q

What is a Top-heavy plan?

A

A plan is top-heavy if 60% or more of its aggregate accrued benefits or account balances are allocated towards key employees.

top-hEavy —- kEy

96
Q

What represents the most stringent service requirement?

A

Virtually all vesting schedules offer participation in the plan with one year of service. Ie: 3 year cliff, 2-6 graded, 5 year cliff, 3-7 graded.

The only option that allows for more than one year of service requirement to participate would be the 2-year/100% option which allows immediate vesting after 2 years of service.

97
Q

Family attribution rules: Employees who are the _______, _______, ________, or __________ of an individual who is a >5% owner are deemed to be a >5% owner.

A

spouse, parent, child, grandparent.

Only a parent is deemed to own stock on behalf of children under age 21.

98
Q

If workers are ineligible to participate because of the 21 and 1 rule, are their salaries included when calculating whether a plan is top-heavy or not?

A

No, their salaries would not be included.

99
Q

ADP vs ACP testing

A
  • Elective deferral programs are more likely to cover higher paid employees, and are subject to nondiscrimination testing under ADP.
  • Employer matching and Profit-sharing contributions are subject to nondiscrimination testing under ACP.
  • 0%-2% is x2 NHCE get 2% deferral, HCE get 4% deferral.
  • 3%-8% is +2 NHCE get 4% deferral, HCE get 6% deferral.
100
Q

Control Groups:

A
  • Parent-subsidiary
  • Brother-sister
  • Affiliated service group
  • Employee leasing
101
Q

What is the Social Security wage base?

A

$160,200 for ‘23

102
Q

Catch-up contributions do not affect _______, _______ or the _______. They are permitted in addition to _______.

A

Deferrals, company contributions, or the $66,000 maximum annual additions limit. They are permitted in addition to 415 limit of $66,000.

103
Q

Deduction Limit - Section 404(c)

A

The employer can only deduct a maximum of 25% of all participants (aggregate) eligible compensation.

Certain participants may receive contributions in excess of 25% as long as total company contributions do not exceed 25%, and contributions do not violate the rules of discrimination.

104
Q

What is the annual compensation limit for QPs?

A

$330,000.

105
Q

A plan is top-heavy if more than _____ of its aggregate accrued benefits or account balances are allocated to ______________.

A

60%, key employees.

106
Q

Top-heavy plans: Minimum benefits to non-key employees under a Defined benefit plan

A
  • Benefit must be at least 2% of compensation x years of service where the plan has been top heavy, up to a maximum of 10 years.

Remember: For DB, B is the 2nd letter in the alphabet, use 2%.

107
Q

Top-heavy plans: Minimum benefits to non-key employees under a Defined Contribution plan

A
  • Employer contribution must be at least 3% of compensation for non-key employees.

Remember: For DC, C is the 3rd letter in the alphabet, use 3%.

108
Q

Loans from a QP: IRC Section 72(p) allows participants to borrow from their plans on a tax-free basis, provided the following requirements are satisfied:

A
  1. There’s a loan agreement requiring repayment.
  2. Total loans don’t exceed 50% of vested benefit, OR, $50,000. (Special rule allows small accounts to borrow up to $10,000)
  3. Loan repaid in 5 years or less, unless the loan is used to acquire PRINCIPAL residence (home does not need to be pledged), or there is a leave of absence.
  4. Loan repayments are paid in level installments at least quarterly. If participant fails to make payments, the entire balance due is deemed a taxable distribution (income tax + 10% penalty if less than 59.5).
109
Q

Loans from a QP from Brett Danko

A

“For income tax purposes, interest on a plan loan will be treated as consumer interest. Generally, it will
not be deductible by the employee as an itemized deduction unless the loan is secured by the principal
residence. Principal residence loans are also allowed to key employees. However, the interest is not
deductible (ever!) even when the loan is secured by the key employee’s principal residence. Interest is
never deductible when a plan loan is secured by elective contributions made to a 401(k) or tax-sheltered
annuity. In other words, the only way a non-key participant can deduct interest paid on a plan loan is if
the following two conditions are met:
1. The loan is for the participant’s primary residence
2. The loan is secured by the primary residence”

110
Q

T or F: Loans from IRAs, SEPs, SIMPLEs and ROTH accounts are not permitted

A

T

111
Q

T or F: Qualified plan loans are permitted from 403(b)/TSA?

A

T!

Even though these are not Qualified plans, they do offer plan loans.

112
Q

is K1 income earned or unearned income?

A

Unearned

113
Q

Traditional and Roth IRA contribution limits

A

$6,500 + $1,000 catch-up if 50+

Must have earned income (wages, salaries, tips, professional fees, and bonuses. Plus alimony and separate-maintenance payments for pre-2019 divorces). S-corp (k-1) distributions are unearned income and do not count!

114
Q

Keys to IRA deductibility: Plans that affect active participant status include participation in the following (5): STUQS

Activity that results in active participant status includes _____________ to a DC or DB plan.

A

SEP
TSA/TDA
Union plans (but not 457 give or non-gov plans)
Qualified plans
SIMPLE

Annual additions. Annual additions include employer contributions, employee contributions, and forfeitures.

115
Q

What falls underneath a “Defined Contribution” plan?

A
  • Money Purchase Pension plan (fixed contribution)
  • Target Benefit Pension plan (fixed contribution)
  • Profit sharing plan (flexible contribution)
  • Stock bonus plan (flexible contribution)
116
Q

T or F: If an employer does not make a contribution to a profit-sharing plan in a given year, the employee is not an active participant (although still covered under the plan)

A

T

As long as there are no annual additions or accrued benefits (for DB purposes) .

117
Q

Distributions within 60 days (conversions) from a regular IRA, also including _____, _____, _____, _____, _____, to a Roth IRA are ALLOWED.

A

QPs, SEP, SIMPLE, 403(b) or 457

118
Q

T or F: While a non-spouse beneficiary who inherits a qualified plan account balance can convert it to an inherited Roth IRA, if the same beneficiary inherits an IRA, they cannot convert it to an inherited Roth IRA.

A

T

119
Q

Roth Conversion Distributions:
1. Withdrawal meets 5-year holding period

A
  • No income tax
  • No 10% early withdrawal penalty
120
Q

Roth Conversion Distributions:
2. Withdrawal fails to meet 5-year holding period

A

Must meet one of the special purposes:
1. 59.5+
2. Death
3. Disability
4. First home purchase up to $10k
5. Medical expenses
6. Medical insurance premiums while unemployed
7. Substantially equal periodic payments
8. Higher education expenses
9. Birth/adoption

If special purpose is met, no income tax or 10% early withdrawal penalty

If no special purpose is met, no income tax (already paid at conversion) but subject to 10% penalty.

121
Q

Roth Earnings Distributions:
1. Withdrawal meets 5-year holding period

A

If a Qualifying Triggering Event: No income tax or 10% penalty
1. 59.5+
2. Death
3. Disability
4. First home purchase up to $10k

If a Special Purpose: Income tax, but no 10% penalty
5. Medical expenses
6. Medical insurance premiums while unemployed
7. Substantially equal periodic payments
8. Higher education expenses
9. Birth/adoption

If no qualifying triggering event or special purpose: Both income tax AND 10% penalty

122
Q

Roth Earnings Distributions:
2. Withdrawal fails to meet 5-year holding period

A

If a Special Purpose: Income tax, but no 10% penalty
1. 59.5+
2. Death
3. Disability
4. First home purchase up to $10k
5. Medical expenses
6. Medical insurance premiums while unemployed
7. Substantially equal periodic payments
8. Higher education expenses
9. Birth/adoption

If no Special Purpose: Income tax and 10% penalty

123
Q

Roth 401(k)

A
  • Only 401(k), 403(b) and Government 457 plans may offer a qualified Roth program.
  • $22,500 + $7,500 for 50+.
  • All employer contributions (including match) are into a traditional 401(k) pre-tax account.
  • There are no income limits associated with these Roth contributions.
  • Subject to a 5-year term from first contribution, and there is no exception for first-time home purchase.
  • To be tax-free, participants needs to meet 5-year hold, reached 59.5, died, or become disabled.
124
Q

ABLE Accounts

A

Achieve a Better Life Experience
- Expands on code section 529 to create tax-advantaged accounts for disabled.
- Can contribute up to $17,000 annually (Annual gift tax exclusion).
- Distributions for qualified disability expenses are not included in gross income if beneficiary becomes disabled before 26.
- Exempt from the $2,000 limit on personal assets for Medicaid and SSI.

125
Q

AGI does not mean compensation

A

Yup. Dont get fooled by retirees.

126
Q

Is AGI or Gross income used when reading exam tax tables?

A

AGI

127
Q

SEP coverage requirements:

A
  • Must cover everyone who is 21 and worked for the employer during 3 out of the 5 preceding calendar years. Part-time counts.
  • No contributions need to be made for employees whos comp for the year is less than $750.

For the employer with numerous short-term employees, this permissible exclusion can be an advantage, but for the employer with numerous long-term, part-time employees, this can be a disadvantage.

128
Q

Selecting a SIMPLE:

A
  • Easy to administer
  • 5304 or 5305 SIMPLE. Form is given to employees not filed with the IRS.
  • SIMPLE cannot be terminated mid year. Must be Jan 1 of the year following confirmation to employees.
  • Employer cannot maintain any other qualified plan, 403(b) or SEP.
129
Q

SIMPLE eligibility requirements:

A
  • Must cover employees who earned $5,000 in any two previous years and is reasonably expected to earn $5k in the current year.
  • Employer must notify participants of the 60-day window just prior to the calendar year to make a salary deferral election, or modify a previous election from the following year.
  • Employees are fully vested at all times.
  • 10% early distribution penalty is increased to 25% for the first 2 years of participation.
130
Q

SIMPLE 401(k)

A

This is when a traditional 401(k) adopts SIMPLE provisions.

  • Deferral limit of $15,500 like SIMPLE IRAs. Remember, its a 401(k) that adopts SIMPLE provisions.
  • Exempt from ADP and ACP tests and top-heavy requirements.
  • Cannot choose the special 1% match election like SIMPLE IRAs.
  • Both SIMPLE and SIMPLE 401(k) have a catch-up of $3,500.
131
Q

T or F: SIMPLE, SIMPLE 401(k), SEP, SARSEP employer contributions are always 100% vested.

A

T.

132
Q

Establishing a Qualified plan:

A

DB or DC: the plan document must be executed within the tax year for which the employer wishes to take the tax deduction for its contribution.

However for:
- Standard 401(k) must be established before the first deferral can be made (before end of employers tax year)
- Safe Harbor 401(k) must generally be adopted before the beginning of the plan year.
- SIMPLE 401(k) may be adopted anytime on or after January 1, but not later than October 1 of the year in which it is adopted.

133
Q

Establishing a SIMPLE IRA

A

May be established by an employer up to the due date of the employers tax return.

134
Q

Establishing a SEP IRA

A

may be establish after an employers fiscal year end. An employer has until the due date of the business tax return, including extensions, to establish and make contributions to a SEP for the taxable year.

135
Q

What is UBTI income?

A

Income from a limited partnership or dividends from a margin account. If exceeds $1000 the qualified plans UBTI is subject to income tax in the current year.

UBTI is taxable income generated by a tax-exempt entity by means of certain passive activities.

136
Q

T or F: the only plans that are allowed to purchase life insurance are qualified plans, and 403(b) plans. There are no IRA type plans that allow for life insurance.

A

T

137
Q

What is the only plan that can hold a second to die insurance policy?

A

Profit-sharing plan. No Pension plans.

138
Q

Secure Act 2.0 for 2023:

A
  • RMD age is raised to 73 (from 72) for years 2023-2032. The RMD age is increased to age 75 for years 2033 and beyond.
  • RMD penalties have been lowered from 50% to 25% or 10% if the RMD is taken by the end of the second year following the year it was due
  • Plans can allow employer matching contributions to be made on a Roth (after-tax) basis
  • SIMPLE and SEP IRAs can offer Roth options
  • QLACs may have up to $200,000 (adjusted for inflation) invested and the 25% limit has been eliminated.
  • Additional 10% penalty exceptions added (federally declared disasters most notable)
  • Qualified charitable distributions (QCDs) indexed for inflation and one time $50,000 allowed to a CRAT or charitable gift annuity
139
Q

An in-service distribution, meaning distributions from a QP while the participant is still working for the employer, may be allowed in any of the three following situations:

A
  1. Attainment of specific age or years of service (NRA for Money purchase, 59.5 for 401(k)).
  2. Hardship (any age, any type of profit-sharing plan. Must follow financial needs test & resources test).
  3. Attainment of age 62 (for defined benefit plans).
140
Q

Are hardship withdrawals from profit-sharing and stock bonus plans subject to ordinary income tax and the 10% early withdrawal penalty?

A

yes. No 10% penalty if over 59.5 or disability qualified plan exemptions.

141
Q

72(t) substantially equal payments:

A
  • Paid not less frequently than annually.
  • Paid without changing the amount for the LONGER of 5 years or until the payee reaches age 59.5.
  • Based upon the life expectancy of the recipient or recipients.
  • Based on a reasonable rate of interest.
  • If applicable, based upon reasonable mortality assumptions.

If payments are changed or stopped within the 5 year period but its after they reach 59.5, recapture will be for only those payments before he turned 59.5.

An important exception is that a one time election allows participants to switch from the annuity or amortization method to the RMD method with no penalty.

142
Q

Qualified Joint and Survivor Annuity

A
  • a post-retirement death benefit for the plan participants spouse.
  • qualified pension plans are required to provide a QJSA option.
  • must be not less than 50% of, nor greater than 100% of the annuity payable during the joint lives of the participant and spouse.
143
Q

Qualified Optional Survivor Annuity

A
  • Pension Protection Act requires a second joint and survivor annuity option in pension plans.
  • must be a 50% joint and survivor annuity. Many plans specify a 75% joint and survivor annuity.
  • The participant can elect out of this benefit only with written spousal consent.

Election out must be made during a 180 day prior to the annuities starting date.

144
Q

Qualified Preretirement Survivor Annuity

A

A QPSA is a preretirement death benefit for the plan participant’s spouse payable upon the death of the participant who dies before the starting date of the QJSA. The survivorship annuity must be not less than what would be payable under the plan’s QJSA.

145
Q

SIMPLE IRA Rollover: 2 year rule

A

A participant in a QP, 403(b) or 457 may now roll over their distribution from that plan into a SIMPLE, however the receiving SIMPLE had to have been established at least 2 years prior to receiving funds from the non-SIMPLE plan.

146
Q

IRA 60-day rule

A
  • An IRA owner can withdraw all or part of the balance in the account and reinvest it within 60 days in another IRA. This can occur only once per year, per taxpayer.
  • If a participant receives a direct distribution from a QUALIFIED PLAN, the distributing plan must withhold 20% of the distribution. The check is made to the participant.
  • To ensure tax-deferred treatment on the full amount with no 20% withholding, rollovers must be completed by means of a DIRECT TRANSFER.
147
Q

T or F: Each taxpayer gets two 60-day distributions. One “Qualified 60-day” and one “IRA 60-day”

A

This is TRUE!! one from a QP and one from a IRA per year per taxpayer.

Also, unlimited trustee to trustee transfers!

148
Q

RMD penalty imposed on the amount a distribution falls short:

A

25% or 10% if the RMD is taken by the end of the second year following the year it was due.

149
Q

Qualified Charitable Distribution:

A
  • At 70.5 (not 73) individuals can make QCD of up to $100,000 annually.
  • The amount is excluded from taxable income, and satisfied RMDs.

This does not offer a charitable income tax deduction tho.

150
Q

2019 Secure act eliminated the stretch IRA, requiring non-spouse beneficiaries to liquidate an inherited IRA within 10 years. Exceptions to the 10-year tule are: _____, _____, _____, _____, and _____

A

surviving spouse, person not more than 10 years younger than the plan participant, minor child, disabled person, and a chronically ill person.

151
Q

Special penalty waiver rule for public service employees

A

The 10% early withdrawal penalty is waived if a distribution from a governmental plan (not 457) is made after the public safety employee participant turns 50 (instead of 55).

152
Q

Nonqualified deferred compensation

A
  • Plans to entice high profile employees.
  • Does not meet the tax and labor laws of ERISA which are applicable to qualified plans.
  • No employer tax deductions for contributions until the employee is taxed.
  • Fund’s earned may be taxable to employer
  • non-profits cannot offer these.
153
Q

What is an unfunded plan?

A
  • A “naked promise” to pay benefits.
  • It also could informally funded with life insurance, annuities, mutual funds or other investments. These assets are owned by the company and are subject to the companies creditors.
  • Both are considered unfunded plans.
154
Q

Secular trust

A
  • Ann irrevocable trust established for the exclusive benefit of the employee.
  • Addresses two current problems associated with nonqualified deferred compensation:
    • The lack of security in relying on an informally funded plan
    • The fear that tax savings will disappear because tax rates after retirement may be higher.
155
Q

Substantial risk of forfeiture

A
  • Exists if conditioned upon performance of services for a period of time.
  • If you can lose it, there is forfeiture.

Also considered:
- The employee’s relationship to other stockholders and the degree of their potential control
- The employee’s relationship to corporate officers.

156
Q

Only the first _______ worth of ISOs granted to any employee that vest in one calendar year is entitled to ___________________.

A

$100,000. Favorable ISO treatment.

Options granted which exceed that amount are non-qualified.

157
Q

ISO/NSO Disqualifying disposition subject to FICA/FUTA

A
  • If ISOs are SOLD in the SAME calendar year as exercised, the bargain element is taxable compensation subject to FICA/FUTA.
  • If the ISOs are SOLD within 12 months but in the following calendar year, the bargain element is ordinary income but not subject to FICA/FUTA.

If both the 1 and 2 year rule are violated, the bargain element is taxable compensation and subject to FICA and FUTA.

158
Q

is the bargain element of an ISO taxable at exercise?

A

No. It is an AMT add-back item.

159
Q

Can you gift ISOs?

A

Yeah you can, but they become NSOs (disqualifying disposition), and when the recipient exercises the options, the bargain element is taxed to the transferer.

160
Q

Section 83(b) election

A

This is dealing with NSOs not ISOs.

Employee elects to recognize the ordinary income tax at the time of the award instead of at the time of exercise. Any appreciation in the stock after the date of the award (grant) will not be taxed to the employee until he/she sells the stock.

This allows for more of the final award to be taxed at the lower capital gains tax rates.

83(b) should be elected if the stock is really expected to substantially appreciate over time.

161
Q

Restricted Stock Units

A
  • RSUs have no value when issued but can have great value once vested.
  • Value of shares are taxed as compensation, and then taxed as cap gains based on the difference between the sale price and the value of the shares upon vesting.
162
Q

Stock Appreciation Rights

A

Rights to be paid an amount of money equal to:
value of specified number of shares granted, and the value on exercise.

163
Q

Employer Stock Purchase Plan

A

Section 423 stock purchase plan. Employer is allowed to discount the stock by 15% of the market value.

Creates a constant demand for shares.

164
Q

Can the employer that maintains a profit-sharing plan contribute more than 25% to an employee’s account?

A

Individual employees can receive contributions in excess of 25% providing the contributions conform to the 415 limit (as long as company contributions do not exceed 25% of total eligible plan compensation).

165
Q

Small Moves, Inc. has 12 employees. Three employees who are van drivers work part-time. Two full-time employees are under age 21. The part-timers all earned $1,000 or less last year and this year. The company wants to install a retirement plan with minimal expenses to set up and maintain. The four owners (all related) are all full-time employees. Which plan would be most suitable for Small Moves, Inc.?

A

Although the SEP will have to cover the part-timers, at worst, the contribution would only total $3,000 @ 25% or $750. The part-timers still have to meet the 3-out-of-5 years of service rule. The employees under age 21 would not be eligible. A SEP is the simplest, most flexible plan.

166
Q

Debra Snow, age 50, works for Tilden, Inc. Tilden provides a defined benefit pension plan. Debra is the VP of creative marketing. She earns $200,000 per year from Tilden. Debra is also a talented artist. This year she sold paintings netting $100,000 after expenses this year. If Tilden adds $100,000 to her defined benefit plan this year, can Debra also fund a SEP?

A

SEP contribution rules are similar to those for a Keogh PS Plan. For self-employed individuals, the maximum contribution percentage is 18.59% (Note: $18,590/$100,000 is 18.59%) of earned income with a 25% plan, and for corporate employees (including owners) the contribution limit is 25%. The 1.0 rule has been repealed. Note: She works for two unrelated employers, so both contributions are allowed.

When do qualified plan coverage rules apply or not apply here? shes covered by a DB plan regardless if she has an unrelated employer.

167
Q

IRA Rollover eligibility:

A

QPs etc.

168
Q

Mr. Hale wants to borrow money to purchase additional investments. He would like to deduct the loan interest. Which of the following assets makes the most sense to pledge as collateral for a margin (account) loan?

A

Pledging the stock is like buying stock on the margin. It makes the most sense. The loan interest deduction is disallowed when municipal bonds are pledged for a loan. Municipal income is not investment income. If an IRA is pledged for a loan, the IRA will be disqualified.

169
Q

Mr. Henry is a very successful sales manager for LK Industries. He would like a nonqualified deferred compensation plan that is not subject to the creditors of his employer. He is concerned the company may experience financial problems in the future. The company wants to retain Mr. Henry but also wants an immediate deduction for any money contributed to the plan. Given the objectives of the parties, which one of the following plans should they install?

A

Contributions to a secular trust are deductible in the contribution year by LK Industries. The secular trust is irrevocable (funded) and not subject to the company’s bankruptcy or insolvency creditors. A secular trust can be funded with various investments including (but not limited to) variable annuities.

Creditors before anyone in a Rabbi trust

170
Q

When may an employee avoid receipt of taxable income when participating in a funded nonqualified deferred compensation plan?

A

When deferred compensation is subject to “substantial risk of forfeiture,” the amount, if any, of economic benefit is uncertain and the deferred income is then not taxable until it is distributed.

171
Q

Roger’s wife is accompanying him on a business trip. She is employed by his closely held company. Are her expenses tax deductible?

A

Yes, if her reason for making the trip is for a valid business purpose.

Travel-related expenses are deductible if the individual is an employee of the taxpayer, the travel of the individual is for a bona fide business purpose, and the expense would otherwise be deductible by the individual. Roger’s wife is an employee.

172
Q

Are S- corp owners always charged with the premium (non-deductible expense) for providing disability insurance coverage?

A

Yes!

173
Q

Can you deduct investment interest expense if you itemize on Schedule A?

A

Yes, but you only up to investment income!

If there is no investment income, there is no investment interest expense.

Popular investment expense is margin interest, but make sure there is investment income.

174
Q

Martha wants to purchase another CD at a different bank in joint tenancy with her son. What amount can she deposit in a joint account and have it fully insured if the names on the JTWROS account are Martha and her son?

A

Martha will be covered by FDIC for an additional $500,000 in a jointly held account with her son at another bank. It will be fully insured ($250,000 for her and $250,000 for him).

175
Q

T or F: Loans from a QP are not Subject to ordinary income tax or the 10% early withdrawal penalty.

A

T

176
Q

T or F: COBRA (health continuation coverage) only affects employers with 20 or more employees. COBRA is based on the number of employees; not how many are participating in the plan.

A

T

177
Q

Cross testing requirement

A

The lesser of at least 1/3 of the allocation rate of the HCE with the highest allocation rate, or, 5% of the NHCE’s compensation.

178
Q

Which defined contribution plan cannot be cross tested?

A

ESOPs!!

179
Q

How are forfeitures applied in a DB type plan?

A

They MUST be applied to reduce employer contributions.

180
Q

The surviving spouse of a deceased insured worker, regardless of age, qualifies for Social Security payments, if caring for an entitled child of the deceased who is either ________ or _______.

A

Under age 16, or became disabled before age 22.

181
Q

Social Security benefits calculation. Read only.

A

Sue had already worked part time. Her PIA is $250. If your husband Sam’s PIA is $1000, then Sue’s spousal benefit is $500.

182
Q

What is provisional income?

A

Municipal bond interest is considered income for the purposes of determining the taxation of Social Security benefits.

Provisional income is AGI plus tax exempt interest, and 1/2 of Social Security income.

183
Q

Definition of compensation

A

Taxable compensation paid or accrued during the tax year.

Elective deferrals under section 401(k) in section 457.

Salary reduction contributions to section 125 cafeteria plans. FSA.

184
Q

Elliott, employee of smart ink is concerned because he has not received an annual addition to the smart profit-sharing plan for the past two years. He earns $100,000 per year, is 40 years old and married. What are your thoughts surrounding this situation?

A

He can make a deductible contribution of $6500 to an IRA, or $13,000 with a spousal IRA.

If smart ink does not make a contribution to a profit, sharing plan in a given year, Elliot is not considered to be an active participation, although he is still covered under the plan. This is true as long as there are no annual additions made to the employees account.

Annual additions are employee contributions, employer contributions, and forfeitures.

185
Q

When can a married couple make a spousal contribution to a deductible IRA?

A

If one spouse is actively participating in an employer-sponsored qualified plan, and the other spouse is not covered under an employer-sponsored qualified plan, the couple can make a deductible IRA contribution if they are under the “spousal IRA” phaseout on the provided tax tables.

186
Q

Is Roth IRA eligibility affected by the individuals participation in an employer sponsored retirement plan?

A

No. Don’t get this confused. Look at the tax sheet.

187
Q

T or F: a non-spouse beneficiary, who inherits a qualified plan, can convert it to a inherited Roth IRA. If the same non-spouse beneficiary inherits an IRA, they cannot converted to an inherited Roth IRA.

A

T. Read carefully.

188
Q

Ordering rules for Roth IRA’s

A

Contributions, conversions, earnings.

189
Q

What is the first step in figuring out the tax consequences (or lack there of) for Roth conversion distributions and Roth earnings distributions?

A

DOES IT MEET THE 5 YEAR HOLDING PERIOD?

190
Q

Employers who set up SEP plans

A

When employers make contributions for employees, they must be sent to a employees traditional IRA. The employee is responsible for the investment management of that SEP-IRA??

191
Q

What is the early distribution penalty for SIMPLE IRAs?

A

The normal 10% penalty for IRAs is increased to 25% in the first two years of participation in a SIMPLE. This is to discourage participants from spending their account.

192
Q

All Plans, All max contributions, all catch-ups:

A
193
Q

SIMPLE IRA vs. SIMPLE 401(k) compensation cap:

A

There is no compensation cap for SIMPLE IRAs, but the the $330,000 salary cap does exist for SIMPLE 401(k)s. This is because SIMPLE 401(k)s are qualified plans!!

Under a SIMPLE 401(k) using the max match (3%) formula, an employee under 50 earning $516,667 is eligible to receive an employer match of $15,500 plus another $15,500 employee deferral. $31,000 total.

Under a SIMPLE 401(k), the employee can defer up to $15,500 plus get 3% of up to $330,000 ($9,900) for a total of $25,400.

194
Q

Section 457 inclusion of income:

A

Distributions from an eligible governmental section 457 plan must include deferred compensation in gross income for the tax year in which such deferred compensation is paid.

Distributions from an eligible non-governmental tax exempt plan are required to include deferred compensation for the tax year in which such deferred compensation is paid, or otherwise made available. Substantial risk of forfeiture is removed.

195
Q

Section 457 RMD‘s and rollovers:

A

Only governmental for 57’s can be rolled into an IRA, Roth IRA, or a qualified plan.

Non-governmental 457’s can only be rolled over into another non-governmental 457.

196
Q

Withholding Social Security taxes (FICA) taxes under non-qualified plans

A

Amounts deferred under non-qualified plans are not subject to Social Security taxes until the year the employee has constructive receipt, or no longer has a substantial risk of forfeiture.

At that point, the deferred compensation is subject to withholding and Social Security taxes.

197
Q

Uni-401(k) vs. SEP

A

Uni-401(k) allows a deferral of $22,500 + Employer profit sharing contributions with a cap of $66,000 + a $7,500 catch-up if 50+. Generally permitted when only one participant or husband and wife.

SEP (and Keogh) allows for a $66,000 contribution max, but no catch-up.

198
Q

Plans that can be rolled over into IRAs or successor plans include:

A

All defined benefit, defined contribution, 403(b), and governmental 457 plans.

199
Q

Permissible rollovers:

Read only

A
  • A distribution from a qualified plan into another qualified plan or to an IRA.
  • A QDRO distribution to a spouse, former spouse, or alternate payee, may be rolled over to an IRA or to another qualified plan.
  • A distribution to a surviving beneficiary may be ruled to an IRA or a qualified plan.
  • A distribution from a 403B may be rolled over to a qualified plan or to an IRA.
  • A distribution from a simple IRA may be rolled over to an eligible retirement plan after two years of participation. Less than two years of participation can be rolled to another simple IRA.
  • After tax contributions can be rolled over from a qualified plan to a traditional IRA, or can be transferred in a direct trustee to trustee transfer to a defined contribution account.
  • Pretax contributions from an IRA may be rolled over from a traditional IRA into a qualified plan. If the qualified plan documents allow. After tax contributions from an IRA may not be rolled over into a qualified plan.
  • A distribution from a 457 governmental plan can be rolled over to a qualified plan or to an IRA.
  • hardship distributions from any retirement plan cannot be rolled into any other qualified plan.
200
Q

Conduit IRA

A

The conduit IRA holds the funds that have been distributed from the qualified plan for the subsequent transfer to a new or different qualified plan.

201
Q

What is an eligible designated beneficiary, and what are the five exceptions?

A

The secure act change the requirements for inherited IRAs, requiring that the entire balance of the participants account to be distributed within 10 years.

The five exceptions to the rule are called eligible designated beneficiaries:
1. Surviving spouse
2. Child who is less than 18 years of age
3. Disabled individual
4. A chronically ill individual
5. Any other individual who is no more than 10 years younger than the deceased IRA owner

Once a minor child beneficiary reaches the age of 18, the 10-year rule goes into effect.

A disabled individual is allowed to use their own life expectancy to calculate RMD’s .

202
Q

Is there in assumed investment return in a profit sharing plan?

A

No. It is assumed by the employee for DC plans.

203
Q

Deferral vs contribution (read only)

A

For participants age 50, the salary reduction catch-up contributions are not included in calculating employer deduction limits or contribution limits. If the question says deferral, it is $22,500 maximum. If it says contribution, then it includes the deferral and the catch-up ($30,000).

204
Q

What type of plan can have hardship withdrawals?

A

This only applies to 401(k) plans.

Loans may be available with other plans, but not hardship withdrawals.

The hardship withdrawal is subject to ordinary income tax and the 10% early withdrawal penalty.

205
Q

What happens if someone takes a 72T distribution rather than a full distribution at retirement to avoid phantom income when there is NUA involved?

A

The NUA would be lost. All the company funds must be distributed in one taxable year to qualify. Lump sum all in one year.

206
Q

Qualified plans for sole proprietorship, or partnerships:

A

Keogh plans

These cover business organizations that are not Inc. They are qualified plans with special contribution limits for owner employees.

For a 15% plan, the employee would get 15% contribution, but for the owner use the 12.12% shortcut.

For a 25% plan, the employee would get 25% contribution, before the owner use the 18.59% short cut.

207
Q

Under a 401(k) SIMPLE plan, what is the maximum the employer can contribute to the plan for 2023?

A

$330,000 x 3% equals $9900. The salary cap applies for 401(k) SIMPLE plans. It is still a 401(k) plan thus, it functions like a qualified plan.

Employee deferral is still $15,500.

208
Q

When should you suggest a defined benefit plan?

A

When an older controlling employee wants to maximize tax deferred retirement savings for their benefit, and when the company has a very stable, cash flow with excess profits.

209
Q

What is an elective deferral?

A

It is the amount deferred into a QP by the employer at the EMPLOYEES ELECTION. It is a salary deferral from the employee. It is not included in the 25% amount the employer is allowed to deduct.

210
Q

T or F: fiduciaries who do not follow certain standards of conduct may be personally liable to restore any losses to the plan, or to restore any profit made through improper use of plan assets.

A

T

211
Q

T or F: the ratio percentage test and the average benefits test both use the same %

A

T

70%!

212
Q

What plans DO NOT integrate with Social Security?

A

ESOP, SIMPLE, 401(k) SIMPLE

213
Q

Multiple Plan Rules: Deferrals vs Annual Additions

A

When considering multiple plans, an EMPLOYEE’s DEFERRALS are aggregate no matter what, but if there are multiple employers, ANNUAL ADDITIONS FROM THE EMPLOYER CAN be aggregate or separate!!

Employee deferrals: Must be aggregate
401(k) / 403(b) / SIMPLE / SARSEP: $22,500 + $7,500
SIMPLE and another SIMPLE: $15,500 + $3,500

Annual Additions from ER: CAN be aggregate or Separate.
- Aggregate for single employer, or 2+ related employers
- Separate for UNRELATED employer plans.

214
Q

T or F: You get one rollover from a Qualified Plan, and another rollover from an IRA within 12 months.

A

T

A 60-day distribution from a Qualified Plan DOES NOT disqualify an IRA from another 60-day distribution within one year. What the client CANT do is ANOTHER IRA distribution (60-day) until one year has passed. The client can however, do a direct trustee-to-trustee transfer within the same year. This is because there is no distribution or 60-day window initiated! Good!

215
Q

QDRO Rules:

A

If a QDRO orders a distribution of funds to a spouse or former spouse, it is not taxable income to the plan participant, and no 10% penalty applies.

If the order is distributed to a child or dependent, it is taxable to the plan participant, but no 10% penalty.

If the order is distributed to a random, it is taxable to the participant, and the 10% penalty could apply!

216
Q

What is the max contribution for a 457 plan?

A

$22,500 deferral +7500 catch-up is over 50 years old. The catch-up only pertains to governmental 457 plans.

For non-governmental 457 plans the contribution max is 22,500 deferral. 

217
Q

What would be the impact on a money purchase plan if:
1. A key employee retires, and is replaced by a clerical employee.
2. Increasing investment returns.
3. Forfeitures are not reallocated to remaining participants.
4. Salary levels for all employees increase.

A
  1. Company contributions would decrease.
  2. The amount of the employers contribution would not change.
  3. The employer contributions would decrease.
  4. Employer contributions would increase.
218
Q

Safe Harbor 401k vs SIMPLE

A

Safe harbor 401k is 1/1 match on first 3% and .50/1 on next 2 percent. Or a non elective contribution of 3%. Remember 3% for DC plan!!

SIMPLE is dollar for dollar matching up to 3% of employees compensation, or 2% nonelective contribution of compensation

219
Q

Roth conversions versus Roth earnings distributions

A

Roth conversions = 5 years or 59.5.

Roth earnings = five years and 59.5.

220
Q

T or F: Loans can be taken from other profit sharing plans, but hardship withdrawals can only be taken from 401k type plans

A

T

221
Q

What plans do QDROs apply to?

A

They only apply to Qualified plans, 403(b)s, and governmental 457s.

NOT IRAs!!!!! FIGURE IT OUT