Retirement Planning Flashcards
Post SECURE Act (2020) Distribution within…
By the end of the tenth year if non-eligible designated beneficiary
Eligible designated beneficiaries…
A disabled or chronically ill individual, a minor child age < 10, Spouse, beneficiary no more than 10 years younger than decedent
Stretch IRA Concept
Younger beneficiary has more account growth over time
Pre SECURE Act (2020) Distribution within…
5-Year Anniversary of Decedent
RMD calculation
Account Balance 12/31 previous year, age of current year, see life-expectancy table
QLAC, Purpose, Limit
Qualified Longevity Annuity Contract
Defer some RMD to age 85, purchase annuity for later in life that cannot be outlived
Lesser of 25% of plan funds or $145,000
Penalty for not taking RMD by the correct time
50%
Deadline for RMD
12/31 for Account Balance, distributed by Apr 1
10% Penalty for Pre-Retirement Withdrawal waived if…
Hardship, Death, Disability, 59 1/2
Adjusted basis means…
Mixed pre-tax and post-tax contributions, use exclusion ratio (post tax/total account)
Pre-Tax Accounts are taxed at…
Ordinary Income + 10% penalty (if not age 59.5)
Hardship Examples
Medical, Principal Residence, Foreclosure, Educational Expenses for self, spouse or immediate family, eviction prevention
Superannuation
outliving your funds
Assume a participant has a $31,000 basis (post tax) and her age is 55. From the relevant IRS table, the annuity period is 28.5 years (310 months)
Therefore, the participant may exclude from income $100 of each of 310 monthly payments received from the plan.
Qualified Plans with an Annuity Benefit Option
Defined Benefit Plans, Cash Balance Plans, Money Purchase Plans, and Target Benefit Plans generally offer an annuity as either the default form of benefit or an optional form of benefit.
Qualified Plans without an Annuity Benefit Option
Profit-Sharing Plans, 401(k) Plans, Stock Bonus Plans, and Employee Stock Ownership Plans generally offer a lump-sum distribution or another form of benefit instead of an annuity.
QPSA
Qualified Pre-Retirement Survivor Annuity
lifetime annuity for the benefit of the surviving spouse and must be purchased with at least 50%, but as much as 100%, of the deceased participant’s account balance
QRJSA
Qualified Retirement Joint and Survivor Annuity
A surviving spouse as sole beneficiary…
Take distributions as the beneficiary of the participant’s qualified plan account based upon the surviving spouse’s remaining lifetime measured in the year of participant’s death
Take distributions as an owner – begin required minimum distributions no later than April 1 of the year following the surviving spouse’s attainment of age 72 (rollover to IRA) (5 Year Rule if No Rollover)
-No other beneficiary has the choice of rolling the participant’s qualified plan account into an IRA and treating it as his or her own IRA
Minors of participant and critically ill or disabled individuals (eligible designated beneficiaries)
NO ROLLOVERS ALLOWED
Except for minors, these individuals may take required minimum distributions for as long as their own remaining life expectancy measured in the year of the participant’s death
100% of the remaining qualified plan account balance must be distributed no later than the end of the tenth year following the year the minor reaches the age of majority
The “Five-Year Rule”
The five-year rule applies if there are no designated beneficiaries at the death of the participant before his or her required beginning date
The plan administrator may permit an involuntary cash-out of a participant’s vested account balance or accrued benefit in the amount of…
$1,000 or less
What Is Substantially Equal Periodic Payment (SEPP)?
A SEPP plan is best suited to those who need a steady stream of pre-retirement income, perhaps to compensate for a career that ended sooner than anticipated
Income tax must still be paid on the withdrawals.
The amount you withdraw every year is determined by formulas set out by the IRS.
What Is a Qualified Domestic Relations Order (QDRO)?
A QDRO is only valid for retirement plans covered by the Employee Retirement Income Security Act (ERISA). (Not IRAs)
A QDRO recognizes that a spouse, former spouse, child, or other dependent is entitled to receive some of the account owner’s retirement plan assets.
Avoids 10% Early-Withdrawal Penalty (if appropriate)
What Is Net Unrealized Appreciation?
Net unrealized appreciation (NUA) is the difference between the original cost basis and current market value of shares of employer stock.
The IRS offers a provision that allows for a more favorable capital gains tax rate on the NUA of employer stock upon distribution, after certain qualifying events.
The downside is that ordinary income tax must be paid immediately on the cost basis of the shares of employer stock.
457(b) Plan
Non qualified; Government (Public), Tax Exempt Entities (Private)
*Not integrated with other salary deferral plans, can max out one of those PLUS 457(b)
Loans permitted on public 457(b), but not private
A Public 457(b) Plan participant is NOT subject to a 10% penalty for withdrawals prior to age 59½ when the participant retires, or upon termination of employment. All withdrawals are taxable as ordinary income
403(b) Plan
Non qualified; Public Schools, co-op hospitals, nonprofit, tax-exempt, ministers
Nonqualified deferred compensation plan is..
an employer-sponsored retirement, savings or deferred compensation plan for certain employees that does not meet the tax and ERISA requirements for qualified plans
*For those who do not receive an adequate wage replacement ratio (WRR) from qualified plan caps (305k, 245k)
Nonqualified Executive Benefit Plan (NQEBP)
is an employer retirement, savings or salary deferral arrangement for key executives that does not meet the tax and ERISA requirements for qualified plans
TYPES OF NONQUALIFIED EXECUTIVE BENEFIT PLANS
Salary Reduction Plans
Death Benefit Only Plans
Excess Benefit and Excess Contribution Plans
Supplemental Executive Retirement Plans (SERPs)
Death Benefit Only Plans (DBO)
Death benefits are taxed as ordinary income, Death benefit not included in decedent’s estate, The sponsor’s tax deduction for the plan is deferred
Section 162 Executive Bonus Plan
insurance policy (life or disability) paid by employer on key employee
Supplemental Executive Retirement Plans (SERPs)
is another form of a deferred compensation plan for key executives
SERPs are often used to recruit and retain key executive talent
ABC Corp. is anxious to hire John as the new CFO. He is offered a SERP that provides an annual retirement benefit of $500,000 to be offset by his retirement income from other sources. At retirement, John receives $200,000 from other sources. As his total retirement income will be $500,000, the remaining $300,000 will come from the SERP.
Constructive Receipt Doctine (ELI5)
Imagine you have a birthday party and your friends gave you presents, but you didn’t open them yet, so you didn’t really receive them yet. But your friends already gave them to you, so it’s like you already got them. That’s how constructive receipt doctrine works in taxes.
We can generally avoid constructive receipt if the funds are subject to a “substantial risk of forfeiture.” A substantial risk of forfeiture exists if the employee’s rights are contingent on continued service with the employer until retirement
Economic benefit doctrine (ELI5)
It’s like if your parents give you an allowance, and they put it in a piggy bank for you. Even though you haven’t taken the money out of the piggy bank yet, you can use it to buy things you want. So it’s like you already have the money. That’s how the economic benefit doctrine works in taxes.
Which of the following is/are true concerning nonqualified deferred-compensation plans?
They can provide for deferral of taxation until the benefit is received
They CAN NOT provide for fully secured benefit promises
They CAN NOT give an employer an immediate tax deduction and an employee a deferral of tax
cafeteria plan
the plan allows participants to choose from an available menu of benefits
Voluntary Employee Benefit Association (VEBA)
a multi-employer welfare benefit trust that is used for funding employee benefits with favorable income tax results
must include at least 10 separate sponsors
The level of annual contributions to a VEBA in order to fund benefits is determined actuarially
Group Term Life Insurance Plan
the cost of the first $50,000 of life insurance is income tax-free to the employee.
At least 70% of all employees must be covered
No more than 15% of the participation is by key employees
The coverage is part of a cafeteria plan
Health Reimbursement Arrangement (HRA)
a type of employer-sponsored health care plan that reimburses employees for out-of-pocket qualified medical expenses
Employees may not defer compensation into an HRA; only the employer may contribute,
Employer contributions are excluded from the employee’s total gross income,
The employer determines the plan terms and conditions, such as maximum amount of out-of-pocket medical expenses that will be reimbursed per year, and
There is no custodian or trustee; the employer administers the HRA
Group Long-Term Disability Insurance Plans
Elimination Period (6-12 Months)
Benefits may be taxable to employee / excludable from income / deductible for the employer
If employee pays 100% premiums, the benefits are tax-free
If employer pays 100%, benefits are taxable to employee
If split, it’s a ratio
Group Long-Term Disability Insurance Plans
Elimination Period (6-12 Months)
Benefits may be taxable to employee / excludable from income / deductible for the employer
If employee pays 100% premiums, the benefits are tax-free
If employer pays 100%, benefits are taxable to employee
If split, it’s a ratio
Unemployment benefits
The typical initial benefit term is 26 weeks
The maximum and minimum amount of weekly unemployment benefits vary by state but are related to the worker’s previous earnings
Benefits are generally includable in the individual’s taxable income
FILE FOR UNEMPLOYMENT FIRST THING
DEPENDENT CARE ASSISTANCE PLANS (DCAPS)
Payments from the employer are deductible as employee compensation and are generally non-taxable to the employee.
Services must be solely for dependent care
the dependent care plan can be funded using employee salary reductions under a Flexible Spending Account (FSA)
Employees can exclude up to $5,000 (2022, not indexed)
Education Assistance Plan
pays or reimburses employees for expenses incurred in educational programs that are intended to improve job-related skills
Education assistance may not be provided as part of a cafeteria plan
Benefits are deductible by the employer ($5,250 per year)
must not discriminate in favor of HCEs
no more than 5% of the total amount paid annually by the employer under the plan may be provided for employees who are shareholders or owners of at least 5% of the business
Adoption Assistance Plan
pays for or reimburses employees for qualified adoption expenses incurred in connection with the adoption of a child
YR 2022 AMOUNT $14,890
PHASEOUT RANGE $223,410 - $263,410
An eligible child must be:
Under age 18, or
Physically or mentally incapable of caring for himself or herself
Qualified adoption expenses include:
Reasonable and necessary adoption fees
Court costs
Attorney fees
Traveling expenses while away from home
Other expenses directly related to the legal adoption of a child
Nonqualified Stock Options (NSOs)
“non-qualified” because they offer limited tax benefits. They are essentially a form of deferred compensation
The price paid by the executive for the shares plus ordinary income recognized becomes the cost basis.
Capital gains treatment is available if the stock is held for the requisite period and sold at a gain over the cost basis (otherwise it is ordinary income)
Incentive Stock Options (ISOs)
No more than $100,000 of ISOs can vest per person per year; any amount beyond $100,000 becomes non-qualified
The term of the option may not exceed 10 years and the employer’s Board of Directors must authorize the ISO
ISOs have tax benefits that include the deferral of gain at exercise date and the conversion of ordinary income into capital gains
To receive their special tax treatment (Long Term Capital Gains), the shares may not be disposed of within two years of the date of grant or one year after the option is exercised
Stock Appreciation Rights (SARs)
A SAR gives an employee the right to be paid additional compensation equal to the appreciation in the employer’s stock. Be aware that no stock actually changes hands
Employee Stock Purchase Plans (ESPPs)
are non-qualified, employer-sponsored benefit plans designed to provide the advantages of restricted stock plans to all employees
Employees pay no taxes until the stock is sold at a gain
Sold <2 years, ordinary income, if longer, capital gains (long-term)
Fringe Benefit
any compensation or other benefit received by an employee that is not in the form of cash
Golden Parachute Plans
parachute payments, are payable in the event of an actual takeover or merger resulting in the executive’s loss of employment
Parachute payments are generally deductible by the employer and taxed as compensation income to the executive without penalty
An excess parachute payment occurs whenever a parachute payment exceeds three times an executive’s average annual compensation over the preceding five years (How much tax paid by executive?)
20% excise tax paid by the executive
FICA
6.2% up to $147,000 (OASDI) - DOUBLE if Self-Employed
1.45% Medicare – DOUBLE if Self-Employed
0.9% Additional Medicare (Above 200/250)
3.8% Net Investment Income Medicare
Social Security “Full Retirement Age”
67, Early is 62; Special treatment if pushed to age 70
SSI Funding
US Treasury Dept, NOT FICA
Social Security Disability
Unable to perform “substantial work” for at least one year, monthly benefit for 2022 is $1350 (more if blind)
Medicare (Part B) funding source
Premiums
Medicare (Part A) funding source
1.65% FICA
PIA
Primary Insurance Amount;
the retirement benefit that the worker would receive if the worker retires at full retirement age
AIME
Average Indexed Monthly Earnings
Calculated during the 35 years in which the applicant earned the most
Reduction of PIA for Early Retirement
5/9 of 1% for the first 36 months, 5/12 of 1% for each month additional
May begin at age 62, even though full benefits would be age 67
Reasons to delay Social Security
increased benefit; but should consider what COLA (cost of living adjustments) are made
Who is entitled to Medicare
Anyone 65 & older, disabled/ permanent kidney failure at any age
Individuals 65 & older and receiving Social Security are automatically qualified
Individuals receiving disability benefits for at least two years also automatically qualify
Parts of Traditional Medicare
A - Hospital Insurance, Hospice, Nursing Home
B - Physicians (optional) must pay premiums
-optional- Part D - Prescription Drug Coverage
Parts of Medicare Advantage
C - Hospital, Hospice, Nursing Home, Physicians
-optional- Part D- Prescription Drug Coverage
*must also be enrolled in Medicare A&B
Part A Timeline (Hospital)
Hospital - 150 Days Maximum
1-60 is a ‘benefit period deductible’ of $1556
61-90 is per diem coinsurance of $389
91-150 is ‘lifetime reserve’ coinsurance of $778 per day & loss of lifetime reserve days (must be kept up with)
Part A Timeline (Skilled Nursing)
Skilled Nursing- 100 Days Maximum
1-20 $0 coinsurance
21-100 $194.50 coinsurance per day
Medicare Enrollment Period
Initial: 3 months before, the month of, or 3 months after your 65th birthday (7 months)
Open Enrollment: Oct 15 - Dec 7 annually
Jan 1 - March 31 (later = higher premiums, coverage begins July 1)
Medigap
Policies that provide gap coverage until Medicare coverage begins; also can provide coverage in gaps associated with copays and deductibles
SSI (Supplemental Security Income)
assures monthly income for needy elderly, disabled or blind persons; financed by general tax revenues (Treasury)
Windfall Elimination Provision (WEP)
Special rule to prevent overpaying of SS benefits to those who did not pay into the system (pension that did not have OASI taxes)
Government Pension Offset (GPO)
Reduction of benefits based on another pension received
Medicaid
Overview: provides health-related services for impoverished Americans
Benefits: Hospital, Physician, Transportation, other optional are prescription, dental
Funding Source: Jointly funded by state and federal governments
Eligibility: varies from state to state; low-income and (65+, blind, permanent disability, pregnant, child or caretaker of a child)
* Note that a look-back period of 5 years (60 mo) will occur to make sure there has been no significant transfer of assets
Special Needs Trust
provides benefits to persons on beneficiaries with special needs;
Not considered for purposes of Medicaid eligibility (exempt asset)
Structured to provide benefits that other governmental assistance will NOT provide (medical treatment, therapy, education, travel)
Spousal Benefit
The spouse can receive a maximum of 50% of the worker’s PIA at the spouse’s NRA and will receive less if spousal benefits are taken before NRA
Eligible Child
The spouse of the worker is entitled to spousal benefits at any age if caring for an eligible child (Unmarried, and Under age 16, or
Any age, if disabled before age 22)
Early Retirement (Social Security)
permanently reduced benefit
Disability Insured Criteria (Social Security)
Currently Insured: You must have earned from 6 to 20 credits in recent employment; the exact requirements vary by age.
The IRS refers to this test as the “Recent Work” test.
Fully Insured: You must have earned a minimum of 6 to 40 credits during your working career; the exact requirements vary by age.
The IRS refers to this test as the “Duration of Work’” test.
Social Security Disability Waiting Period
5 Months
Social Security Survivor Benefits
Survivor benefits can be paid to the dependents of a deceased worker who is either fully insured or currently insured (value equivalent to roughly 350,000 in private life insurance)
