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CFP Flashcards > Retirement Planning > Flashcards

Retirement Planning Flashcards

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1
Q

Types of Defined Contribution Plans

A
  • Traditional Profit Sharing Plan
  • Section 401(k) Plan
  • Stock Bonus Plan
  • ESOP
  • Money Purchase Pension Plan
  • Target Benefit Pension Plan
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2
Q

All profit sharing plans are (DC/DB) plans

A

DC

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3
Q

Defined Contribution Plan Characteristics

A
  • Participant-directed accounts
  • Participant bears investment risk
  • No guaranteed final benefit amount
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4
Q

Defined Contribution Plan
Maximum Compensation Considered in Benefit Formula

A

$305,000

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5
Q

Defined Contribution Plan
Vesting

A

Must be at least as generous as 3-year cliff or 2-6 year graded

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6
Q

Defined Contribution Plan
Maximum Deductible Employer Contribution

A

25% of covered payroll

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7
Q

Defined Contribution Plan
Maximum Elective Deferral

A

$20,500

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8
Q

Defined Contribution Plan
Annual Additions Amount

A

$61,000

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9
Q

Vesting in a defined contribution plan starts on the date of:
- hire
- enrollment in the plan

A

hire

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10
Q

What’s included in the annual additions limit?

A
  • Employee deferrals
  • Employer contributions
  • Reallocated forfeitures
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11
Q

Defined contribution plans benefit (younger/older) participants

A

younger (more time to accumulate)

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12
Q

Defined contribution plans (do/do not) require mandatory employer contributions

A

do (not good for companies with uneven cash flow)

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13
Q

Traditional Profit Sharing Plan
Employer Contribution Requirements

A
  • flexible
  • no requirement for a contribution every year
  • contribution must be “substantial and recurring”; 3 out of last 5 years
  • 100% employer funded
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14
Q

Traditional profit sharing plans (do/do not) allow for hardship withdrawals and loans to participants

A

do

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15
Q

Traditional profit sharing plans may invest up to _____% in employer stock

A

100%

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16
Q

Traditional profit sharing plans (are/are not) subject to Qualified Joint and Survivor Annuity

A

are not

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17
Q

_____-________ traditional profit sharing plan can skew higher plan contributions to older participants

A

Age-weighted

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18
Q

Section 401(k) Plan
Participant Elective Deferrals

A

The lesser of:
- 100% of compensation
- $20,500

Ages 50+ can make additional catch-up contribution of $6,500/year

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19
Q

Section 401(k) Plan
Employer (is/is not) required to contribute annually

A

is not

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20
Q

Section 401(k) plans may invest in up to ___% company stock

A

100%

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21
Q

Participants in a Section 401(k) plan must be given at least ___ diversification alternatives

A

3

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22
Q

If an employee participates in multiple 401(k) plans at different jobs, the elective deferrals (are/are not) aggregated in applying the annual maximum

A

are

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23
Q

Employee contributions to a 401(k) plan are subject to (ACP/ADP) testing

A

ADP

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24
Q

Employer contributions to a 401(k) plan are subject to (ACP/ADP) testing

A

ACP

25
Q

Money Purchase Pension Plan
Employer Contributions

A
  • mandatory
  • 100% employer funded
  • determined as a percentage of the employee’s compensation
26
Q

A money purchase pension plan may invest up to ___% in company stock

A

10%

27
Q

A money purchase pension plan (is/is not) subject to Qualified Joint and Survivor Annuity

A

is

28
Q

A money purchase pension plan (does/does not) allow(s) in-service withdrawals

A

no; not until age 62

29
Q

Target Benefit Pension Plan
Employer Contributions

A
  • mandatory
  • 100% employer funded
  • actuary determines contributions based on participant age at plan entry
30
Q

A target benefit pension plan (can/cannot) skew higher plan contributions to older participants

A

can

31
Q

A target benefit pension plan uses an actuary (in the initial year/every year)

A

in the initial year

32
Q

In a target benefit pension plan, the final benefit amount (is/is not) guaranteed

A

is not; it is a “target”

33
Q

A target benefit pension plan may invest up to ___% in company stock

A

10%

34
Q

In a target benefit pension plan, contributions (are/are not) adjusted each year

A

are not

35
Q

Types of Defined Benefit Plans

A
  • Traditional Defined Benefit Pension
  • Cash Balance Pension Plan
36
Q

Defined Benefit Plan Characteristics

A
  • guarantee final benefit
  • only qualified plans insured by Pension Benefit and Guaranty Corporation
  • Must have joint and survivor payout unless waived
  • No participant-directed accounts
  • Sponsor bears investment risk
  • Annual actuarial work required
  • Must satisfy 50/40 rule
  • No predetermined maximum deductible employer contribution
37
Q

Defined Benefit Plan
Maximum Annual Pension

A

$245,000

38
Q

Defined Benefit Plan
Maximum Compensation Considered in Benefit Formula

A

$305,000

39
Q

Defined Benefit Plan
Vesting Schedule

A

Must be at least as generous as 5-year cliff or 3-7 year graded

*Cash balance plan may only use 3-year cliff

40
Q

Defined Benefit Plan
Suitabilty

A
  • benefit guarantees are desired
  • PBGC insurance coverage is needed
  • skew benefits to older participants
41
Q

Defined Benefit Plan
Funding Limits

A

“whatever it takes” to provide guaranteed benefits

42
Q

Traditional Defined Benefit Pension Plan

A
  • guarantees a monthly pension
  • older, higher earning participants can have substantial funding on their behalf
  • typically uses a formula based on number of years of service
  • no individual accounts
  • accruing a benefit of any amount is “active participation” for IRA deduction purposes
43
Q

Traditional Defined Benefit Pension Plan
Disadvantages

A
  • expensive
  • mandatory annual funding
44
Q

Cash Balance Pension Plan

A
  • guarantees a specific cash balance at the plan’s stated normal retirement age
  • “hypothetical” participant accounts for record-keeping; not participant-directed
  • each year, participant accrues a plan contribution based on a “pay credit” (percentage of compensation) plus an “interest rate credit”
  • provides uniform benefit accrual for all employees
  • participant can convert guaranteed cash balance into lifetime pension
  • considered easier for participants to understand than a traditional defined benefit pension plan
45
Q

Cash Balance Pension Plan
Vesting Schedule

A

Can only use 3-year cliff vesting, or better

46
Q

A tax-advantaged salary reduction retirement plan often used by Section 501(c)(3) tax-exempt organizations

A

403(b)/TSA

47
Q

Section 403(b) Plan
Employee Deferrals

A
  • Up to $20,500 per year
  • Ages 50+ catch up contribution of $6,500
48
Q

Section 403(b) Plan
Special Catch Up

A
  • Employees with a minimum of 15 years of service with sponsoring employer
  • Additional deferral of up to $3,000 per year
  • May be used in the same year as the 50+ catch up
49
Q

Section 403(b) Plan RMD Age

A

72

50
Q

Section 403(b) Plan
Early Withdrawal Penalty

A

10% if distributed prior to 59 1/2

51
Q

Section 403(b) Plan
Aggregation

A

Aggregated with other plan deferrals in applying annual maximums

52
Q

403(b) Plan Investment Options

A

Only mutual funds and annuities

53
Q

Tax-advantaged salary reduction retirement plan used by government and certain non-profit agencies

A

Section 457 Plan

54
Q

Section 457 Plan
Employee Deferrals

A
  • Up to $20,500 per year
  • Ages 50+ get a $6,500 catch up
55
Q

Section 457 Plan
Special Catch Up

A
  • Available for last three years of service (at normal plan retirement age)
  • Unused deferrals from past service
  • Up to twice the normal contribution limit ($41,000) per year
  • The age 50+ catch up may NOT be used in the same tax year as the special catch up
56
Q

Section 457 Plan RMD Age

A

72

57
Q

Section 457 Plan
Aggregation

A

Not aggregated with other salary deferrals in applying annual maximums

58
Q

Section 457 Plan
Active Participant Status

A

Not considered an “active participant” for IRA deduction purposes

CFP Flashcards (9 decks)

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