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CFP Exam March 2023 > Retirement Planning > Flashcards

Retirement Planning Flashcards

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1
Q

What makes up social security tax of 7.56%?

A

7.65% = 6.2% Social Security + 1.45% Medicare

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2
Q

How is social security funded?

A

Through payroll taxes assessed on earned income up to $147,000 and 1.45% from the employee & employer is paid on UNLIMITED earned income

7.65% from Employees & 7.65% from Employers

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3
Q

Someone earns $10,000 in January, how many social security quarters of coverage (worker credits) did they earn for the year

A

4 quarters: there is no regard for when the income is earned, but there is 1 credit for each $1,510

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4
Q

How many credits does it take for retirement income benefits to be fully insured?

A

40 earned credits (10 years)

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5
Q

What is the earliest age you can claim your social security benefits?

A

62 and have 40 credits to be eligible

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6
Q

Disability definition for social security disability benefits

A

Disability so severe that a person cannot work any occupation and the condition is expected to last no less than 12 months or result in death

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7
Q

How long do you have to wait to start disability benefits?

A

5 month waiting period

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8
Q

Who is taken care of the best for survivor benefits for social security benefits when the worker has died?

A

Remaining children are taken care of the best

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9
Q

How many years of earnings are taken into account for social security average indexed monthly earnings (AIME)?

A

35 years (highest years of earnings)

*use AIME to calculate PIA

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10
Q

What determines one’s retirement benefit and full retirement age?

A

primary insurance amount (PIA)

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11
Q

Claiming your social security benefits 36 months early results in a ______ reduction

A

20% reduction

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12
Q

Claiming your social security benefits 24 months after the first 36 months early results in an additional _________ reduction

A

10% reduction

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13
Q

What is the maximum reduction in benefits for someone with the FRA of 67 and claims benefits at 62?

A

30% reduction

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14
Q

If someone has a FRA of 67 and they wait to claim social security benefits until 70 by what percentage would their benefit increase?

A

24% (8%/year)

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15
Q

People who claim social security benefits early AND have earned income can…

A

temporarily have their some of their benefits withheld

Prior to FRA: any income over $19,560 will be withheld $1 for every $2

Year of FRA: any income over $51,960 will be withheld $1 for every $3

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16
Q

Is there earned income limit after FRA?

A

NO, if they have attained their FRA

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17
Q

Claiming social security retirement benefits prior to FRA may have 2 consequences:

A
  1. Permanent reductions in monthly benefits
  2. Benefits withheld temporarily if the claimant has earned income above the applicable threshold
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18
Q

Which of the following are included in provisional income for the taxation of social security benefit?

A

50% of social security benefits for the year + tax-exempt income (muni bond interest) + AGI (ie: dividends, interest, earned income, taxable pension or annuity money)

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19
Q

For social security MFJ (combined income), if provisional income is less than $32,000 how much is taxed?

A

not subject for taxation, 0%

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20
Q

For social security MFJ (combined income), if provisional income is between $32,000 - $44,000 how much is taxed?

A

50% of social security benefits are subject to taxation

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21
Q

For social security MFJ (combined income), if provisional income is above $44,000 how much is taxed?

A

85% of social security benefits are subject to taxation

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22
Q

What’s the maximum percentage of one’s social security retirement benefits that may be subject to taxation?

A

85%

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23
Q

Do you pull tax-exempt income back into the provisional income calculation for social security retirement benefits?

A

YES

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24
Q

When can a current spouse claim social security benefits on their spouse’s social security record?

A

Only when the worker is receiving benefits!

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25
Q

When can a former spouse claim social security benefits on their ex-spouses social security record?

A

When they are age 62 and were married for at least 10 years

*divorced spouse cannot be remarried to claim social security benefits on their ex’s record

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26
Q

What is the maximum social security retirement benefit a spouse/ex-spouse can receive?

A

50% of the worker’s PIA

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27
Q

If a spouse has dual eligibility (their own record & their spouse’s) the spouse is required to file for…

A

BOTH benefits and will receive the HIGHER of the 2 amounts (not the combined total)

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28
Q

If the maximum family benefit has been exceeded can the workers own benefit be reduced?

A

Never, the others claiming the benefit are reduced (spouse, children, dependent parent)

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29
Q

When applying the maximum family benefit, is the former spouse’s benefit included in the math of determining the benefit?

A

NO, the former spouse benefits are not included in application of the maximum family benefit

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30
Q

What is not covered in Part A of Medicare?

A

-regular doctor visits or prescription drugs
-custodial care

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31
Q

What is covered in Medicare Part A?

A

-inpatient hospital stays
-care in skilled nursing facility
-hospice care
-some home health care

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32
Q

What is Medicare Part A?

A

Part A: Admittance (Hospital)

-Must be age 65 and older
-Paid into Medicare for at least 10 years
-No separate premium for part A

One hospitalization deductible for each episode

Costs beyond 180 days are paid by the individual

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33
Q

What is covered in Medicare part B?

A

-certain doctors’ services
-outpatient care
-medical supplies
-preventative services

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34
Q

What is Medicare Part B?

A

Part B: Be preventative/Before issues (Medical)

-part B is optional
-There is a premium for Part B that is, income related
-Annual deductible then Medicare pays for 80% of eligible charges and the individual pays 20%
-Restarts every year

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35
Q

What is Medicare Part C?

A

Part C: Care plans (Advantage)

-Medicare advantage plan is an alternative to Medicare

-One must be enrolled in A and B those to get it

-Designed to be a lower cost than what traditional Medicare and it uses network

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36
Q

Which part of Medicare covers prescription drugs?

A

Part D: Drugs (Prescriptions)

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37
Q

Which of the following forms of Medicare coverage utilizes a gatekeeper approach?

A

Medicare advantage

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38
Q

What is Income related monthly adjustment amount (IRMAA)?

A

Higher earners are going to have to pay additional premium for parts B and part D if they exceed the the the thresholds

Calculated by using Medicare specific MAGI = AGI + tax-exempt income

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39
Q

What is covered in Medicare part C?

A

-everything you get with original Medicare

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40
Q

Non-qualified deferred compensation is an executive level benefit sometimes referred to as

A

Golden handcuffs or golden parachute

ie: executive will stay for a defined term (10 years), if you leave employment prior the executive will not get the benefit

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41
Q

Non-qualified deferred compensation plans are referred to as

A

top hat plan, excess benefit plan, supplemental executive retirement plan (SERP)

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42
Q

For non-qualified deferred compensation there has to be a…

A

substantial risk of forfeiture or it ALL becomes taxable

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43
Q

What is an excess benefit plan

A

Excess plan benefit works around the qualified plan benefits, using higher compensation amount compared to the $305,000 allowed

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44
Q

What is a SERP?

A

is just a supplement

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45
Q

The goal of non-qualified deferred compensation is to AVOID…

A

constructive receipt, so $ is not currently taxable

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46
Q

What does informally funded mean?

A

It means funded using cash value life insurance

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47
Q

How do you provide some additional security for the executive WITHOUT triggering constructive receipt?

A

Rabbi trust: funds in the Rabbi trust are NOT available to the corporation for ANY other purpose

But the IRS considers there to be substantial risk of forfeiture because in the event of bankruptcy the creditors can get the $ in the Rabbi trust

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48
Q

If it is not a Rabbi trust, what kind of trust is it?

A

Secular trust

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49
Q

How many defined contribution plans are there?

A

6 DC plans

4 are profit sharing plans & 2 are DC pension plans

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50
Q

With defined contribution plan the final benefit…

A

is NOT guaranteed!

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51
Q

Defined contribution pension plans require…

A

mandatory employer contributions

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52
Q

Defined contribution plans favor…

A

Younger participants

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53
Q

In all defined benefit contribution plans there are what type of accounts…

A

individually managed accounts because the employee bears the investment risk

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54
Q

For the rule of 21 and 1 (must be 21 years old with 1 year of service), if it says the employee has been in the plan for 3 years, it means…

A

the employee has 4 years of service

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55
Q

What is the maximum compensation allowable in a qualified plan benefit formula…

A

$305,000

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56
Q

What is the maximum pension benefit…

A

$245,000

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57
Q

For defined contribution plans the maximum deductible for employer contributions is…

A

25% of covered payroll

*remember covered compensation limit is $305,000

58
Q

Defined contribution plans use what type of vesting?

A

Accelerated vesting: 3 year cliff or 2-6 year graded

59
Q

What is the annual additions limit for defined contribution plans?

A

$61,000

  1. employer contributions to the plan
  2. any employee elected deferrals
  3. reallocated forfeitures ($ left in the plan when someone terminates employment having not been 100% fully vested in the employer contributions)

*reallocated forfeitures can be distributed to the remaining participants

ie: What is the most an employer can put in or an employee can defer?

60
Q

What are the 4 DC plans?

A
  1. Traditional PSP
  2. Section 401k plan
  3. Stock bonus plan
  4. ESOP
61
Q

What are the 2 DC pension plans?

A
  1. Money Purchase Pension Plan
  2. Target Benefit Pension Plan
62
Q

What are the common features to all defined contribution plans?

A

-participant directed accounts & participant bears investment risk

-tends to favor younger participants

-no guaranteed final benefit amount

-combined EE/ER contributions subject to annual additions limit of $61,000

-maximum compensation considered in benefit formula $305,000

-vesting cliff must be at least as generous as 3 yer cliff OR 2-6 year graded

-maximum deductible employer contribution is 25% of covered payroll

-No PBGC insurance

63
Q

Why would an employer choose a traditional PSP?

A

-DC plan

-FLEXIBILITY in employer contributions

-flexible year to year employer contributions (no requirement to fund every year

-100% employer funded

-may invest 100% in employer stock! (ONLY THE TRAD PSP)

-yearly profit is NOT required for employer contributions

-contributions can be made from retained earnings or CF

-typically allows inservice hardship withdrawals/loans to participants

-age weighted traditional PSP can skew higher plan contributions to older participants

64
Q

Why would an employer choose a Section 401k plan?

A

-DC plan

-Cash or deferred arrangement (CODA) provision added to an underlying PSP

-participant can make annual elective deferrals up to the lesser of 100% of compensation OR $20,500

-Age 50+ can make additional catch up contributions of $6,500

*catch up contributions are NOT included in the annual additions limit

-Employer is NOT required to contribute annually but usually makes some type of match contribution

-plan often offer participant loans and hardship withdrawal

-as a PSP employer contribution can be 100% employer stock

-if employee participates in multiple 401k plans at different jobs the elective deferrals are aggregated in applying annual maximum

65
Q

Why would an employer choose a money purchase pension plan?

A

-DC pension plan

-Employer wants a plan that is easy for participants to understand with stated guaranteed contributions

-employer wants the employees to bear investment risk

-the census has younger participant

-MANDATORY annual employer contributions

-100% employer funded!

-may invest no MORE than 10% in employer stock

-typically NO inservice or hardship withdrawals until 62

66
Q

Why would an employer choose a target benefit plan?

A

-DC pension plan

-an actuary determines the needed funding level to hopefully reach the benefit target

-requires MANDATORY annual employer contributions

-100% employer funded

-a plan that can skew higher plan contributions to older participants

-actuary is used only in the INITIAL year, contributions are NOT adjusted each year

-final benefit amount is not guaranteed, it is a target!

-may invest in no more than 10% in employer stock

67
Q

What are the 2 defined benefit plans?

A
  1. Traditional DB Pension
  2. Cash balance Pension
68
Q

What are the common features of all defined benefit plans?

A

-only plans that GUARANTEE final benefit

-maximum annual pension $245,000

-maximum compensation considered in benefit formula $305,000

-the ONLY qualified plans insured by PBGC

-Must vest at least as generously as 5 year cliff or 3-7 year graded

-Cash balance plan may use only 3 year cliff!

-must have JT and survivor payout unless waived

-no participant directed accounts

-sponsor bears investment risk

-no predetermined maximum deductible employer contribution

-annual actuarial work required

-must satisfy 50/40 rule

69
Q

With defined benefit pension plans there are no…

A

participant directed accounts!

The funds are in a pension trust and plan trustees choose the investments and they tend to be more conservative as this plan has so many guarantees

EMPLOYER BEARS THE RISK!

70
Q

What is a fully insured defined benefit pension plan?

A

Funded entirely by cash value life insurance policies

71
Q

There is no 25% deductible employer contribution with defined benefit plans. The plan is known as…

A

WHATEVER IT TAKES FUNDING!

There is no pre-determined limit on what the employer can put into the plan

The plan has to be kept on time to pay the final benefit

72
Q

Defined benefit pension plans require what type of funding…

A

Mandatory annual contributions

73
Q

Defined benefit plans are heavy in…

A

Actuarial work every single year to make sure that the plan is on time and that the assets in the trust support the promised benefits

The actuarial work makes these plans very expensive to administer

74
Q

What is plan suitability for DB plans?

A

DB plans are a match when benefit guarantees are desired, PBGC insurance coverage is needed, or the stated goal is to skew benefits to older plan participants

75
Q

Only qualified plans are insured by PBGC…

A

only defined benefit plans are insured!

76
Q

Why would an employer choose a traditional defined benefit pension plan?

A

-traditional DB pension plan provides the highest level of guarantees for the participant but is the most expensive plan to administer

-this plan may be the correct answer choice if the sponsor has numerous older management and owners and the company has good financial standing and stable cash flows

-guarantees a monthly pension

-older, high-earning participants can have substantial funding on their behalf

-common pension formula is a a % of pay x the # of years of service

-NO individual accounts

-accruing benefit of any amount is active participation for IRA deduction purposes

-if the participant is married the pension MUST be JT and survivor unless spouse waives (notarized)

77
Q

Why would an employer choose a cash balance pension plan?

A

-DB pension plan that guarantees a specific cash balance at the plan’s stated normal retirement age

-a cash balance plan has a 3 year cliff!

-hypothetical participant accounts for record keeping (not participant directed)

-guaranteed benefit is a guaranteed cash balance at plans normal retirement age

-each year participant accrues a plan contribution based on a pay credit % of comp + interest rate credit

-provides uniform benefit accrual for all employees

-participant can convert guaranteed cash balance into lifetime pension

-considered easier for participants to understands than a traditional DB pension plan

78
Q

What does the cash balance pension plan guarantee?

A

Cash balance pension plan does not guarantee the final monthly pension (like a traditional defined benefit pension plan) but it does guarantee a specific cash balance in the person’s account at normal retirement age 65

79
Q

Typically, defined benefit pension plans use a 5 year cliff or 3-7 year graded vesting schedule, but the cash balance pension plan may use…

A

3 year cliff vesting!

80
Q

Which of the following plans must satisfy the 50/40 rule?

A

Defined benefit pension plan

50/40 rules means the plan has to benefit the lesser of 50 employees or 40% of those eligible

81
Q

The default payout for any defined benefit pension plan is…

A

joint & survivor

the participant can’t get the higher amount if they select individual unless the other spouse waives the benefit in writing and it is notarized

82
Q

What is a tax advantaged salary reduction retirement plan often used by 501c3 tax exempt organizations (hospitals & public schools)?

A

403b

83
Q

Self-employment tax calculation formula

A
  1. Multiply SE earnings by .9235
  2. Multiply step 1 answer by .153
    AKA self-employment tax rate 15.3%
    7.65+7.65=15.3
84
Q

What is the shortcut % when net earnings from self-employment are = to or < than the taxable social security wage base ($147,000)?

A

14.13%

.1413

85
Q

What is the maximum retirement plan contribution for self-employed?

A
  1. Subtract 50% of SE tax from net earnings
    *which is calculated by NE x .9235 & using that # to multiply by .153
  2. employer contribution rate usually (25%/1 + ER contribution rate
    ie: .25/(1+.25)= .20
    20%
  3. Multiply answer from step 1 and answer from step 2 to get the maximum contribution for retirement plan for SE individual
86
Q

If the plan contribution rate is 25% what is the % short cut to calculate the maximum retirement plan contribution for self-employed individual?

A

18.59%

87
Q

The adjustments to earnings and contribution rates do not…

A

apply for the employees of the self employed person!

The adjustments and contributions ONLY apply to the self employed person

88
Q

What are the key features of a 403b plan?

A

Special catch up with 15 years of service ($3,000)
*may be used in the same year as the 50+ catch up ($6,500)

89
Q

Are 403b deferrals aggregated with other plan deferrals in applying annual maximums?

A

YES

90
Q

What type of investments can participants use in their 403b?

A

Participants can only invest in mutual funds or annuities!

91
Q

What are the key features of a 457b plan?

A
  1. Special catch up is available for the last 3 years of service (at plan normal retirement age)
    $20,500 + $20,500 = $41,000
  2. You CANNOT use the age 50+ catch up ($6,500) AND the special catch up in the same year
  3. No active participant status (no aggregation)
92
Q

Is there a 10% penalty for withdrawal before 59.5 with 457b plans?

A

NO, there is no 10% penalty for early withdrawal!

93
Q

What plan has an easy set up, with minimal yearly admin costs, and is funded 100% by the employer?

A

SEP IRA

94
Q

How are withdrawals on SIMPLE IRAs taxed?

A

Withdrawals are permitted anytime, but there is a 10% early withdrawal penalty

Withdrawals within 2 years of enrollment are also subject to a penalty tax of 25% + the 10% penalty!

95
Q

Are account earnings included in the application of annual additions limit when determining IRA deduction rules?

A

NO

96
Q

Are account earnings included in the application of annual additions limit when determining IRA deduction rules?

A

NO

97
Q

Are participants in SEP, SIMPLE, 403b active participants for IRA deduction purposes?

A

Yes, if you participate in a SEP, SIMPLE, or 403b you are considered an active participant and may affect your ability to deduct your IRA contribution (depending on AGI)

98
Q

How many traditional rollovers are allowed in a year?

A

1

99
Q

What is a traditional rollover?

A

when the plan admin transfers account balance to the participant and within the next 60 days the participant must deposit the fund into another plan or IRA

100
Q

Traditional rollovers from a qualified plan requires…

A

Mandatory 20% withholding

101
Q

If the withheld amount is not replaced and deposited with the rollover…

A

The withholding amount is considered distributed and subject to income tax AND possible 10% penalty

102
Q

What is a direct transfer rollover?

A

Plan trustee transfer rollover directly to IRA or another plan

No mandatory withholding b/c participant never tool possession of the funds

103
Q

Who are eligible designated beneficiaries for inherited IRAs?

A

-surviving spouse
-minor child of decedent
-chronically ill person
-other beneficiaries not MORE than 10 years younger than decedent

104
Q

Who are non-eligible designated beneficiaries for inherited IRAs?

A

-non spouse bene
-see through trust
-successor bene

105
Q

Eligible designated beneficiaries of inherited IRAs can take distributions…

A

over their life, except when minor’s turn 18

106
Q

Non-eligible designated benes of inherited IRAs can take distributions…

A

Over 10 years!

107
Q

Who are non designated benes of inherited IRAs have to take distributions over 5 years?

A

-estate
-charities
-trust qualifying as designated bene

108
Q

Can surviving spouses rollover the deceased’s IRA into their own IRA?

A

Yes!

109
Q

With qualified plans you cannot receive an exception to an early withdrawal penalty if…

A
  1. You use funds for higher education
  2. Use funds to pay for health insurance premiums while unemployed
  3. Use funds for first time home purchase

*Please note that there is an exception for IRAs for using funds for qualified higher education expenses, to pay for health insurance premiums, and for $10,000 used to buy first home!

110
Q

If an employee separates from service during or after the year the employee reaches age 55 can they withdraw from their IRA without a penalty?

A

No, no exceptions for separation of service for IRAs

*Please note that there IS an exception for qualified plans!

111
Q

Are qualified plans and tax advantaged plans tax deductible to employer?

A

Yes

112
Q

Are qualified plans and tax advantaged plan benefits taxable to the employee?

A

No, benefits are not currently taxable to the employee

113
Q

What is the 83b election?

A

Executive elects to pay all the tax when it is granted, so when the stock price goes up in the future they don’t have to pay higher taxes on it later

When restricted stock vests it is taxable at FMV (taxed at ordinary income)!

114
Q

How do you calculate the basis of a NQSO?

A

the bargain element + exercise price

115
Q

With a NQSOs the bargain element is taxed as…

A

ordinary income

116
Q

How do you calculate the capital gain/loss for NQSOs?

A

Difference between FMV at sell price + what they recognized as ordinary income

117
Q

At the exercise of an ISO there is no…

A

recognized ordinary income

Like for NQSOs

118
Q

What is the penalty for failing to distribute RMD on an IRA or 401k?

A

50% penalty on undistributed amount

119
Q

Can you defer your RMD if you are still working?

A

No!

Please note that you CAN defer your RMD until actual retirement if the RMD is from your employer’s plan that you’re currently working for

120
Q

Can you defer your RMD until actual retirement age if you own greater than 5% owners of the employer/sponsor company?

A

NO

121
Q

How old do you have to be to make a QCD?

A

70.5

122
Q

Can a QCD be executed using a direct transfer rollover to an eligible charity?

A

YES

123
Q

Can a QCD be used to satisfy the RMD for the year of distribution if the tax payer is 72 or older?

A

YES

124
Q

What is the maximum annual exclusion for a QCD?

A

$100,000

125
Q

When MFJ the spouse can also have a QCD and exclude…

A

$100,000

combined QCD for couple can be $200,000

126
Q

What form is QCD reported on?

A

1040

Reported as an IRA distribution with a taxable amount of $0

127
Q

What is the benefit of using a QCD?

A

amount is not taxed as income and NOT INCLUDED in AGI

128
Q

If a qualified plan participant’s account hold employer stock, special tax-advantaged treatment is available in a qualifying lump-sum distribution known as…

A

net unrealized appreciation

129
Q

NUA must be executed as part of a qualified lump-sum distribution within…

A

1 year

130
Q

With NUA the employer contribution basis is taxed as…

A

ordinary income in the year of distribution

131
Q

NUA is taxed as…

A

LTCG when subsequently sold without regard to holding period

ie:
employer stock contribution of $100,000
*taxed at ordinary income at NUA election!

stock appreciates to $300,000
*this appreciation is taxed at LTCG

132
Q

Is there a step up in basis at death for NUA portion remaining?

A

NO!

133
Q

A judgment, decree, or order for a qualified retirement plan to pay child support, alimony, or marital property rights to an alternate payee (spouse, former spouse, child or other dependent of a participant)

A

Qualified domestic relations order (QDRO)

134
Q

What info must a QDRO contain?

A

-participant and each alternate payee’s name and last know mailing address

-the amount or percentage of the participant’s benefits to be paid to each alternate payee

135
Q

What can a former spouse do with the QDRO payments?

A

They can rollover the payout amount into their IRA or other qualified plan

OR

If the payment is NOT rolled over it may be subject to ordinary income tax and 10% penalty

136
Q

Is the QDRO payor subject to income tax or penalty?

A

NO

*but if the QDRO distribution is paid to a child or other dependent it IS taxed to the plan participant

137
Q

The term QDRO only applies to…

A

qualified plans NOT IRAs

138
Q

SIMPLE IRAs are available to employees who have earned at least $5,000 in each of the past…

A

2 years and are expected to earn $5,000 are eligible

139
Q

What are SEP eligibility rules?

A

-age 21
-worked for the sponsor 3/5 prior years
-minimum compensation $600/yr
-may exclude union members and non-resident aliens

140
Q

Are non-deferred compensation plans deductible to the employer?

A

NO!

non-deferred compensation plans and SERPs are not currently deductible to the employer

CFP Exam March 2023 (7 decks)

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