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Certified Financial Planning Exam Prep > Retirement Planning > Flashcards

Retirement Planning Flashcards

1
Q

How much compensation is covered for retirement contributions?

A

$265,000

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2
Q

How much is the defined benefit limit that can be received?

A

$210,000

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3
Q

How much is the defined contribution annual limit?

A

$53,000

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4
Q

How much is the employee deferral limit for 401(k), SARSEP, 457, and 403(b) plans?

A

$18,000

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5
Q

What is the income threshold to be considered a highly compensated employee?

A

$120,000

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6
Q

What is the income threshold to be considered a key employee?

A

$170,000

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7
Q

How much is the Social Security wage base?

A

$118,500

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8
Q

PENSION PLANS vs. PROFIT SHARING PLANS

Legal promise of the plan

A

Pension
Paying a pension at retirement

Profit-Sharing
Deferral of compensation and taxation

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9
Q

PENSION PLANS vs. PROFIT SHARING PLANS

Are inservice withdrawals permitted?

A

Pension Plans:
No (Under the Pension Protection Act of 2006, defined benefit plans can provide for in-service distributions to participants who are age 62 or older.

Profit-Sharing Plans:
Yes (after two years) if plan document permits

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10
Q

PENSION PLANS VS. PROFIT SHARING PLANS

Is the plan subject to mandatory funding standards?

A

Pension Plan:
Yes

Profit Sharing Plan:
No

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11
Q

PENSION PLANS VS. PROFIT SHARING PLANS

Percent of plan assets available to be invested in employer securities.

A

Pension Plans:
10%

Profit-Sharing Plans:
Up to 100%

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12
Q

PENSION PLANS vs. PROFIT SHARING PLANS

Must the plan provide qualified joint and survivor annuity and a qualified pre-survivor annuity?

A

Pension Plan:
Yes

Profit-Sharing Plans:
No

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13
Q

DEFINED BENEFIT vs. DEFINED CONTRIBUTION PLANS

What is the Annual Employer Contribution Limit?

A

Defined Benefit:
Not less than the unfunded current liability.

Defined Contribution:
25% of covered compensation.

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14
Q

DEFINED BENEFIT vs. DEFINED CONTRIBUTION PLANS

How are forfeitures allocated?

A

Defined Benefit Plans:
Reduce plan costs

Defined Contribution Plans:
Reduce plan costs or allocate to other participants

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15
Q

DEFINED BENEFIT vs. DEFINED CONTRIBUTION PLANS

Is the plan subject to Pension Benefit Guaranty Corporation coverage?

A

Defined Benefit Plans:
Yes (except professional firms with less than 25 employees).

Defined Contribution Plans:
No

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16
Q

DEFINED BENEFIT PLANS vs. DEFINED CONTRIBUTION PLANS

Can credit be given for prior service for the purpose of benefits?

A

Defined Benefit Plans:
Yes

Defined Contribution Plans:
No

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17
Q

How are payroll taxes treated regarding plan contributions?

A
  • Employers and employees are exempt from payroll taxes on contributions to a qualified retirement plan, providing up to a 15.3 percent (12.4 percent OASDI and 2.9 percent Medicare tax) savings on taxes for employer contributions into a qualified plan.
  • This payroll tax exclusion does not apply to employees elective deferrals to retirement plans such as 401(k), 403(b), SIMPLEs, and 457 plans.
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18
Q

What are the standard eligibility requirements for qualified plans?

A

An employee is considered eligible to participate in the plan after completing a period of service that extends beyond the later of either the employee’s attaining age 21 or the completion of one year of service (defined as a 12 month period in which the employee works at least 1,000 hours).

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19
Q

What is the standard exception to the special eligibility rules?

A
  • As an exception to the eligibility rule, a qualified retirement plan may require that an employee complete two years of service to be eligible for participation in the qualified retirement plan.
  • If the employer elects this special exception for its qualified retirement plan, then plan participants are immediately vested in their accrued benefit or account balance upon completion of two years service. This exception is not available to 401(k)s.
20
Q

Characteristics of highly compensated employees.

A

Owner Employees:
An owner of > 5% for current or prior plan year or Compensation in excess of $120,000 for 2015 for the plan year.

Non owner Employees:
Compensation in excess of $120,000 for 2015 for prior plan year.

21
Q

What is the Defined Benefit 50/40 Test?

A
  • The 50/40 coverage test require the defined benefit plan to benefit the lesser of 50 non excludable (eligible) employees or 40 percent of all non excludable (eligible) employees on each day of the plan year.

**To remember that it’s 50 employees or 40%, remember “people come first”.

22
Q

Characteristics of a Key Employee

A
  • A key (decision-makers as opposed to just highly paid) employee is any employee who is any one or ore of the following:
    • A greater than five percent owner, or
    • A greater than one percent owner with compensation in excess of $150,000 (not indexed), or
    • An offer with compensation in excess of $170,000 for 2015
23
Q

TOP HEAVY DEFINED BENEFIT PLAN

Definition

A

More than 60% of the total accrued benefits f the defined benefit plan are for the benefit of key employees.

24
Q

TOP HEAVY DEFINED BENEFIT PLAN

Funding

A

Must be at least 2% x years of service x compensation factor

25
Q

TOP HEAVY DEFINED BENEFIT PLAN

Vesting

A

The plan participant’s benefits must vest at least as rapidly as a 2 to 6 year graduated vesting schedule or a 3-year cliff vesting schedule.

26
Q

TOP HEAVY DEFINED CONTRIBUTION PLAN

Definition

A

More than 60% of the total account balance of the defined ontribution plan are for the benefit of key employees.

27
Q

TOP HEAVY DEFINED CONTRIBUTION PLAN

Funding

A

3% minimum to all eligible employees or less if less provided to the key employees.

28
Q

TOP HEAVY DEFINED CONTRIBUTION PLAN

Vesting

A

The plan participant’s benefits must vest at least as rapidly as a 2 to 6 year graduated vesting schedule or a 3-year cliff vesting schedule

29
Q

Defined benefit maximum plan limitations

A

Covered Compensation: $265,000 for 2015

Maximum Benefit:

Lesser of: $210,000 for 2015 or
Average of 3 highest consecutive years of compensation

30
Q

Defined contribution maximum plan limitations

A

Covered compensation: $265,000 for 2015

Maximum Benefit: Lesser of: 100% of compensation or
$53,000 for 2015 (not including catch-up
provision)

31
Q

What is the 25 Percent Test?

A
  • The 25% test consists of two tests, a 25% test and a 50% test. The test used depends upon the type of life insurance provided by the plan.
  • If a term insurance or universal life insurance policy is purchased within the qualified plan, the aggregate premiums paid for the life insurance policy cannot exceed 25% of the employer’s aggregate contributions to the participant’s account.
  • If a whole life insurance policy is purchased within a qualified plan, the aggregate premiums paid for the whole life insurance policy cannot exceed 50% of the employer’s aggregate contributions to the participant’s account.
32
Q

Characteristics of the Pension Benefit Guaranty Corporation (PBGC Insurance)

A
  • The plan sponsors of defined benefit pension plans pay premiums for insurance coverage designed to pay the “promised pension” in the event the plan is underfunded or unfunded.
  • The PBGC pays only a limited retirement benefit ($5,011 per month or $60,136 per year (2015) in the event of a plan completely or partially terminating with an unfunded or underfunded liability.
  • The PBGC does NOT insure defined contribution plans or profit sharing plans, AND it does not insure defined benefit plans of professional service corporations with 25 or fewer participants.
  • The PBCG doe insure all other defined benefit plans and covered plans are required to pay a flat-rate, per participant premium.
33
Q

CHARACTERISTICS OF DEFINED BENEFIT PENSION PLANS

  • Actuary (Annually)
  • Investment Risk Borne by
  • Treatment of Forfeitures
  • PBGC Insurance
  • Credit for Prior Service
  • Social Security Integration
  • Separate Investment Accounts
  • Favors Younger/Older
A
  • Actuary (Annually) Yes
  • Investment Risk Borne by Employer
  • Treatment of Forfeitures Must Reduce Plan Costs
  • PBGC Insurance Yes
  • Credit for Prior Service Yes
  • Social Security Integration Offset or Excess
  • Separate Investment Accounts No - Commingled
34
Q

Characteristics of Defined Contribution Pension Plans

  • Actuary (Annually)
  • Investment Risk Borne by
  • Treatment of Forfeitures
  • PBGC Insurance
  • Credit for Prior Service
  • Social Security Integration
  • Separate Investment Accounts
  • Favors Younger/Older
A
  • Actuary (Annually) No
  • Invest Risk Borne by Employee
  • Treatment of Forfeitures Reduce Plan Costs or Allocate
  • PBGC Insurance No
  • Credit for Prior Service No
  • Social Security Integration Excess Only
  • Separate Investment Accounts Yes - Separate (Unusually)
  • Favors Younger/Older Younger
35
Q

What is the legal promise of a pension plan?

A

Paying a pension at retirement.

36
Q

Is a pension plan subject to mandatory funding standards?

37
Q

What percentage of pension plan assets is allowed to be invested in employer securities?

A

10 percent

38
Q

For pension plans, what is the employer annual contribution limit of covered compensation?

A

25 percent (The plan must meet minimum funding standards. Defined benefit pension plans may exceed 25%.)

39
Q

What is the legal promise of a profit sharing plan?

A

Deferral of compensation and thus tax deferral

40
Q

Are in-service withdrawals permitted in profit-sharing plans?

A

Yes (after two years)

41
Q

Is a profit-sharing plan subject to mandatory funding standards?

42
Q

What percent of profit sharing plan assets are allowed to be invested in employer securities?

43
Q

For profit-sharing plans, what is the employer annual contribution limit of covered compensation?

A

25 percent

44
Q

What are the entities that may establish a 401(k) plan?

A 
Corporations
Partnerships
LLCs
Proprietorships
Tax-exempt entities
45
Q

What is the income limit phase outs for Roth IRAs?

A

Married Filing Jointly - $183k - 193k MAGI
Single - $116k - 131k MAGI
Married Filing Sep - $ 10k

46
Q

What are the qualified distribution requirements for Roth IRAs?

A
  • Held for at least 5 years.
  • For first-time home purchase
  • Death
  • Disability
  • On or after attainment of age 59 1/2
47
Q

What are the specific non qualified ordering rules for distributions of a Roth IRA?

A

Contributions first
Conversions second
Earnings third

Certified Financial Planning Exam Prep (9 decks)

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