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CFP > Retirement Planning > Flashcards

Retirement Planning Flashcards

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1
Q

Basic Concepts of Social Security

A

Coverage - Nearly every worker is covered under OASDI. Employment catagories by social security include:

A Federal employees who have been continuosly employeed since before 1984.

B Some Americans working abroad

C Student nurses and students working for a college or college club

D Railroad employees

E A child, under age 18, who is employed by a parent in an unicorporated business.

F Ministers, members of religious orders and Christian Science practioners if they claim an exemption

G Members of tribal councils

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2
Q

Social Security

(reduction of benefits)

A
  • Age 62 - FRA (full retirement age): benefits reduced $1 for every $2 earned over $17,040 (2018 threshold)
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3
Q

Social Security

(taxation)

A
  • Must include muni bond income to calculate MAGI
  • If income (MAGI) plus 1/2 of social security benefits is:
  1. Above 25k for a single taxpayer, then 50% of the total social security is included in income.
  2. Above 44k for maried filing jointly, then 85% of the total social security is included in income.
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4
Q

Types of Qualified Plans / ERISA

(vesting/admin costs / exempt form creditors / integrate iwth Social Security)

A
  • Defined Benefit
  • Cash Balance
  • Money Purchase
  • Target benefit
  • Profit Sharing
  • Profit Sharing 401 (k)
  • Stock Bonus
  • ESOP (NOT integrated with social security or corss tested)
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5
Q

Type of Retirement Plans

(no vesting / limited admin costs)

A
  • SEP
  • SIMPLE
  • SAR-SEP
  • Thrift or savings plans
  • 403(b)
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6
Q

Defined Benefit - qualified plan

A
  • Favors older employee/owner (50+)
  • Certain retirement benefit; Max $220k (2018) Meet a specific retirement objective
  • Company must have very stable cash flow
  • Past service credits allowed
  • Forfeitures MUST be applied to redce employer contributions
  • PBGC insured (along with Cash Balance plan)
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7
Q

Money Purchase - qualified plan

A
  • Up to 25% employer deduction
  • Fixed contributions - need stable cash flow
  • Maximum annual contribution lesser of 100% of salary or $55k (2018)
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8
Q

Target Benefit - qualified plan

A
  • Up to 25% employer deduction
  • Fixed contributions - need stable cash flow
  • Maximum annual contributions lesser of 100% of salary or $55k (2018)
  • Favors older workers
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9
Q

Profit Sharing - qualified plan

A
  • Up to 25% employer deduction
  • Flexible contributions (must be recurring and substantial)
  • Maximum annual contributions lesser of 100% of salary or $55k (2018)
  • Can have 401(k) provisions
  • SIMPLE 401(k) exempt from creditors
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10
Q

Section 401(k) Plan

A
  • Qualified profit sharing or stock bonus plan that allows plan participant to defer salary into the plan.
  • Max $18,500 (2018) deferral for participants under 50 (subject to FICA)
  • Additional $6,000 catch-up for age 50 and over (2018)
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11
Q

Section 415 annual additions limit

A
  • Lesser of 100% of compensation or $55k (2018)
  • Includes employer contributions, employee salary reductions, and plan forfeitures
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12
Q

Safe Harbor

Nondiscrimination

A

A safe harbor 401(k) plan automatically satisfies the nondiscrimination tests involving highly compensated employees {HCEs} with either an employer matching contribution or a nonelective contribution.

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13
Q

Safe Harbor

Match / Vesting

A

The statuary contribution using a match is $1/$1 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 employee’s compensation regardless of whether the employee is deferring or not.

Employer contributions must be immediately vested.

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14
Q

Stock Bonus / ESOP - qualified plan

A
  • Up to 25% employer deduction
  • Flexible contributions
  • Maximum annual contributions lesser of 100% of salary or $55k (2018)
  • 100% of contribution can be invested in company stock
  • ESOP cannot be integrated with Social Security or cross-tested
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15
Q

Net Unrealized Appreciation

(NUA)

A

NUA Example

Stock is contributed to the retirement plan with a basis of $20,000. Stock is distrubed at retirement with a market value of $200,000. The NUA, $180,000 is not taxable until the employee sells the stock, but the $20,000 (the basis) is taxable now as ordinary income.

The $180,000 is always LTCG. If the client sells the stock for $230,000, the $30,000 of extra gain is either STCG or LTCG depending on the holding period after distributed at retirement.

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16
Q

Keogh Contribution

A
  • Only for sole propreitor and partnerships

Self-employment tax must be computed and a deduction of one-half of the self-employment tax must be taken before determining the Keogh deduction. Shortcut below takes into account self-employment taxes:

  • If contribution 15% - multiply by 12.12% of net earnings
  • If contribution 25% - multiply by 18.59% of net earnings
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17
Q

Simple Plan

A
  • Fewer than 100 employees
  • Employer cannot maintain any other plan
  • Participants fully vested
  • East to administer and funded by employee salary reductions and an employer match
18
Q

SEP

(Simplified employee pension)

A
  • NO salary deferrals - employer contributions only
  • Up to 25% conrtibution for owner (W-2)/treated like Keogh contributions for self-employed
  • Maximum of $55K (2018)
  • Account immediately vested
  • Can be integrated with social security
  • Special eligibility: 21+ years old, paid at least $600 (2018), and worked 3 of the 5 prior years
19
Q

Tax-deferred annuity (TDA)/Tax sheltered

annuity (TSA)/403(b)

A
  • for 501(c)(3) organizations and public schools
  • Subject to ERISA only if employer contributes
  • Salary reduction limit up to $18,500 (2018) (plus $6,000 catch-up if 50 or over)
20
Q

IRA Keys (SIMPLE, SEP,

SARSEP)

A
  • No loans
  • No life insurance
  • Immediate vesting
  • May not be creditor protected(state specific)
  • 59 1/2 not 55 for no 10% penalty
  • Must take RMDs at 70 1/2 (even if not an owner)
21
Q

Age and service rules -

qualified plans

A
  • Max age and service are age 21 and one year of service (21 - and - one - rule)
  • Special provision allows up to 2-year service requirement, BUT then employee is immediately vested (2-year/100%)
  • Year of service is 1,000 hours (includes vacations, holidays and illness time)
22
Q

Highly Compensated (HC)

Employee

A
  • A greater than 5% - owner, or
  • An employee earnings in excess of $120,000 during the preceding year (2017)
23
Q

Key Employee

A

An individual is a key employee if at any time during the current year he/she has been one of the following:

  • A greater-than-5% owner, or
  • An officer and compensation > $175,000 (2018), or
  • Greater than 1% ownership and compensation > $150,000 (2018)
24
Q

Vesting - Fast / Slow

A

Fast: DB Top-heavy Plans / All DC Plans

  • 3-year cliff or 2-6 year graded or 100% vested after 2 years

Slow: Non-top-heavy DB plans only

  • 5-year cliff or 3-7 year graded or 100% vested after 2 years
25
Q

Defined Conrtibution Plans

(Integration with social security)

A

Base % + Permitted Disp[arity = Excess%

  • Base % - DC Plan contribution for compensation below integration level
  • Permitted Disparity - Lesser of base % or 5.7%
  • Excess % - DC Plan contribution for compensation above integration level
26
Q

Defined Benefit Plans

(Integrated with social security)

A

Base % + Permitted Disparity = Excess %

  • Base % - DB Plan contribution for compensation below integration level
  • Permitted Disparity - Lesser of base % or 26.25%
  • Excess % - DB Plan contribution for compensation above integration level
27
Q

Multiple Plans 2018

Elective Deferrals

A

Elective deferrals - more than one employer (2018)

Elective deferrals to multiple plans are always aggregated.

2018

401(k)/403$18,500 plus catch up ($6k)

SIMPLE and other SIMPLE__$12,500 plus catch up ($6k)

457 plans are not part of aggregared amounts

28
Q

Life Insurance as a Funding Vehicle

A

According to the Treasury Regulations, life insurance benefits must be merely “incidental” to the primary purpose of th eplan. If the amount of insurance meets either of the following tests, it is considered incidental.

  1. The aggregate premiums paid for a participant’s insured death benefit are all times less than the following percetanges of the plan cost for that particioant: Ordinary Life Insurance 50%; Term Insurance 25%; Universal Life 25%
  2. The participant’s imnsured death benefit must be no more than 100 times the expected monthly benefit. Defined benefit plans typically use the “100 times” limit
29
Q

Rololover NOT Permitted

A
  • Transfers to another 457 plan remain in the only option for non-government tax exempt organizations
  • Hardship distributions cannot be rolled into any othr qualified plan
  • Required minimum distributions
30
Q

Qualified Plan

Early (age 59 1/2) - 10% Tax Penalty

Exceptions

A
  • Death
  • Disability
  • Substantially equal periodic payments following seperation from service
  • Distribution following from service at age 55
  • Distribution in accordance with QDRO (to any alternative payee)
  • Medical expenses in excess of 10% of AGI or health insurance costs while unemployed
  • Distribution used to pay insurance premium after seperation from employement (must file for unemployement)
31
Q

Rquired Beginning Date (RBD)

for

IRAs / SEPs / SARSEPs / SIMPLEs

A

The required beginning date is April 1st of th eyear following the year in which the covered individual attained age 70 1/2. Subsequent distributions must be made by December 31st of each year thereafter.

32
Q

Required Beginning Date (RBD)

for

Qualified plans / 403(b) plans / 457 plans

A

The required beginning date, with the exception of 5% owners, is the later of April 1st follwing the year in which the individual attained 70 1/2 or retired. Subsequent distributions must be made by December 31st of each year thereafter.

5% owner RBD is the same as IRA/SEP RBD

33
Q

IRA Deductibility Keys

A
  • If neither spouse (nor singlke person) is an active participant in an employee plan, th eIRA is deductible. Employer plans that affect participant status include almost all plans EXCEPT for 457 plans.
  • If one spouse is an active participant, the other spouse (not active) can do a deductible IRA if combined AGI is less than $189K-$199K (2018)
  • if both spouses are active, AGI limits apply - $63k-$74k (single) and $101k-$121k (married) (2018) Given

Note: Activity that results in active status: annual additions to a DC account or benefits accrued to a DB plan

34
Q

IRA

Exceptions to 10% Penalty for Early

Distributions before Age 59 1/2

A
  • Death
  • Substantially equal payments
  • Disabilty
  • First home expense up to $10,000
  • Qualified education expense
  • Medical expense greater than 7.5%
  • Distributions used to pay insurance premium after seperation from employment (must have received unemployment compensation for 12 weeks)
35
Q

ROTH IRA

Ordering rules for distribution

A
  1. Any contributions (not conversions) are withdrawn first
  2. Conversions are withdrawn second
  3. Earnings are withdrawn last
36
Q

ROTH IRA

Required Minimum Distributions

A
  • Distributions within five years of owner’s death, or
  • Distributions over the life expectancy of the designated beneficiary with distributions commencing prior to the end of the calendar year following death (stretch)
  • Where sole beneficiary is owner’s surviving spouse, the spouse may delay distributions until the ROTH owner would have reached age 70 1/2, or may treat the ROTH as his or her own (roll in to his/her Roth)
37
Q

Non-qualified Deferred

Compensation Plans

A
  • Salary reduction plan - uses some portion of employee’s current compensation to fund the ultimate compensation benefit (also called pure deferred)
  • Salary continuation plan - uses employer contributions to fund ultimate benefit
38
Q

Rabbi Trust

A
  • Key Words - merger, acquisition or change of ownership
  • Assets in rabbi trust available for company’s creditors
  • Fear that ownership / management may change before deferred compensation is paid
39
Q

Incentive Stock Options (ISO)

Holding Period

A

​Holding Period:

​1 year from exercise date and 2 years from grant before selling ISOs

Violating eithe rule results in a disqualified disposition

40
Q

Section 457 Deferred

Compensation Plan

A
  • Nonqualified deferred compensation plans of governmental
  • Deferral limited to $18,500 or 100% of compensation (2018)
  • Catch-up of $6,000 allowed for those aged 50 and over ONLY for governmental plans (2018)
  • Non-governmental plans can ONLY be rolled into another 457 plan

CFP (6 decks)

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