Retirement Planning Flashcards
Basic Concept of SS
Coverage for nearly every worker. Except for:
Fed Employee who have been continueously employeed since 1984
Some Americans working abroad
Student nurses and student working for a college or college club
railroad employees
a child under age 18 who is employed by a parent in an unincorporated business
ministers, religious orders
tribal councils
Types of Retirement Plans no vesting limited admin costs
SEP Simple Sar-Sep Thrift r saving plans 403B
Social Security fully insured worker eligibility and benefits
a worker is entitled to DI benefits if he/she is under age 65 and has been disabled for 12 months, and expected to result in death and has completed a 5 month waiting
a retired insured worker age 62 or over is entitled to retirement benefits.
Social Security - Spouse Eligibility and Benefits
The spouse of a RETIRED OR DISABLED worker qualifies for SS payments if they are
age 62 or over or
has a child in care under age 16 or
has a child age 16 and over an disabled
*The SURVIVING SPOUSE (including divorced) or a DECEASED insured worker qualifies for SS pmts if widower is age 60+
*The SURVIVING SPOUSE regardless of age qualifies if careing for an entitled child of the deceased who is either uner age 16 or disabled before age 22.
SS dependent/child eligibility and benefits
The SURVIVING DEPENDENT, unmarried child of a DECEASED OR DISABLED insured worker, qualifies for SS payments if the child is:
- under 19 and a full time elementary or secondary student
- under 18 or over but has a disability which began before age 22
SS Currently Insured Worker Eligibility and Benefits
lump sum death benefit - $255
surviving spouse’s benefit (if children are under age 16)
Dependent benefit
Social Security reduction of benefits
FRA is 66
working at FRA or older - you will keep all benefits
if younger than FRA - limited income if receiving full SS bene
if younger than FRA during all of 2013 - deduct $1 from benefits for each $2 earned above $14,640
if reach FRA in 2013 - deduct $1 for benefits for each $3 earned above $38,880 until mo on e reaches FRA
SS taxation
must include muni bond income to calculate MAGI If income + 1/2 of SS bene is above $25,000 = 50% of ss is included in income If above 44,000 = 85% total SS is included in income #s do not adj for inflation.
Disability Benefits
a worker is entitled to DI benefit if they
1) is insured for Disability benefits, is under age 65
2) has been DI for 12 months, and expected to stay that way for 12 more mo or death
3) has filed for DI benefit and completed a 5 mo waiting period
Nonqualified Plan Definition
any employer retirement, saving, or deferred compensation plan for employees that does not meet the tax an labor laws ERIA req.
there are major differences between Q and NQ plans
Components of a Nonqualified Plan
May Discriminate
exempt from most ERISa requirements
No employers Tax Deductions for contributions until employee is taxed
Plan Earning taxable to employer
Distributions taxable at ordinary tax rates
Components of Qualified Plan
May not discriminate
Must satisfy ERISA requirements
Immediate tax ded for contributions (may not be vested)
Earnings accrue tax deffered until distribution
Distributions are taxable at ordinary tax rates
Types of Qualified plans/ERISA vesting/Admin Costs/Exempt from creditors/ integrate with SS
Defined Benefit Cash Balance Money Purchase Target Benefit Profit Sharing Profit Sharing 401K Stock Bonus ESOP - CANNOT be integrated with SS or cross tested
Defined Benefit Qualified Plan
Favors OLDER employee/owner 50+
Certain retirement benefit; Max 200K (2012)
Meet a specific retirement objective
Company must have very stable cash flow
past service credit allowed
forfeitures MUST be applied to reduce employer contributions
PBGC insured (along with Cash Balance plan)
Qualified Plan Money Purchase
up to 25% employer deduction
fixed contributions - need stable cash flow
maximum annual contribution lesser of 100% of salary or 50K 2012
Qualified Plan Target Benefit
up to 25% employer deduction
Fixed contributions - need stable cash flow
Maximum annual contribution lesser of 100% of salary or 50K 2012
Favors older workers
Qualified Plan Profit Sharing
up to 25% employer deduction
FLEXIBLE CONTRIBUTIONS (must be recurring and substantial)
Maximum annual contribution lesser of 100% of salary or 50K 2012
Can have 401K provisions
Simple 401K exempt form creditors
Section 401K plan
Qualified profit sharing or stock bonus plan that allows plan participants to defer salary into the plan
Max 17,500 deferral for participants under 50
additional $5,500 catch-up for age 50 and over
Safe Harbor Nondiscrimination
a safe harbor 401K plan automatically satisfies the nondiscrimination test involving highly compensated employees with either an employer matching contribution or a nonelective contribution
solo 401K/uni-401k
not subject to coverage testing
nondiscrimination rules necessary for the typical 401K plan
plan allows the elective deferral up to 17,500 plus the employer contribution with cap of $50,000
catchup of 5,500 is allowed if participants age is 50+
corporate plan limitations are 25% of the owners compensation to a maximum of $50K (no catch-up)
Qualified Plan Stock Bonus/ESOP
up to 25% employer deduction
FLEXIBLE CONTRIBUTIONS
maximum annual contribution lesser of 100% of comp or 50,000 2012
100% of contribution can be invested in co stock
ESOP CANNOT BE INTEGRATED WITHSS OR CROSS-TESTED
THRIFT PLAN SAVING PLAN
employees are directly involved in contributing money to the plan
employer contributions on behalf of a particular employee are based on mandatory contribution by the employee
employer contributions are made on a matching basis
the plan may permit both the employer at its discretion to make additional contributions and the employee to make voluntary contributions
employees can only participate if they contribute a part of their compensation to the plan
Section 415 annual additions limit
lessor of 100% of compensation or 50K 2012
includes employer contributions, employee salary reductions, and plan forfeitures
Cash Balance Pension Plan
Plan is qualified employer plan that provides for annual employer contributions at a specified rate that hypo individual accounts that are set-up for each plan participant
employer guarantees not only the contribution level but also minimum rate of return on each participants account
Plan works like a money purchase plan, but money purchase does not guarantee rate of return
Qualified plan coverage requirements
ratio vs average benefit test
Ratio percent test: plan must cover a % of NHC EE that is at least 70% of the % of HCE covered. If the test is failed then the next test must be passed.
Average Benefit Test: Average benefits for all NHCE must be at least 70% of that for HCE
Qualified Plans Age and Service Rules
Max age and service are 21 and 1 year of service
Special provision allow up to 2 year service requirement
BUT then employee is immediately (2 year/100%)
Year of service is 1000 hours (including vacations, holidays, and illness time)
Highly Compensated Employee
A greater than 5% owner or
An employee in excess of 115,000 2011 during the preceding year
Key Employee
An individual is a key employee if at any time during the current year they have been one of the following:
A greater than 5% owner
an officer and compensation greater than 165,000 = 2012
greater than 1% ownership and compensation $165,000 = 2012
Vesting - Fast/Slow
Fast: Top-heavy plan/ All DC plans
3 yr 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
Defined Contribution Plans Integration with Social Security
Based % + Permitted Disparity = Excess %
Base % - DC plan contributions for compensation below integration level
Permitted Disparity - lesser of base % or 5.7%
Excess % - DC Plan contribution for compensation above integration level
Defined Benefit Plans
Integration with Social Security
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
Defined Contribution Plan Integration Level definition
Any dollar amount up to Social Security wage 110,100 - 2012
Defined Contribution PlanBase Contribution Percentage Definition
Contribution percentage for compensation below the integration level
Defined Contribution Plan Excess Contribution Percentage definition
Contribution Percentage of compensation above the integration level
Multiple Plans 2012 Elective Deferrals
Elective Deferrals - more than one employer 2012
Elective Deferrals to multiple plans are always aggregated.
2012:
401K, 4013B, Simple, SARSEP
Simple + other Simple
457 not aggregated
Special Rules for Self-Employed - Non Corporation
Short Cut!
multiply 12.12% for 15% contribution
multiply 18.59% for 25% contribution
Top Heavy Plans definition
Plan is top heavy if more than 60% of the total amount in the account sof all employees is allotted to key employees
Effects on Contributions or benefits DB vs. DC
DB: The benefit must be at least 2% of compensation multiplied by the number of employees years of service in which the plan is top-heavy up to the max of 10 years. B is the 2nd letter in the alphabet 2%
DC: The benefit must be at least 3% of each non-key employees compensation. C is the 3rd letter in the alphabet think 3%
IRA Deductibiltiy Keys
If neither spouse (or single) is an active participant in an employer plan, the IRA is deductible. 457 is not aggregated
If 1 spouse is active participant, the other spouse not active, can do a deductible IRA if combined AGI is less than 173-183- 2012
If both spouses are active, AGI limits Apply -56-66 (single) 92-112 married 2012
Activity that results in active status = annual additions to a DC account or benefits accrued to a DB plan
IRA Exceptions to 10% penalty for early distributions before age 59 1/2
Death, 72T, Disability, First home expense up to 10,000, Qualified education expense, medical expense greater than 7.5%, distribution used to pay insurance premium after separation from employment (must have received unemployment compensation for 12 weeks)
Roth IRA - RMD
Distributions within 5 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
Where sole beneficiary is owner’s surviving spouse, the spouse may delay distributions until the Roth owner would have reaches age 70 1/2 or may treat the Roth as his or heir own (roll it to his/her Roth)
Roth IRA - ordering rules for distribution
any contributions (not conversions) are withdrawn first
conversions are withdrawn second
earnings are withdrawn last
Roth IRA Restrictions
Single - 110-125
MFJ - 173-183
MFS - 0-10K
2012
Roth 401K/403B/457b
Max elective deferral is 17,500 plus 5,500 catch up if age 50 by 12/31 of deferral year. employer contribution (including matching contributions) go into traditional 401k pre-tax accounts No income restrictions associated with Roth 401K, 403b or 457 accounts.
Simplified Employee Pension - SEP
no salary deferrals - employer contributions only
up to 25% of contributions for owner (w-2) / treated liek Keogh contributions for self employed
max 50,000
account immediately vested
can be integrates with ss
special eligibility: 21+ paid at least $550, and work 3 of the 5 prior years 2012
Simple Plan
fewer than 100 employees
employer cannot maintain any other plan
participates fully vested
easy to administer and funded by employee salary reductions and an employer match
tax deferred annuity (TDA/ tax sheltered annuity (TSA) / 403B
for 501c 3 organizations and public schools
subject to ERISA only if employer contributes
Salary reduction limit up to (plus $5500 catch-up if 50 or over) 17,500
Deferred Compensation Plan Section 457
Non-qualified deferred compensation plans of governmental agencies and non-church controlled tax exempt organizations
deferral limit 17,500 or 100% of compensation
catch up of $5,500 allowed for those aged 50 and over only for governmental plans
Salary deferrals NOT aggregated with other plans (401K,)
nongovernmental plans can ONLY be rolled into another 457 plan
Life Insurance as a Funding Vehicle
Life insurance benefit must be merely “incidental” to the primary purpose of the plan. If the amount of insurance meets either the following test is is considered incidental:
1) the aggregate premiums pd for a participants insured death benefit are less than the following percentages o fthe plan cost for that participant: Ordinary life ins 50%; Term Insurance 25%; Universal Life 25%
2) The participants insured death beneift must be no more than 100 times the expected monthly benefit. Defined benefit plans typically use the 100 times limit.
Keogh Contributions
Self employment tax must be computed and a deduction of 1/2 of the self-employment tax must be taken before determining the keogh deduction. Short cut!
if contribution 15% = multiply by 12.12% of net earnings
if contribution 25% = multiply by 18.95% of net earnings
Qualified Plan
early (age 59 1/2) - 10% tax penalty exceptions
Death, disability, 72T, distribution following service at age 55, distributions in accordance with a QDRO (to any alternative payee)
Medical expenses in excess of 7.5 % of AGI or health insurance costs while unemployed
Distributions used to pay insurance premium after separation from employement (must file for unemployment)
Rollovers NOT permitted
Transfered to another 457 plan remain the only option for NONGOVERNMENTAL tax exempt organizations. Hardship distributions cannot be rolled into any other qualified plan
RMD
Required Beginning Date RBD for
IRA / SEPs / SARSEPs / SIMPLEs
the required beginning date is april 1st of the year fllwing the year in which the covered individual attained age 70 1/2.
Subsequent distributions must be made by December 31st of each year thereafter
Required Begging Date RBD for
Qualified plans / 403B plans / 457 plans
the required beginning date, WITH THE EXCEPTION OF 5% OWNERS, is the later of April 1st following 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
Rabbi Trust
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.
Net Unrealized Appreciation NUA
NUA EX: stock is contributed to the retirement plan with a basis of $20,000. Stock is distributed at retirement with a MV of 200,000. The NUA 180,000 is not taxable until the employee sell the stock, but the 20,000 (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
Incentive Stock Options ISO holding period
Holding period:
1 year from exercise date and 2 years from grant before selling ISOs
Violating either rule results in a disqualifying disposition
Stock Plans Restricted Stock
A restricted stock plan normally involves a sale of stock (not options) to an employee at a bargain price. No taxation occurs if a substantial risk of forfeiture exists.
Stock Plan - Stock appreciation rights are SARs
SARs are rights to be paid an amount equal to the difference between the value of a specified number of shares of stock on the date the Sars are granted and the value of the stock on the date the Sars are exercised.
Stock Plan and Phantom Stock
Phantom stock is a right to a bonus based on the performance of phantom shares of a corporation’s common stock over a specified period of time
Employee Stock Purchase ESSP
Also known as Section 423 stock purchase plan
under this plan the employer is allowed to discount the price of stock up to 15% (charge 85%) of the market value
Target Benefit Plan
the account’s projected value is an actuarially targeted amount at retirement. Employers contribute 100% comp or 50,000 max regardless of the actuarially determined amt
the acct balance may be - or + targeted amt due to inv performance.
DC name 4 kinds
money purchase - fixed contributions, older employee +
target benefit - fixed contrib, older employee +
profit share - flexible contributions
Stock bonus - flexible contributions
permitted disparity
Lesser of:
1) base or 2) 5.7%
1) base + permitted = excess (4+4 = 8)
2) if excess is 12% what is base? X+5.7=12. x=6.3= base
DC plan can be integrated with SS or Age Weighted. What is the difference?
Integrated with SS: age is 50 or younger, owner income under 200,000, rank and file employees under 90,000
Age weighted - 50+, owner income 200K+, rank and file employee younger than owner
Remember AGI doesn’t equal earned income
100,000 agi doesn’t mean they can contribute to an IRA
DB plans - think 415 - think only 250,000 considered, max deferral limit is 50,000
Sids salary is 250,000, he defers the max of 17,500, co matches 3% of salary = 7,500. Question: how much can he add?
50,000 - 25,000 = 25,000
hardship withdrawal
10% will not apply if 59 1/2 or disabled
ADP & ACP testing
0-2% = X2 = 2% HCE 2-8% = +2 = 2 NHCE + 2 = 4% for HCE
What is max amt bob can defer if comp is 300,000 4% def?
only 250,000 considered. 4+2 = 6% = 15,000, if bob over 50? + 5,500 = 20,500.
Key Employee
greater than $165,000 or
greater than 5% owner or
greater than 1% of comp of 165,000
Deferral Question: George age 50 defers 6% salary = 80,000, 5,500 catch-up and 50% match.
What amount did he defer?
80,000 X .06 = $4800
match = 4800 x 50% = $2400
+ 5,500
= 12700
NSO
right to purchase a specific # of shares of the employer stock at a give time and price - no tax because there is a substantial risk of forfeiture
ISO
is a qualified stock option, granting stock options to buy company stock. NOTE! only 100,000 in a give year vests.
IRA withdrawal order
1) contributions = tax free
2) conversions = tax free
3) earnings = taxable
Random card
Section 162
insurance is a direct bonus made to an insurance company to pay a premium owned by the employee = phantom income to the employee
