Retirement Planning Flashcards
Distributions from Qualified PlansDistributions Prior to 59 ½
10% Early Withdrawal Penalty Exceptions: Qualified Plans and IRAs 59½ Death Disability Substantially equal periodic payment (Section 72(t)) Medical expenses in excess of schedule A medical AGI limit for tax year (2020 – 7.5%) Federal Tax Levy
Qualified Plans Only
• Separation from service unemployed after age 55 • Higher education costs
• Qualified Domestic Relations Order
IRA Only
• Health Ins. for unemployed
• Higher education costs
• First time home purchase up to $10,000
Jason and his wife, Jane, are both over 70. Jason turned 70 on December 1, 2018, and Jane turned 70 in April, 2019. He rolled over his balance in his previous employer’s profit sharing plan into an IRA. The IRA had a balance at the end of last year of $250,000. The balance at the end of this year was $300,000. The balance in Jane’s IRA was $400,000 at the end of last year and $440,000 at the end of this year. According to the Uniform Lifetime Table, the factors for ages 70, 71, and 72 are 27.4, 26.5, and 25.6 respectively. What is their minimum distribution for this year?
$24,033
Jason turns 70 ½ in 2019, and therefore needs a distribution for the year. He will be 71 at the end of 2019, so the factor 26.5 will be used for his distribution. The account balance that is used is the balance at the end of last year - $250,000. $250,000 ÷ 26.5 = $9,433.96
Jane is 70 at the end of 2019, so her factor is 27.4. The plan balance used for her is $400,000.
$400,000 ÷ 27.4 = $14,598.54
Since they are both 70 1/2 by 12/31/2019 they will follow the pre-SECURE Act rules for RMDs.
qualified plans
Incorrect :A small business looking to maximize deductible contributions to a defined contribution plan should consider coupling a money purchase plan with a profit-sharing plan.
Currently, the profit -sharing plan deduction limit is 25%, and therefore there is no need to utilize a money purchase plan
A cross-tested profit- sharing plan can be used to skew the employer contributions to the older, more highly compensated employees.
Life insurance can be used to fund participant’s accounts, and it can also be used as a general asset of the trust to insure the lives of key employees. The trust is considered to have an insurable interest.
A company that has a loss can still contribute to a profit-sharing plan
Robert is age 69 and is currently receiving Social Security retirement benefits. Robert provides all of the support for his 17-year-old grandson, Scott, whom Robert claims as a dependent for income tax purposes. Scott’s parents passed away in an automobile accident two years ago. Robert also provides all of the support for his 2-year-old great granddaughter, Stacy, whom Robert also claims as a dependent. Stacy’s father is deceased, and her mother is disabled. Robert approached a CFP® professional for advice on the eligibility of Scott and Stacy to receive Social Security benefits under Robert’s Social Security earnings record. The CFP® professional should advise Robert that:
A. Scott may be eligible to receive a Social Security benefit based on Robert’s earnings history, but Stacy will not be eligible because she is a great grandchild.
B. Neither Scott nor Stacy will be eligible to receive a Social Security benefit based on Robert’s earnings history because grandchildren and great grandchildren are not eligible family members.
C. Stacy may be eligible to receive a Social Security benefit based on Robert’s earnings history, but Scott will not be eligible because both of his parents are deceased.
D. Both Scott and Stacy may be eligible to receive a Social Security benefit based on Robert’s earnings history.
The correct answer is D.
Grandchildren and great grandchildren may qualify as children on their grandparent’s Social Security earnings record if certain conditions are met.
These conditions include: The grandchildren and great grandchildren are dependents of the grandparent or great grandparent. The grandchild’s or great grandchild’s natural or adoptive parents are deceased or disab
Jeanie recently filed for bankruptcy under chapter 7. Which of the following assets will most likely be included in her bankruptcy estate?
A. $20,000 of home equity in her primary residence purchased five years ago.
B. $50,000 balance in her employer-provided ESOP vested in the last 9 months.
C. $1,000,000 death benefit universal life insurance policy with a $15,000 cash value in force for the past three years.
D. $100,000 balance in a 529 plan Janie owns, created six months ago with her child as the beneficiary.
The correct answer is D.
A 529 plan created within the last 24 months may be included in the bankruptcy estate.
A is incorrect. State home equity limits vary, but all are under $50,000. B is incorrect. Any ERISA plan is not included in a bankruptcy estate – even those created within the last year. C is incorrect. Life Insurance cash values are generally subject to high limitations.
Ginger, age 35, was recently became a client and is divorced from her husband after 9 years of marriage. Pursuant to the divorce agreement, she finally received 50% of her ex-husband’s 401(k) plan as the result of a court-issued qualified domestic relations order (QDRO). Ginger would like to remove her money from her ex-husband’s 401(k) plan immediately, so she asks the CFP® professional to rollover the 401(k) to a traditional IRA, and then to take a distribution to cover her current cash flow needs. Which of the following is the best response for the CFP® professional?
A. Fulfill Ginger’s request.
B. Explore additional options to satisfy Ginger’s cash flow needs.
C. Educate Ginger about the tax consequences of her request.
D. Update Ginger’s financial plan to reflect her changing circumstances
The correct answer is C.
If Ginger takes a distribution directly from the 401(k) plan, there will be no early withdrawal penalty on the distribution, because distributions from a qualified plan made pursuant to a QDRO are not subject to the penalty. However, if she rolls over the 401(k) plan into a traditional IRA, then takes a distribution, the distribution from the traditional IRA will be subject to the 10% penalty.
Before investigating different options to satisfy Ginger’s cash flow needs, the CFP® professional should educate her on the negative tax consequences of her desired strategy.
Marge was granted an incentive stock option 5 years ago for 1,000 shares of employer stock at $20 per share. Marge exercised the option this year and immediately sold the shares at $30 per share. Marge is in the 24% marginal tax bracket. She will pay federal tax this year on the transaction in the amount of:
A. $1,500.
B. $2,400.
C. $3,000.
D. $8,400.
The correct answer is B.
An incentive stock option is eligible for favorable income tax treatment only if the underlying stock is held for the longer of (1) two years from the date of grant or (2) one year from the date of exercise. Tax determination of an ISO is not made until disposition. Selling the stock within one year of the date of exercise creates a disqualifying disposition and ordinary income tax treatment.
The bargain element of a nonqualified stock option is taxed as ordinary income at the time of exercise. The bargain element of the option is $10,000 [($30 fair market value less $20 strike price) x 1,000 shares].
Tax is $2,400 ($10,000 bargain element x 24% tax rate).
Margaret owns a small business that currently employs 30 full- and part-time employees. Four years ago, she implemented a SIMPLE IRA for the business, with a 3% matching contribution for all eligible employees who contribute to the plan. Which of the following statements is correct regarding the SIMPLE IRA?
A. Margaret can make contributions of her closely-held stock to the SIMPLE IRA and receive a deduction without having to contribute cash to the plan.
B. Margaret can pay an extra 2% into the plan for all her eligible employees to increase her income tax deduction.
C. Margaret can pay herself a bonus before filing her tax return and increase her matching contribution to the plan for the tax year.
D. Margaret will be prohibited from establishing a defined benefit plan for the company as long as the SIMPLE IRA is maintained.
The correct answer is D.
A is incorrect. Only cash contributions can be made to an IRA (unless the contribution represents a rollover). B is incorrect. Since the SIMPLE IRA already has been established with a 3% matching contribution, an additional employer contribution will not be permitted. She could switch from a 3% match to a 2% nonelective contribution, but she cannot utilize both options in the same year. C is incorrect. Although Margaret could match any elective deferral contributions she makes to the plan (up to the 3% limit), her tax return will be filed after the close of the tax year. If she pays herself a bonus before filing the tax return, the elective deferral contribution would be considered made after the tax year, meaning her deduction and match would be in the following yea
Which of the following statements concerning the top-heavy requirements is correct?
A. Most small plans covering 25 or fewer employees will eventually become top heavy.
B. If a plan becomes top-heavy, non-vested balances in an employee’s account will immediately become 100% vested.
C. Elective salary deferral contributions to a 401(k) plan are not counted towards determining top-heavy status.
D. A SIMPLE IRA is subject to the top-heavy rules
The correct answer is A.
B is incorrect. If a plan becomes top-heavy, the plan must use a vesting schedule that is at least as rapid as a 3-year cliff schedule or as a 2-6-year graded schedule.
C is incorrect. Elective salary deferral contributions to a 401(k) plan are counted towards determining top-heavy status. Therefore, a 401(k) plan that allows only employee salary deferral contributions can become top-heavy.
D is incorrect. SIMPLE IRAs and safe harbor 401(k) plans are not subject to the top-heavy rules.
If an individual’s combined federal and state income tax rate is the same at the time of contribution and at the time of distribution:
A. A Roth IRA would be preferable to a deductible traditional IRA.
B. The individual would be indifferent when deciding between a Roth IRA and a deductible traditional IRA.
C. A non-deductible traditional IRA would be preferable to a Roth IRA.
D. A deductible traditional IRA would be preferable to a Roth IRA.
The correct answer is A.
If tax rates are the same at the time of contribution and the time of distribution, it is true that the accumulation in a deductible traditional IRA and a Roth IRA will be the same after all taxes have been taken into account. Therefore, it would seem that the individual would be indifferent when deciding between a Roth IRA and a deductible traditional IRA. However, a Roth IRA would still be preferred in this scenario because: -The Roth IRA does not require minimum distributions while a traditional IRA does. The Roth IRA provides for tax-free income at retirement, which may be beneficial as it will not increase an individual’s AGI. Increases in AGI may cause the phase out of other tax advantages. -The Roth IRA can allow for tax-free distributions to heirs after the participant’s death. C is incorrect. A non-deductible traditional IRA would never be preferable to a Roth IRA. It should be noted that even though some individuals are ineligible to contribute to a Roth IRA due to their AGI, they can still contribute to a non-deductible traditional IRA and convert the traditional IRA to a Roth IRA.
Supplemental Executive Retirement Plan (SERP).
A supplemental deferred compensation plan providing retirement benefits above the company’s qualified plan AND without regard to Section 415 limits
SERP supplements the pension plan without regard to limits imposed upon salary levels (i.e., maximum salary of $285,000 in 2020) or the maximum funding levels of Section 415. Do not confuse with an excess benefit plan which extends the benefits of a company’s qualified plan above the Section 415 limits but still adheres to maximum salary limitations.
A supplemental deferred compensation plan providing retirement benefits above the company’s qualified plan AND without regard to Section 415 limits
An excess benefit plan extends the same benefits to employees whose contributions to the plan are limited by Section 415 (e.g., employee earns $285,000 yet receives $57,000 contribution instead of $70,000 contribution due to Section 415 limitation on a 25% money purchase plan). An excess benefit plan would put additional $13,000 into non-qualified retirement plan. Do not confuse with a SERP which provides benefits in excess of the Section 415 limits AND ignores the covered compensation limits (i.e., $285,000 in 2020) applied to qualified plans.
golden parachute” payments made to a “disqualified” person?
Payments under a “golden parachute” are considered ordinary income. Additionally, any amounts under the Social Security cap will be subject to the OASDI tax. All amounts will be subject to Medicare tax. “Golden parachute” payments are also subject to an additional 20% excise tax. Because these are non-qualified plans, no lump sum treatment or IRA rollover options apply.
unfunded deferred compensation plan.
A non-qualified deferred compensation plan that provides the targeted key employees with only a promise to pay benefits at a future time
In the unfunded defined compensation plan, no assets are segregated (as in a rabbi trust or taxable trust), so the plan is considered unfunded even though the employer may establish a pool of assets to meet the obligation. Those assets are still owned by the employer and subject to the creditors of the employer.
funded deferred compensation plan
A non-qualified deferred compensation plan providing the key employee with a vested beneficial interest in an account
If the employee has a non-forfeitable beneficial interest in a deferred compensation account, the IRS considers the plan “funded” and subject to current income tax due because the employee has constructive receipt of the assets.
Which of the following are characteristics of a non-qualified deferred compensation agreement for an individual?
A) It may provide for benefits in excess of qualified plan limits.
B) The contribution underlying the agreement may NOT be structured as additional compensation to the employee.
C) It must be entered into prior to the rendering of services to achieve deferral of compensation.
D) The contribution underlying the agreement may be paid from the current compensation of the employee.
A) I and II only.
B) I and III only.
C) II and III only.
D) I, III and IV only.
The correct answer is D.
Statement “II” is incorrect. The underlying contribution may be structured as additional compensation (a so-called salary continuation plan.) Statement “IV” represents a so-called pure deferred compensation plan.
