Retirement Planning _ Administration of Qualified Plans Flashcards
What is Net Unrealized Appreciation (NUA) and how does it work?
the excess of the FMV of the ER securities at the date of the lump-sum distribution over the cost of the ER securities at the date the securities were contributed to the qualified plan
NUA = FMV @ Date of Distribution - Value of Securities Used at the Date of the ER Contribution
when ER securities sold, participant will be required to recognize LTCG deferred since date of distribution
any subsequent gain after distribution date is either STCG or LTCG based on HP beginning at date of distribution
What are the 10 exceptions to the 10% early withdrawal penalty?
Mnemonic to recall the exceptions:
“MESS AT D^3 Q”
MESS AT D^3 Q
medical expenses
equal periodic payments
separation from service
age
tax levies (and terminal illness w/in 84 months)
death
disability
disaster
QDRO
How can IRAs avoid the 10% early withdrawal penalty?
“HIDE ME”
First time Home purchase
health Insurance
Death and disability
higher Education
Medical expenses
Equal periodic payments
age
What are the RMD rules?
Age 72 for 70-1/2 after 12/31/2019 and before 1/1/2023.
Age 73 for 72 after 12/31/2022 and before 1/1/2033.
Age 75 for 74 after 12/31/2032 (Secure 2.0)
25% excise tax for undistributed funds (10% if distribution from same plan to which tax relates during the “correction window”)
- ends on earlier of (1) date IRS issues notice of deficiency, (2) date IRS assesses excise tax, or (3) last day of second taxable year that begins after the end of the year the tax is imposed.
RMD applies to qualified plan, IRA, 403B, SIMPLE, SEP, 457 plan. Also to Roth accounts (401K, 403B, 457B, Inherited Roth IRA).
1st year by April 1 of following year and by DEC 31st every year afterwards.
RMD Tips (year to use for distribution calculation)
Value age as of the END of the year for which you are taking the distribution (you can accurately project it).
Value your portfolio as of the end of the previous year.
Remember it’s the year for which you are making the distribution - whether you take it then or not!
What are the 3 types of RMD beneficiaries?
- Eligible Designated Beneficiary
- surviving spouse
- child yet to reach age of majority
- disabled or chronically ill individual
- any other individual who is NOT MORE THAN 10 YEARS YOUNGER THAN PARTICIPANT - Designated Beneficiary
- must distribute by DEC 31st of 10th year of participant death - Non-Designated Beneficiary
- estate
- charity
- some trusts
Designated Beneficiary based on owner’s death after 12/31/19
What are the key elements of Qualified Plan Selection?
Business Objectives
Employee Census
- employee, age, compensation, years of employment, ownership interest
- review EE turnover
Cash Flow Considerations
Administration Costs
Owner’s Business and Personal Objectives
- small business owners typically want to reduce their current taxes and save for their own financial future
Plan Selection Application
Characteristics Chart of all Qualified Plans
Qualified Plan Selection Process
When must a qualified plan be adopted for the company to take income tax deductions for contributions for a particular tax year?
Plan must be adopted by the due date of the tax return plus extensions (for plan years after 12/31/2019)
What is the required minimum number of investments in a qualified plan and what are the investment criteria requirements?
Minimum of 3 investments
Investment alternative criteria:
- be diversified
- have materially different risk and return characteristics
- each alternative, when combined w/ investments in the other alternatives tend to minimize through diversification the overall risk of a participant’s or beneficiary’s portfolio
What is the self-employed individual’s qualified plan contribution calculation (Keogh plan)?
SE Contribution Rate = Contribution Rate / (1 + Contribution Rate)
Step 1: Calculate SE Tax
Net SE Income
X 92.35%
= Net Earnings Subject to SE Tax
X 12.4% up to $160,200 + 2.9% on all income
= SE Tax
Step 2: Calculate SE Individual’s Contribution
Net SE Income
- 1/2 SE Tax
= Adjusted Net SE Earnings
X SE Contribution Rate
= SE Individual’s Plan Contribution
How are excess contributions to qualified plans carried over to future years when more than the permitted deduction?
can be carried over and deducted for future years, combined with, or in lieu of, contributions for those years
carryover amount may be subject to excise tax
- generally 10% excise tax applies to nondeductible excess contributions made to qualified pension and profit sharing plans
excise tax does not apply for a SE individual to meet the minimum funding requirements in a DB plan
Who are considered to be disqualified persons for qualified plans (to determine prohibited transactions)?
What are prohibited transactions for qualified plans?
