Retirement Planning _ Other Tax Advantaged Plans Flashcards
What is considered earned income?
Earned Income
- W-2
- Schedule C net income
- K-1 income from an LLC
- K-1 income from a partnership where the partner is a material participant
- Alimony (if divorce agreement signed BEFORE 12/31/18)
What is considered unearned income?
- Earnings and profits from property (rental, interest, dividend income)
- Capital gains
- Pension and annuity income
- Deferred compensation received (compensation payments postponed from a past year)
- Partnership income for which you do not provide services that are a material income-producing factor
- Unemployment benefits
- Any amounts excluded from income (foreign income and housing costs)
- Alimony from divorce agreement signed AFTER 12/31/18
- Limited partner investment returns
- Income flowing from an S-corp via K-1
- Social security benefits
- Worker’s compensation
What are the IRA deductibility phaseout amounts?
What is the calculation for IRA deductibility reduction?
Reduction = Max Contribution X [AGI - AGI Phaseout Minimum] / [$10,000 (Single Filer) OR $20,000 (MFJ Filer)]
What is the order of nonqualified Roth IRA distributions?
FIRST from regular contributions (e.g., current tax year contributions)
NEXT from conversion contributions on FIFO basis
FINALLY from earnings
Qualified and IRA Early Withdrawal Penalty Exceptions
What are SEP IRA requirements?
Lesser of 25% compensation or $66,000 (2023)
Must provide benefits to almost all EEs. EE coverage requirements are:
- Age 21 or older
- Performance of services for 3 of last 5 years, AND
- Received compensation of at least $750 (2023) during the year
Can be established and funded as late as the due date of the federal tax return including extensions (see below):
- Sole proprietorship, C-Corp (APR 15 / OCT 15)
- Partnership, S-Corp (MAR 15, SEPT 15)
How are SEP contributions made and to whom?
Made by the employer
Are discretionary and nondiscriminatory
Must be made to all eligible EEs during the year whether or not they are employed or alive as of the end of the year
What are features of SIMPLE plans?
100 or fewer EEs who earn at least $5,000 or more in the previous year employed anytime during the calendar year
Can be setup as either an IRA or 401K
May not establish if ER contributes to a DC plan for its EEs, if its EEs accrue a benefit from a DB plan, or if the ER contributes to a SEP or 403B during the year.
Eligible EEs earn at least $5,000 in any two preceding years and expect to earn at least $5,000 in the current calendar year.
Fully vested immediately, cannot be forfeited by EE
Only EEs elective deferral contributions and required ER matching contributions (most be dollar-for-dollar up to 3%) allowed plus rollovers
ER non-elective contributions must be 2% of each eligible EE’s compensation up to covered compensation limit ($330,000 for 2023)
SIMPLE IRA, SIMPLE 401K, 401K Plan Comparison Chart
What are the two types of 403B catch-up contributions?
Both can be used simultaneously in some circumstances
- Age 50 Catch-Up Provisions = lesser of $7,500 (2023) or includable compensation subtracted by other elective deferrals for the year
- 15-Year Rule Exception
- ONLY applies to EEs that have WORKED FOR THE SAME EMPLOYER FOR 15 YEARS (NOT REQUIRED TO BE CONSECUTIVE)
- elective deferral limit increased by the lesser of:
(1) $3,000
(2) $15,000 reduced by increases to the general limit allowed in previous years due to the 15-year rule, OR
(3) $5,000 times the number of years of service for the organization by the EE subtracted from the total elective deferrals made by ER for earlier years
Maximum elective deferrals using the 15-Year Rule may be as high as $33,000 (2023) = $22,500 + $3,000 + $7,500)
Business must be a Health, Education, or Religious Organization (HER) to qualify for the 15-Year Rule Catch-Up
What is a 457 plan?
not subject to many of the eligibility standards of IRC such as nondiscrimination, minimum participation, and funding and vesting standards
a non-qualified deferred compensation plan
3 types: (1) eligible governmental plans, (2) eligible tax-exempt plans, and (3) “ineligible plans”
eligible plans are 457(b) plans
- “PUBLIC” = funded, governmental (all eligible EEs), funds placed in a trust
- “PRIVATE” = unfunded tax exempt (HCE or management), funds not placed in a trust
ineligible plans are 457(f) plans ==> greater deferral of funds = “TOP-HAT PLANS”
457 Plan Catch-Up Provisions
Age 50 Catch-Up Contributions for Governmental 457(b) Plans
- additional $7,500 above $22,500 elective deferral limit
- available only for eligible gov’t (public) 457(b) plans
Special “Final 3-Year” Additional Catch-Up Provision
- applies to both public and private 457(b) plans
- 3 years prior to normal retirement age (as defined by the plan) an EE may contribute an additional amount equal to the elective deferral limit
- limited to prior unused maximum deferral amounts (where participant did not contribute)
- not a requirement to offer
- cannot use both Age 50 and Final 3-Year simultaneously
What is a 457(f) “Ineligible” or “Top-Hat” Plan?
NQ deferred compensation plan for state and local gov’t EEs and for tax-exempt ERs
contributions subject to a “substantial risk of forfeiture”
taxation occurs when no risk of forfeiture
Disadvantages
- termination before stated payment period subject to forfeiture
- participant may be taxed once funds vested even without a distribution or no longer subject to substantial risk of forfeiture
