Retirement Plans and Taxation Flashcards
Defined contribution plan - what is it? Is it a qualified plan?
IS A QUALIFIED PLAN Separate account for each employee and benefits based on contributions/earnings in account. Have cash value today that’s easy to quantify. Yes qualified. QDRO required
Defined benefit plans - what is it ? Does it require QDRO ?
YES qualified. QDRO required (except some government plans no QDRO). Obligates employer to pay specific pension to employee upon retirement. Interest is derived from the amount of pension promised to each employee upon retirement. No cash value today.
IRA - what is it ? Is it qualified ?
NOT qualified. Accounts set up at custodial for individual to save for retirement - with tax free growth (ROTH) or on tax deferred basis (traditional)
What is IRC 1041?
TRANSFER of spouse interest in retirement plan as part of division of marital property is not taxable
Are distributions pursuant to divorce taxable ? How in general ? Employer security ?
YES - if employer securities, tax on unrealized appreciation is deferred until sale otherwise ordinary income
What happens with a distribution from qualified plan ?
Mandatory 20% withholding unless direct rollover
NOT APPLICABLE TO IRA’s
What is IRC 72 T 2 C?
Non participant spouse can receive DISTRIBUTIONS from QUALIFIED PLAN pursuant to a QDRO without 10% penalty (subject to OI). They have to take cash before 401k changed hands to escape penalty
What are methods of TRANSFERRING IRAs?
- Change owners name on IRA (if full transfer)
- Trustee to trustee transfer (60 day rule applies)
- Rollover (60 day rule applies)
In which type of account can you avoid the 10% penalty rule by making equal and periodic payments for 5 years or until age 59 1/2, whichever is longer?
IRAs
What are the exceptions to 10% penalty for premature distributions for qualified plans (plans regulated by ERISA (Employee Retirement Income Security Act)?
- Death
- Disability
- Distributions for medical/qualified higher education
- Distributions in form of annuity payments for life expectancy
- Distributions made to ex-spouse pursuant to QDRO (IRC section 72T2c)
What are the methods of dividing a pension ?
- Present value or cash out method (non-employee paid lump sum settlement or receives assets equal their interest)
- Deferred division of future share method (no PV determined. spouse is awarded share of bene’s if and when paid)
- Reserved jurisdiction (court retains the authority to order distributions from pension in future. (LAST RESORT)
Define Coverture fraction
Method in pension valuing and defined contribution to show percentage of plan spouse has access to (# of years married while working/ total # of years worked until retirement OR years working while married until divorce) X pension amount.
What is the formula for inflation-adjusted ROR (rate of return)?
[(1+ discount rate) / (1+inf rate)] - 1 x 100
What are the differences between corporate and public employee pensions?
Public Employee pensions WONT ALLOW division by QDRO (exception because it is a qualified defined bene plan). In some states, assets are not assignable at all to ex ex-spouse.
Vesting schedules - required
5 year cliff vest
3-7 year graded vesting: (20% more per year) year 3 20%, year 4 40%, year 5 60%, six 80%, 100% year 7
Mature plan
Employee may be fully vested but may have to wait until reaching a certain age to get benefits. For ex, some companies do not pay out benefits until the employee has reached age 60 or 65. In some cases, if employee isn’t vested in plan and dies before retirement age, benefits are lost.
What date must be used in determining the present value of a pension?
Earliest year of retirement without penalty
Who are QDRO distributions taxable to ?
If child support (usually arrears), taxable to participant. If marital division, taxable to alternate payee. Alimony, not taxable income to payee
Plans divisible by QDRO include (9)
1) Defined contribution plans
2) Defined benefit pension plans
3) 401ks
4) Thrift savings plans
5) Some profit sharing and money purchase plans
6) Keogh plans
7) Tax sheltered annuities
8) Esops
9) Old PAYSOPs
What are methods to determine amount paid to alternate payee QDRO pension ?
- stated %
- stated $
ERISA - when and what
1974 - Employee Retirement Income Security Act of 1974. Established laws relating to attachment of pension benefits. Family courts confused about how to treat plan assets that state courts said were marital property
USFSPA When ? What ?
1982 - Uniformed Services Former Spouses Protection Act. Recognizes military retirement bene’s as marital property and says state court can divide by state law. can order direct payment of benefits to ex-spouse (not more than 50%) if during marriage military spouse was in service for 10+ years
REA When ? What ?
(10 years after ERISA) Retirement Equity Act 1984 - Provides all qualified plans subject to ERISA may segregate assets for benefit of an alternate payee through court order known as a QDRO. Many non ERISA plans will also honor
TRA When ? What ?
1984 - Tax Reform Act of 1984 - added code sec 1041 which allowed marital property to be transferred free of tax.
