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Superfight 2 > Retirement Plans & Beyond > Flashcards

Retirement Plans & Beyond Flashcards

1
Q

What are the 401k safe harbor rules?
How do safe harbor contributions vest?
What does safe harbor get you out of?

A

Either:

  1. Match 100% of the first 3% of deferral and 50% of the next 2%, or
  2. Make 3% contribution to everyone, even those who don’t defer.

Safe harbor gets the plan out of discrimination testing + top heavy rules
Contributions must vest immediately or before.

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2
Q

How do ESOP’s work?

Can partnerships use them?

A

Think of an ESOP as a separate entity from the company. It receives cash from the company, and then uses it to buy the company’s stock. Sometimes the company even borrows $ to buy the stock. In this sense, ESOP’s can be said to finance company operations.

Partnerships can’t use ESOPs because they don’t issue stock.

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3
Q

What do ESOP’s accomplish for EE’s?

Are EE’s then stuck with all their retirement assets in company stock? How do they get out of that?

A

ESOP’s give stock to the EE’s as a stock bonus retirement plan.
EE’s aren’t completely stuck with the stock; those 55+ who have 10 years in can demand diversification. They either get $ or 3 investment choices.

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4
Q

What do ESOP’s do for the company and the owner?

A

They give the owner a market for the stock, and liquidity for his estate.
They allow the company to continue after the owner cashes out.
They can even be leveraged to allow the company to borrow money.

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5
Q

How do New Comparability plans work? Are they expensive and complicated?

A

NC plans use different formulas to compute the contribution % of different types of EE’s.
They’re expensive and complicated but they bring to the owner and the older.

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6
Q

How do DB plans work (specifically the ones that aren’t CB plans)?
Whom do they benefit?

A

DB plans compute benefit by unit formula (years of service x a factor x average pay). Can’t pay more than $230k a year, or compute with more than $290k as pay.
They bring to the owner and the older employees. They even allow credit for past service.

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7
Q

How do Cash Balance DB plans work? Why are they driving out DB plans? What do they guarantee, and whom do they favor?
Do they allow credit for past service?

A

CBDB plans pay a % of EE salary to a fictitious account, and guarantee a rate of return (the 30-year treasury yield).
Ultimately, EE’s get whatever’s in their fake account.
Gives more to younger workers compared to other plans.
Much cheaper/simpler than DBDB plans, so pushing them out.
Allow credit for past service, like all DB plans.

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8
Q

Are 401k’s Qualified Plans?

A

Yes.

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9
Q

Who is eligible for 401k participation? Does the ER have 2 eligibility options?
What about part-time EE’s?
When does eligibility begin?

A
  • Age 21 and 1 year of at least 1,000 hrs service
  • Can require 2 years, but then must fully vest.
  • 3 years + 500 hrs qualifies part-timers
  • Eligibility begins on first plan enrollment date after you meet the criteria.
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10
Q

You have a client who can’t remember if they filed their tax return. Can you call their CPA? Why/why not?

A

No. You must call their attorney. The attorney is a privileged person and can protect the confidentiality of the client. The CPA cannot.

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11
Q

What is your estimated tax if your AGI was > $150,000?

A

110% of last year’s tax.

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12
Q

If you get divorced toward the end of the year AND you have a dependent, can you file HOH?

A

Yes. You’re married and divorced as of your status at the end of the year.

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13
Q

How much investment interest expense is deductible? Can you deduct against qualified dividends or LTCGs?

A

Investment interest expense is deductible against investment income, but cannot create a loss.
LTCGs and qualified dividends already get a special rate. You cannot deduct investment interest expense against them unless you treat them as OI.

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14
Q

When do meals and entertainment of clients qualify as a deductible expense?
3 criteria

A

If you’re present, the expense is non-extravagant, and business is conducted.

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15
Q

Are meals for the convenience of the ER or incurred by the EE while traveling deductible?
If so, at what rate?

A

Yes, at 50%

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16
Q

Are the cost of recreational or social activities not just for HCE deductible?

A

Yes, 100%

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17
Q

Is entertaining clients without conducting business deductible?

A

No.

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18
Q

Is there a deduction for meals and travel for the salaried EE who isn’t reimbursed? What should that person do?

A

No. That person should seek reimbursement from the ER. The ER can deduct at 50%

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19
Q

Are wages from an S-Corp SE income?
Is a K-1 from a general partnership?
Is part-time work?

A

No and yes and yes

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20
Q

What are the two components of FICA tax? Note: They’re BOTH FICA.
What are their tax rates?

A 
SS = 6.2% on W-2 income up to $142,800
Medicare = 1.45% on all W-2 income
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21
Q

What is the oldest a child can be for the child care tax credit?
What is the max credit for the exam?

A

A child must be under 13 for the child care tax credit.

Max that can be claimed is 20% of expenses up to 3,000 for 1 child and up to 20% of up to 6,000 for 2.

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22
Q

How old must a child be for the child tax credit? How much is the credit and how much is refundable?

A

Child must be under 17. 2k credit, up to 1.4k refundable.

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23
Q

What is the max credit for dependents that are 17 or over?
What is the income catch?
Do they have to live with you?

A

$500. They can’t earn over $4,300 indexed.

I don’t think so.

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24
Q

When can adoption expenses be claimed for the adoption credit? What if they happened in the year before the adoption was final?

A

Adoption expenses can be claimed in the year the adoption was final or the year after. If the expense occurred in the year before final, it can be claimed in the year of final.

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25
Q

What is important to remember about:

  • The elderly and disabled credit?
  • The foreign income tax credit?
  • The EITC?
A

To claim the elderly and disabled credit a taxpayer must be both.
The foreign income tax credit can be either a credit or a deduction.
The EITC is refundable.

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26
Q

Can NOL’s be carried back? Can they create a present year loss?

A

No and no. NOL’s in excess of income can only be carried forward.

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27
Q

How are corporations taxed? On dividends?

A

All income 21%

Dividend income gets a 50% deduction.

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28
Q

S-Corp Stuff

  • What is the max # of shareholders?
  • How many types of stock? Preferred?
  • What must shareholders be?
  • What can > 2% owners deduct?
A

100 shareholders
1 type of stock, can’t be preferred
Shareholders must be US citizens or residents
> 2% owners can deduct medical, dental, LTC insurance (same as partnerships)

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29
Q

What are the advantages of a C-Corp?

Hint: don’t forget dividends

A
  • liability protection
  • continuation of life
  • separate tax entity
  • 50% dividend exclusion
  • Sale of stock to unlimited # of investors
  • Can create non-q deferred compensation
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30
Q

Who can create a Personal Service Corp. (PSC)?

HINT: HALE

A

H - HEALTH (Doctors, dentists)
A - Accountants, Artists, Actors, Acutaries
L - Lawyers
E - Engineers

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31
Q

When is an S-Corp better than a PSC?

A

When you want to pass thru losses.

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32
Q

What is Section 1244 Qualified Small Business Stock rule?

Can you claim it with the normal 3k capital loss?

A

It only applies to the first 1M of stock issued by a C or S corp.
The first 100k of losses (joint–50k single) can be deducted as OI
Yes, can be claimed with 3k capital loss.

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33
Q

What type of loan interest can be deducted without limit?

A

Sole proprietor loans!

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34
Q

What is a primary difference between partnerships and S-corps?
Do partnerships file a tax return even tho’ their income is passed thru to owners?

A

Calculation of basis. Partnership: Cash contributed by partner, direct loans mad to partnership by partner, loans made to partnership that are recourse to the partner. Losses can be taken up to basis. S-corps cannot count recourse loans as basis.

Partnerships do file a return just to show where the money went.

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35
Q

S-corp taxation
Basis increase?
Basis reduction?
Cash distributions? FICA?

A

S-corp basis is increased by undistributed income or gain for the year.
It’s reduced by losses claimed against it.
Cash distributed by an S-Corp is a non-taxable reduction of basis.
It’s all not FICA.

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36
Q

S-Corp Salary taxation
Is it subject to FICA and FUTA?
Does it effect the S-Corps basis?

A

Yes, no.

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37
Q

What are the advantages of an LLC?

Hint: 3

A
  • Liability protection.
  • Losses pass thru
  • Basis includes bank loans for which the owner is “at risk” like a partnership.
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38
Q

When does the QBI deduction apply?
What is the %?
Are service and non-service businesses treated differently for it?

A 
QBI applies to pass thru businesses. It's 20%
Service businesses (they always get it worse) are subject to phaseouts at a high level of AGI.
Non-service businesses phase out too, but the phase out only limits the deduction to 50% of wages.
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39
Q

What must a limited partnership have? Is it usually a good answer?
What happens to a partnership if one partner dies? Why does that matter?

A

A limited partnership must have a general partner. Limited partnership is usually not a good answer for entity choice questions.
If one partner dies a partnership dissolves. This a consideration in entity choice questions.

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40
Q

When can sole proprietorship be the right entity choice?

A

When it’s a no-risk business, or when you already have a lot of insurance. And you want to count recourse loans as basis, and LLC isn’t one of the choices.

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41
Q

Do S-corp losses pass thru?

A

Yes damn it.

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42
Q

What is section 197? What is section 179? How do you remember the difference?

A

Section 197 is higher and represents the amortization of higher things, like good will.
Section 179 is deducting all new equipment expenses in the year you put them into use, up to $1,050,000

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43
Q

How does the 3.8% medicare surtax work?

A

If you have AGI above $200s or 250mfj you can pay either 3.8% or your net investment income for the year.

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44
Q

If your tax bracket is 12%, what’s your LTCG rate?

What if your agi > $501,600?

A

0

20%

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45
Q

What are the two most important words in boot questions or partnership gain/loss questions, or sale of personal residence questions?

A

Recognized vs Realized

46
Q

Section 121 = Deduction on gain from sale of personal residence. If you’re forced to move by work after less than 2 years of residence, what deduction can you get? How far do you have to move to get that deduction?

A

If forced to move by work, multiply the fraction of 2 years you lived there x the amount of deduction you would normally get.
You must have moved at least 50 miles.

47
Q

AMT pref. Items

Hint: IPOD

A
  • Intangible drilling cost
  • Private activity municipal bond
  • Oil and gas % depletion (not cost depletion)
  • Depreciation not SL
48
Q

What are the AMT add back items?

A

ISO bargain
SALT tax
Prop tax
HELOC int. not used for home improvement.

49
Q

What is a Master Limited Partnership (MLP)?

From what can you deduct its losses?

A

A publicly traded partnership, the kind where you can only deduct losses against income from that partnership.

50
Q

Can paying off your mortgage reduce your AMT?

A

Yes, because it raises your taxable income, those reducing the chance you’ll owe AMT.
Eliminating any 1040 deduction potentially reduces the likelihood you’ll pay AMT.

51
Q

What are the 3 coverage tests? What is safe harbor?

A
  1. Ratio percentage test: plan must cover NHCE’s at at least 70% of the rate that it covers HCE’s.
  2. Average benefits test: Average benefit of NHCE’s must be at least 70% of that of HCE’s.
  3. DB only: plan must cover at least 50 people or 40% of all employees.

Safe harbor: cover 70% of NHCE’s

52
Q

Who are HCE’s?

Who are Keys?

A 
HCE = > 5% owner, or those who made more than $130,000 last year.
Key = > 5% owner, or officer sho made more than $185, or greater than 1% owner who made more than $150.
53
Q

When do you test with HCE’s and when do you test with Keys?

A

HCE’s are for plan discrimination and ADP/ACP testing

Keys are for plan vesting (Top heavy tests)

54
Q

When is a DB plan top-heavy? What must it then do?

A

A plan is top heavy if more than 60% of its benefits accrue to keys.
If DB, it must accelerate vesting to DC schedule: 3-year cliff, 2-6 graded, 100% vested w/ 2-yr eligibility.

55
Q

What type of plan is ADP/ACP testing for?

What do they test?

A

ADP/ACP testing is for elective deferral plans (401k’s for ex.)
ADP tests how much EE’s defer
ACP tests how much ER’s match.

56
Q

How does the ADP test work?

Do the tests include catch-up contribution?

A

It regulates how much HCE’s can defer based on how much NHCE’s defer.
If NHCE’s defer 2% or less, HCE can defer double.
If NHCE’s defer between 2 and 8%, HCE can defer 2 points more.
If NHCEs defer > 8%, HCE can defer 125% as much.
These tests DO NOT include catch up contributions.

57
Q

Can the following types of plans use SS integration?
ESOP?
SIMPLE (with their 25% penalty on withdraws in the first 2 years)?
SEP (with their following year start date)?

A

No, no, and YES.

58
Q

Deduction and Account Contribution Limits

  • What is the max deduction an ER can take for contributions to a plan?
  • What is the max that can be contributed to an EE’s account?
A

The max deduction = 25% of covered comp.

The max contribution = 58K or 100% of comp.

59
Q

If you have more than 1 job, can you defer more than $19,500?
Can your accounts in total receive more than 58k?

A

No, deferrals aggregate.

Yes.

60
Q

How do you calculate an SE person’s KEOGH Contribution?

How does the SS wage base matter for this calculation?

A

Start with net SE income.

  • If he’s making a 25% contribution to EE’s, he can make a 20% contribution to himself. Multiply net SE income by 18.59%
  • If he’s making a 20% contribution to EE’s, he can make a 15% contribution to himself. Multiply net SE income by 12.12%
  • If he’s making more than the SS wage base, this is a complex problem. Aim for a higher answer than the %’s above allow.
61
Q

When is a plan top heavy?

What are keys again?

A

A plan is top heavy when > 60% of benefits go to keys.

Keys are > 5% owners, officers who make more than $185, > 1% owners who make more than $150

62
Q

What is the consequence for top heavy plans?
DB?
DC?
How do you remember this?

A

DB - Must contribute 2% to non-keys for every year the plan was top heavy for up to 10 years.
DC - Must contribute 3% of EEs compensation
B = 2nd letter, 2% contribution
C = 3rd letter, 3% contribution.

63
Q

What is the low income housing deduction equivalent credit? Is there a phaseout?

A

25k x your marginal tax rate. No phaseout.

64
Q

What is the low income housing credit?

A

SL depreciation, spread over 10 years.

65
Q

How do you deduct working oil and gas losses if you have personal liability?
What’s the catch?

A

You can deduct losses against any income. No phaseout. Catch: if your liability is limited you can’t do this; you have to use PAL rules.

66
Q

Do I-bonds have phantom income?

What treasury securities have phantom income?

A

No! They’re tax deferred. Like EE’s.

STRIPS, TIPS, and zeroes are phantom income.

67
Q

What is the charitable deduction limit for OI property?

What other property has the same deduction limit?

A

The deduction is basis up to 50% of AGI.

Includes: inventory, art created by donor, non-use-unrelated art and collectibles, STCG property and copyrights.

68
Q

How do you calculate the charitable deduction for loss property?

A

FMV @ transfer up to 50% of AGI?

69
Q

Can you value a car at bluebook for a charitable deduction?

A

Not necessarily. You have to value it at what a willing buyer would pay for it.

70
Q

What can you deduct margin interest against?

Hint: Do qualified dividends and LTCG’s count?

A

You can deduct margin interest against other investment income.
HOWEVER, you can’t use qualified divs or LTCG unless you agree to tax them at OI rates! Let’s not ask for the moon, now.

71
Q

What’s another term for miscellaneous income?

A

Hobby income

72
Q

Do alimony and maintenance count as earned income for IRA contributions?
Do director’s fees?

A

Yes to both.

73
Q

Can you contribute to a spousal IRA if you don’t work?

A

yes as long as your husband has earned income.

74
Q

Do you count as an ‘active participant’ if your account hasn’t rec’d any additions for the year? What about forfeitures?

A

You’re not an active participant until your account receives something. Forfeitures count as something.

75
Q

If you’re an active participant, what is your AGI phaseout for single and MFJ? Is it just double?

A

Single: $66k - 76k
MFJ: 105K - 125k.
It’s slightly less than double.

76
Q

If your spouse is an active participant, what’s your IRA contribution phase out?

A

$198 - 208k

76
Q

If your spouse is an active participant, what’s your IRA contribution phase out?

A

$198 - 208k

77
Q

What’s the AGI threshold for contributing to a Roth?
Single?
MFJ?
MFS?

A

Single: 125 - 140
MFJ: 198 - 208 (same as if your partner is an active participant)
MFS: 0 - 10k

78
Q

What are the exemptions for the IRA 10% early withdrawal penalty?
There are 7 if you count D+D as one.

A 
Death or disability
Medical expense > 10% of AGI.
10k for first time home purchase
Pay health insurance after employment termination
Substantially  equal payments
5k for birth or adoption
Qualified education expenses
79
Q

If you pledge your IRA as collateral for a loan, does that count as a distribution?

A

Yes.

80
Q

Can you make a Roth conversion from a 403b account?

Does a Roth conversion count as an RMD?

A

Yes and no.

81
Q

Do 401k’s have RMD’s? How do you avoid them?

A

Yes. Convert to a Roth.

82
Q

Can you convert an inherited IRA to a Roth?

A

No!

83
Q

Rules for Roth distributions: earnings, conversions, basis - what comes out first?

A

Basis, conversions, earnings.

84
Q

Do Roth conversions need their own 5-yr holding period?

A

Yes! Without that or another qualified withdrawal reason they’re subject to penalty.

85
Q

What is the only way you can re-characterize a Roth contribution?

A

If your AGI exceeds the Roth contribution threshold.

86
Q

Let’s talk Roth 401k’s:

  • Do 401k plans have to offer them?
  • What are the contribution limits?
  • Is the match Roth?
  • Do RMD’s apply?
  • Do you still need 5 years and 59.5 for penalty free withdrawal?
  • Do you still get penalty free withdrawal for a home purchase?
A

No, the same, no-only the deferrals are Roth, Yes-RMD’s, yes, no.

87
Q

Let’s talk about SEP’s: the plan with the latest start date, that’s cheap and easy to set up, but gives you limited flexibility especially around excluding part time EE’s.

  • Basically who contributes to what?
  • Are deferrals allowed?
  • Who participates?
  • What is the maximum contribution?
  • How much can owners contribute to their own accounts?
  • What is the minimum earnings to be eligible?
  • Do “recurring and substantial” contribution rules apply?
  • Can they integrate with SS?
  • What type of EE does a business want and not want to have for this?
A
  • ER makes contribution to EE’s IRA.
  • No deferrals allowed.
  • Anyone 21+ who’s worked for 3 of the last 5 years, incl. part-time
  • 25% of covered comp up to 290k or 58k
  • Owners contribute under KEOGH rules
  • Anyone who earns $650+ is eligible
  • Contribs can be 0, “recurring and substantial” doesn’t apply.
  • Good if you have numerous short-term EE’s, less so w/ long-term part-time EE’s.
  • Can integrate with SS.
88
Q

Savings Incentive Match Plan for EE’s (SIMPLEs) - the easy to set up plan with the early start date that requires 100 ee’s or fewer.

  • Is there discrimination testing?
  • Is there a required match? What is it? Can it be skipped?
  • What is the max deferral?
  • Is there a 50+ catch-up deferral?
  • Who’s eligible?
  • What’s the vesting?
  • What’s the draconian penalty?
A
  • No discrim. testing.
  • Mandatory 3% match or 2% for everyone?
  • EE can reduce match to not less than 1% for 2 out of last 5 years, but can’t skip it.
  • Max deferral = $13,500 for 2021
  • 50+ catch up = $3,000
  • Eligibles earned 5k for the last 2 years and expect to do so again.
  • 100% vested at all times.
  • 25% penalty if account is withdrawn in the first 2 years.
89
Q

403b plans!

  • Who are they for?
  • Can a state sponsor one?
  • What are the deferral contribution limits?
  • Is there a unique to 403b extra deferral contrib?
  • Are deferrals subject to FICA and FUTA?
  • What are your investment choices?
A

403b’s are for non-profits, churches, schools, hospitals, science centers.

  • States cannot sponsor them
  • Same contrib rules as 401k
  • Unique to 403b: Additional 3k deferral if you’ve been with employer for 15 years.
  • Deferrals are subject to FICA and FUTA.
  • Investment choices are mutual funds and annuity contracts (which can include $ value LI).
90
Q

What is the formula for alimony recapture (assuming pre 2019 divorce)?

A

P1 + P2 - 2P3 -$37,500

91
Q

What is fully insured for SS?

What is currently insured?

A

Fully insured = 40 credits (or quarters)

Currently insured = at least 6 quarters out of the last 13.

92
Q

Who is not covered by SS?

There are 4.

A

Railroad workers
Children under 18 working for a parent in an unincorporated business.
Ministers if they claim exemption
Tribal council members

93
Q

Who qualifies for SS retirement benefits at age 60?

What age do all others qualify at?

A

The surviving spouse of a deceased insured worker. Including the surviving spouse divorced from a deceased insured worker as long as they were married 10 years and didn’t re-marry.

All others qualify at 62.

94
Q

How do you calculate the % reduction in someone’s SS retirement benefit if they take benefits before FRA?

A

of months early divided by 180 = % benefit reduction

95
Q

When is your SS income reduced due to earnings? By how much?
Exactly when does the reduction stop?

A

If you have earnings above a certain amount AND you take SS before FRA, your earnings are reduced by 1 of 2 equations:
If you have earnings above $18,960, and you don’t reach FRA in 2021, your SS is reduced $1 for every 2 you earn above that.
If you reach FRA in 2021, and you earn more than $50,520, your SS is reduced $1 for every $3 above that. These numbers are provided. Note: this stops with the month before you reach FRA.

96
Q

What are the 50% rule and the 85% rule for any type of SS income?
What is provisional income again?

A

These are the amts of your SS benefit you must include in income if your provisional income is greater than 25k single and 32k MFJ (for 50% inclusion) and 34k single and 44k for MFJ (85% inclusion).

Provisional income is MAGI (includes muni bond interest) + 1/2 of SS.

97
Q

When is a QTIP a QTIP? Why?

A

A QTIP is only a QTIP when the question says it’s a QTIP.

A QTIP has requirements in addition to saying the STD spouse receives income or hems from it.

98
Q

Who is someone’s next of kin? If they die intestate, how are their assets split?

A

All of immediate family are next of kin. Assets are divided among them.

99
Q

When is a 403b an ERISA plan?

A

When the ER contributes.

100
Q

What is the max benefit from a DB plan?

A

230k or 100% of last 3 years of salary, using 290 as max for any year.

101
Q

Where MUST forfeitures go in DB plans?

A

To reduce company contributions.

102
Q

What does the PBGC cover?

A

Defined Benefit plans only.

103
Q

What is the max contribution for DC plans without a CODA?

A

100% of salary, or 58k

104
Q

Does the maximum 401k deferral include the catch-up contribution?
Does the max ER deduction?

A

No and no. By this, the ER can actually deduct > 25% of covered comp if you count catch ups.

105
Q

How can an ER deduct more than 25% of covered comp given to a specific employee?

A

If it contributes < 25% to another employee. The deduction is based on an aggregate calculation.

106
Q

401k, 403b hardship withdrawals.
Can they come from DC plans?
What is the distributable amount?
Is the HWD subject to OI and 10% penalty?

A

Cannot come from DC plans per se, only 401k, 403b.
Deferrals + vested contributions are available.
HWD is subject to OI, 10% penalty may be waived.

107
Q

What is a solo 401k?
What are the contribution limits?
Subject to coverage testing and discrimination rules?
Who is the plan for?

A

Contribution limit is 58k + catch-up.
Not subject to any testing.
Plan is for you, your spouse or two partners

108
Q

Stock bonus Plans and ESOP’s: They are a variation of profit sharing plans. What makes them different?

A

They invest plan assets primarily in ER stock.
Accounts are stated in shares of ER stock.
Benefits are generally distributed in ER stock.

109
Q

Why stock bonus plan or ESOP?

How many shareholders in an ESOP?

A
  • Broaden ownership of stock.
  • Take advantage of potential nua treatment.
  • An ESOP is one shareholder.
110
Q

How does NUA work?

Can any plan with ER stock do it?

A

NUA gain isn’t taxed until EE sells stock.
NUA = difference between ER’s cost basis and value at lump-sum distribution to EE.
NUA is always LTCG.

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