Retirement Savings and Income Planning (18%) Flashcards
2/5 - Defined Contribution Plan Types
Profit Sharing: 401k, Stock Bonus, ESOP
DC Pension Plan: Money Purchase or Target Benefit
Participant bears investment risk.
No guaranteed final benefit amount.
DC Plan Vesting
Must be at least as generous as 3-year cliff, or 2-6 year graded.
DC Plan Contribution Limits
EE/ER Contribution limit: $69,000
EE max: $23,000 or total income; +7,500 50+; aggregated over multiple jobs.
ER max: 25% of payroll
Max compensation considered is $345,000 for ER match.
Money Purchase Pension Plan Unique Features
Mandatory annual contributions by ER.
100% ER funded.
Max 10% of ER stock
No withdrawals until 62
EE bears investment risk.
Better for younger participants
Simple.
Target Benefit Pension Plan Unique Features
Mandatory annual contributions by ER.
100% ER funded.
Max 10% of ER stock
Actuary determines contributsions based on participant age.
Can skew higher contributions towards older participants.
Actuary only used in initial year.
Final benefit is only a target and not guaranteed.
2 types of defined benefit plans
- Cash Balance Pension Plan;
- Traditional Defined Benefit Pension Plan
Features of Defined Benefit Plans
i. Guarantee final benefit.
ii. Max pension of $275,000
iii. Max compensation considered is $345,000
iv. Qualified plans are insured by PBGC
v. Must vest 5-year cliff or 3-7 year graded.
vi. Must have joint and survivor payout unless waived
vii. Annual actuarial work req’d.
Appropriate use of ‘Traditional Defined Benefit Pension Plan’
Provides highest levels of guarantees for the participant but is most expensive plan to administer.
Use if older management/owners and good financial standing and stable cash flows.
Specific feature of Cash Balance Pension Plan
Defined Benefit plan.
Must use 3-year cliff vesting schedule.
403(b) Plans aka TSA (Tax Sheltered Annuity) - who can use?
Retirement plan used by 501(c)(3) organizations - schools, & hospitals.
Participant can only invest in Mutual Funds and Annuities.
403(b) Contribution Limits
EE - $23,000, 50+ $7,500
15-years of service +$3,000
Contributions NOT aggregated with other plans.
e.g.: Age 50+ with 15-years experience: $23,000+$7,500+$3,000 = $33,500.
403(b) withdrawal rules
Required RMD at 73
10% penalty for w/d before 59.5
Can roll over to IRA or 401k
457(b) plan, who can use?
Government and certain non-profit orgs.
457(b) plan features
EE - $23,000, 50+ $7,500
Last 3 years of service - Up to $46,000 (no using $7,500 also.
Contributions NOT aggregated with other plans.
NO early withdrawal penalty
e.g.: Age 50+ with 15-years experience: $23,000+$7,500+$3,000 = $33,500.
SE Tax Calculations
15.3% - 12.4% SS + 2.9% Medicare.
Net earnings x .9235 x .1535 = SE
Cap at $168,600 for SS.
Above $168,600 = 2.9% only
50% of SE tax is used for:
i. Above the Line Deduction
ii. deducted for max retirement plan contribution
SE Person max retirement contribution formula:
Step 1: Net Earnings x .9235 x .153 = SE Tax
Step 2: SE Tax * 50% = Adjustment
Step 3: Net Earnings - Adjustment = Max earnings
Step 4: Adjusted Contribution Rate = Plan rate (25%) / 1+Plan Rate
Step 5: Max Earnings x Adjusted Plan Rate
Simplified Employee Pension (SEP) IRA Plan Features
Easy to set-up and maintain
1+ EE’s
ER contributions only
25% of covered comp, max of $69,000
EE’s 21+ and 3 of last 5 years EEs
No loans.
No 10% early withdrawal penalty
SIMPLE IRA Features
Salary reduction plan with little paperwork
<100 EEs
No annual filing requirement
EE: $16,000, 50+ $3,500
ER: must either: i. Match EE contrib 100% for first 3% of comp, or ii. contrib 2% of comp.
Early withdrawal 10% penalty.
W/d w/in 2-years of contrib = 25% penalty
Difference b/w SEP and SIMPLE
SEP is 100% ER funded.
SIMPLE has EE contributions
IRA Traditional Rollover
1x year only.
60-day rule to roll over
20% federal withholding by ER except if IRA-IRA rollover.
Direct Transfer Rollover
No annual limit to number of direct transfers.
Patricipant does not take possession of the funds.
Difference b/w Traditional IRA rollover and Direct Transfer Rollover
A “traditional IRA rollover” refers to moving funds from any type of retirement account (like a 401(k)) into a traditional IRA, while a “direct transfer rollover” specifically means that the funds are moved directly from one account to another without ever coming into your possession, essentially eliminating the risk of taxes being withheld; a direct transfer rollover can be a part of a traditional IRA rollover if done correctly.
401k to Roth IRA method
401(k) with only pre-tax contributions must first be rolled into a Traditional IRA & then converted via a Roth IRA conversion
Rule for spousal IRA beneficiary
Spouse has choice:
i. Be treated as IRA owner and defer RMD’s until age 73;
ii. Combine inherited IRA with their own
Rule for non-spouse beneficiary of IRA
10-year rule
Rule for Eligible Designated Beneficiary (EDB)
Distributions can be spread out over life.
Who are Eligible Designated Beneficiaries
-Spouse
-chronically ill bene
-disabled bene
-minor children (under 21)
-Bene’s not more than 10-years younger
-Bene’s older than IRA owner
Rule for Roth IRA Beneficiaries
No RMD’s for life of IRA owner
No RMD’s for life of spouse of IRA owner
Non-Spouse Bene subject to RMD’s
Who has 5-year IRA withdrawal rule
Estate
Charities
Non Look-Through Trusts
Minor (under 21) beneficiaries of IRA
Can take RMD’s over life expectancy until age 21, then 10-year rule applies
Exception to early withdrawal penalties
Separation of Service - only applies to Qualified Plans
Penalty exception for education expenses, health insurance premiums, and first time home buyers applies ONLY to IRA’s.
Roth IRA Distributions
Age 59.5 is not absolute tax-free qualified distribution.
5-year holding period is absolute.
Qualified distribution for: death, disability, or first-time home purchase can occur at younger ages.
Roth IRA Qualified Distribution Requirements
After 5-years! AND
-Death
-Disability
-First time home purchase ($10k max)
-After age 59.5
Roth IRA non-qualified Roth IRA Distributions:
- Earnings - Regular Tax and 10% penalty
- Roth conversion Contribution - No income tax. If w/in 5-years, 10% penalty
- Regular Roth Contributions - No Tax, No Penalty
