Retirement Savings/Income Planning Flashcards
1
Q
Nonqualified deferred compensation
A
often used to provide retirement benefits to top executives that exceed limits available through qualified plans. Plans are often referred to as top-hat plans, excess benefit plans, or supplemental executive
2
Q
excess benefit plan
A
typically mirrors a qualified plan benefit formula but is not subject to funding or benefit amount limits, covered compensation limits, or an annual additions limit.
3
Q
SERP
A
typically promises to pay an executive additional compensation of a specified amount for a specified period contingent on the executive remaining with the company for a specified period and/or attaining specific goals, typically related to production or sales growth.
4
Q
are employers required to include everyone in non qualified plans?
A
Employers can select which executives are included in the plan and benefits do not need to be uniform among participants.
5
Q
are nonqualified plans subject to ERISA regulations?
A
Plans are not subject to all the rules and regulations under ERISA or the funding limits for qualified plans under IRC Section 415.
6
Q
are there formal funding in non qualified plans?
A
no
7
Q
The goal for non qualified deferred comp plans
A
To avoid constructive receipt and current taxation there must be a substantial risk of forfeiture
8
Q
do non qualified deferred comp plans have a vesting schedule?
A
typically
9
Q
Nonqualfied deferred comp plans tax consequences for employer and executive
A
The executive does not recognize income and the employer does not receive a deduction until there is no longer a substantial risk of forfeiture.
10
Q
How are nonqualified deferred comp plans pccasionally “informally funded
A
using cash value life insurance
11
Q
what does a Rabbi Trust do?
A
provides some security to the executive in safeguarding the payment of the promised deferred compensation benefits.
12
Q
Are funds in the rabbi trust are available to the corporation for other purposes?
A
no
13
Q
what are the funds safeguarded from in a Rabbi Trust?
A
funds are safeguarded in the event of a merger or acquisition.
14
Q
Why does a rabbi trust not trigger immediate recognition of compensation to the executive?
A
because the funds in the rabbi trust are accessible by corporate creditors in the event of insolvency of the company.
15
Q
What trust is not subject to the company’s creditors and results in immediate compensation recognition
A
A “secular” trust
16
Q
What does the use of a rabbi trust to provide
A
some security to the executive for the payment of the unfunded promise of nonqualified deferred compensation benefits
17
Q
what is the objective of a rabbi trust
A
to provide a level of security without triggering constructive receipt. Note: the funds are still subject to the companys creditors
18
Q
Types of qualified plans (2)
A
Pension
Profit-sharing-Section 401(k)
19
Q
Tax-Advantaged Plans that have characteristics like qualified plans
A
Simplified Employee Pension (SEP)
Savings Incentive Match Plan for Employees (SIMPLE IRA)
20
Q
List Non-Qualified Plans
A
Non-qualified deferred compensation
Supplemental Executive Retirement Plan (SERP)
Top Hat Plan
Section 162 Bonus Plan
21
Q
When choosing between a qualified plan and a non-qualified what three common elements can be determined by the employer’s ranking
A
1.) Currently deductible employer plan contributions
2.) Benefits not currently taxable to the employee/participant
3.) Employer can limit participation to select individuals (pick and choose)
No retirement plan has all 3 elements. An employer may select any 2 of the 3 and the choices will dictate the plan category
22
Q
Employer plan choices combo visual
A
23
Q
section 162 bonus plan
A
another type of executive benefit.
24
Q
section 162 plan details
A
large cash value life insurance policy, executive owns the policy and names the beneficiary, the employers pay the premiums, the executive pays taxes on the premiums paid as bonus compensation, death benefit is tax free, executive has access to the cash value
25
(NQSO) Grant
Employer awards executive with option to purchase a specified number of shares of the employer’s stock at a specified price.
26
is there a tax consequence with a NQSO grant?
no
27
Are NQSO grant options subject to a vesting schedule before they may be exercised?
typically
28
NQSO exercise stock option
The employee purchases the employer stock at the price specified at grant.
29
Difference between the exercise(strike) price and the FMV on the date of exercised is referred to as
bargain element
30
Tax consequences for employer and employee year of NQSO exercising option
executive recognizes compensation income in the amount of the bargain element.
Compensation income recognized is subject to payroll taxes.
Employer claims a deduction for the compensation recognized by the executive.
31
What is the executive’s basis in the stock purchase for a NQSO
the sum of the exercise price paid and the compensation income recognized.
32
NQSO sale of stock
The stock previously acquired at exercise is sold.
33
Tax consequences for sale of NQSO stock
The difference between the sale price and the basis is taxed as capital gain; either STCG or LTCG depending on the holding period after the exercise date
34
Are there restrictions for NQSO terms of the grant
no
35
Who can NQSO be issues to
NQSOs may be issued to the employee or a beneficiary of the employee.
36
Can NQSO be gifted?
NQSOs may be transferred (gifted) during the lifetime of the original recipient
37
Incentive Stock Option (ISO)
tax-favored plan for compensating executives by granting options to buy company stock at specific exercise prices
38
Do ISO's get taxed at time of grant or time of exercise of the option?
no
39
f the ISO meets the requirements of IRC Section 422, when does the executive get taxed?
only when stock purchased under the ISO is sold, except for the potential of Alternative Minimum Tax (AMT).
40
When does a corporation receive a tax deduction with a qualfiying disposition ISO
never
41
When does a corporation receive a tax deduction with an ISO?
in a non qualifying disposition, when the stock is sold
42
what constitutes a qualifying disposition in an ISO?
sale occurs at least two years from grant AND one year from exercise
43
Grant Phase in ISO
no taxable event, strike price= market value
44
What is the ISO grant limit per year?
100k
45
can an ISO create AMT? If so, during what phase?
yes, during exercise
46
at what price is a stock purchase at when exercising an ISO
strike price
47
What is the Positive AMT Adjustment in an ISO
the amount of the bargain element
48
how can yo calculate the bargain element in an ISO
FMV at exercise price - strike (exercise) price) x # of shares- it is not subject to current taxation but there is an (+) adjustment for AMT in the amount of the bargain element
49
what happens in the sale phase of an ISO
stock is sold, Negative AMT adjustment,, capital gain/loss on the difference from the strike price is its a qualfiying disposition.
50
when does the negative AMT get adjusted in an ISO
during the sale of stock, if the price of the stock at the time of sale is greater than or equal to the price of the stock at the time the ISOs were exercised, the adjustment will be a negative adjustment for the SAME AMOUNT as the og positive AMT ISO adjustment
51
what happens in a disqualifying disposition ISO?
bargain element gain will not be taxed as capital gain
52
what triggers a disqualifying disposition ISO
if holding rules are not met (Qualifying Disposition = Sale occurs at least:
two years from grant AND
one year from exercise.)
53
when is the final tax treatment known in an ISO?
not until the stock is sold
54
Taxation options in a disqualifying disposition ISO
stock is bought & sold in the same year: ordinary income and FICA; employer receives deduction
stock is bought and sold within one year but not within the same calendar year: ordinary income only
55
what is the basis in the shares for regular income tax purposes in a qualified disposition ISO
exercise price paid
56
if a qualifying disposition occurs, how does the ISO become taxed like a NQSO?
-bargain element @ exercise is recognized as compensation income
-gain upon sale is LTCG or STCG depending on holding periods after exercise
-basis in sale is like NQSO: exercise price + compensation income recognized
57
3 characteristics of Non-Qualfied Stock Option (NQSO)
Usually subject to vesting.
Can be transferred or “gifted” to family members, trust, or charitable organizations.
Corporation receives a deduction when employee pays tax at exercise.
58
3 characteristics of incentive stock options (ISO's)
Corporation may not ever receive a deduction.
May create AMT.
No more than $100,000 per year may be granted.
59
Which between a NQSO and ISO has a taxable event during grant option?
none
60
which between a NQSO and ISO has a taxable event during exercise of grant option?
NQSO: "bargain element" subject to w-2 taxation
ISO: "bargain element" not subject to current taxation. preference item for AMT
61
which between a NQSO and ISO has a taxable event during sale of stock option?
NQSO: capital gain/loss on diff from the strike price + w2 income recognized at exercise
ISO: capital gain/loss on dif from strike price if qualfiying disposition- sale at least 1 year from exercise and 2 years from grant
62
taxation consequences of a disqualfiying disposition of an ISP
taxation becomes same as NQSO
if stock is bought and sold in same year: ordinary income & FICA; employer receives a deduction
if stock is boguht and sold within one year but not within same calendar year: ordinary incokme not subject to IFCA; employer receives deduction
63
when does an employer receive a deduction in an ISO?
only if a disqualifying disposition happens
64
Who/what does social security provide benefits for?
Retirement, survivors of a deceased worker, disability
65
What is the max credits one can earn for social security in a year and total required?
4 a year; require fully insured status of 40 earned credits
66
How much does one quarter of coverage of earned income is needed?
One quarter of coverage (i.e., “Social Security credits” or “worker credits”) is earned for each $1,640 (2023) of earned income
67
social security benefit for retirement
for workers 62 and older who have earned at least 40 credits
68
social security benefits for disability benefits
for adults who are unable to work due to a physical or mental disability that is expected to last at least 12 months or result in death
69
social security benefits for a survivors benefit
for the family members of deceased workers who qualified for social security
70
How is the Average Indexed Monthly Earnings (AIME) calculated?
Based on 35 best years of Social Security Earnings
Adjusts (indexes) each year’s earnings to present day dollars
Calculates average monthly earnings in current dollars
71
What is used to calculate Primary Insurance Amount)PIA for social security?
Average Indexed Monthly Earnings (AIME)
71
What is Primary Insurance Amount (PIA)
PIA is the monthly retirement benefit at Full Retirement Age (FRA)
Breaks average earnings down based on “bend points”
In 2023, the bend points are $1,115 and $6,721
71
What is the earliest a worker may claim Social Security retirement benefits
age 62. Benefits are reduced up to 30% permanently
72
What is the benefit paid at full retirement age (FRA)?
PIA
72
what are social security benefits increased by per year if delayed beyond FRA up to age 70?
by 8% per year totaling 24% to age 70.
2/3% for each month following FRA, up to age 70 (8% per year).
72
Early Retirement formula (reduced benefit) for social security
5/9% for each of first 36 months worker is claiming benefits prior to FRA PLUS
5/12% for each month over 36 months worker is claiming benefits prior to FRA up to an additional 24 months
73
How much is withheld for claiming benefits while having earned income from age 62 to the year in which full retirement age (FRA) is attained?
$1 of Social Security benefits is withheld for every $2 earned in excess of $21,240 (2023)
74
How much is withheld for claiming benefits while having earned income in the year in which full retirement age (FRA) is attained?
$1 of Social Security benefits is withheld for every $3 earned in excess of $56,520 (2023)
75
What are the 2 consequences of claiming Social Security retirement benefits prior to FRA?
1) A permanent reduction in monthly benefits, and 2) Benefits withheld temporarily if the claimant has earned income above the applicable threshold. The earned income thresholds are provided in the tax tables for the exam; know how to apply them.
76
How is income earned considered in the first year of claiming benefits prior to claiming benefits?
In the first year of claiming benefits income earned prior to claiming benefits is not considered
77
When does a special “first-year” rule apply when claiming social security?
for the balance of the year in which benefits are first claimed
Benefits can be paid in any month in which the earned income is less than 1/12th of the applicable yearly limit (1/12th of $21,240 (2023) or 1/12th of $56,520 (2023) in the year of FRA)
78
What is the taxation of social security benefits Inclusion for income tax purposes based on?
provisional income aka combined income; Don’t forget to add back tax-exempt earnings in the calculation!
79
What is the formula for provisional income to be considered when getting taxed on social security benefits?
50% of Social Security benefits + tax-exempt income + AGI (without Social Security) = provisional income
80
What is the maximum amount of a worker’s Social Security that will be subject to income tax?
No greater than 85%; a minimum of 15% will always be tax-free
81
Provisional income tax limit numbers for MFJ
0% taxable up to 32k; 50% taxable up to 44k; 85% taxable above 44k
82
Provisional income tax limit numbers for single
0% taxable up to 25k; 50% taxable up to 34k; 85% taxable above 34k
83
Provisional income tax limit numbers for MFS
85% taxable on all/any income. This applies only if living in the same household during the year
84
what are the requirements for a current spouse to claim social security on their working spouse?
A worker must be receiving benefits for a current spouse to be eligible for spousal benefits
85
what are the requirements for a former spouse to claim social security on their working ex-spouse?
can apply for benefits on a former spouse's record even if he or she hasnt retired, as long as they divorced at least 2 years before applying
Minimum age 62
86
What is the max amount a married spouse may receive in social security benefits if claiming based on working spouses social security?
Max 50% at spousal claimant FRA
87
What are the payments based on for a current/former spouse for social security claims on working spouse/ex-spouse?
Based on the worker spouse’s PIA at FRA. It is reduced if claiming spouse has not attained FRA
88
What must the spouse do if the spouse has dual eligibility (their own record and their spouse’s)
the spouse is required to file for both benefits
Will receive the higher of the two amounts, NOT the combined total.
89
Government Pension Offset
If beneficiary claiming spousal benefit receives a government pension benefit for which Social Security taxes were not paid the Social Security spousal retirement benefit will be reduced by two-thirds of the government pension amount
90
Whose benefits are subject to the max family benefit rules and whose are not?
Benefits for current spouse AND child are subject to the maximum family benefit rules
91
Whose benefits are NOT subject to the max family benefit rules and whose are not?
Former spouse benefits are not included in application of the maximum family benefit; and worker
92
Entitled requirements for a spouse filing for spousal benefits via social security
married for at least 1 year; worker must have filed for their own benefit; must be still currently married; in case of child under age 16
93
Entitled requirements for a former spouse filing for spousal benefits via social security
worker MUST be at least 62; must ahve been married for at least 10 years, currently unmarried, and divorced at least 2 years. In care of child under age 16
94
Do participants pay a premium for part A (hospital) Medicare?
NO
95
What are the Part A deductibles for medicare?
Flat per hospitalization deductible for days 1-60; Co-pay for days 61-90; over 90 days uses lifetime reserve days up to 90 additional days and requires even higher co-pay
Costs beyond 180 days are paid by individual
96
What is the age requirement to qualify for Medicare?
Must be age 65 or older and paid into Medicare for at least 10 years
97
Medicare Part B: Medical (non-hospital)
Optional but highly recommended; requires premium – Most individuals pay a standard premium; higher-income individuals pay a higher premium
Annual deductible - after deductible Medicare pays 80%, the individual pays 20%
98
Medicare Part C: Medicare Advantage
Alternative to A & B. Typical vastly lower premiums than Medicare A and B combined with a Medicare Supplement (Medigap) insurance policy. Some plans have zero premiums. Uses “gatekeeper” concept; must use network providers
99
Medicare Part D
Prescription drugs; (remember “D” for drugs)
Coverage is optional but recommended; requires premium; Medicare Advantage plan may include prescription drug coverage
Deductibles and co-pays can be paid by Medicare Supplement (Medigap) policy
100
IRMAA: Income related Monthly Adjustment Amount
Higher income Medicare beneficiaries covered under part B and/or D may pay an additonal premium if medicare specific MAGI exceeds thresholds; 2 year look back
101
Ways to reduce IRMAA: Income related Monthly Adjustment Amount
Look at lowering AGI; max out 401k; exclusions from income; schedule 1; eligible for deductible IRA
102
Social security requirements for a child to collect on parents PIA
under age 18 or under age 19 if in high school or adult but disabled before age 22; worker must be receiving benefits; benefits is subject to reduction under the family max benefit rules; max benefit is 50% of workers PIA
103
what is the lump sum death benefit for social security
payable to only one person either surviving spouse of child if no surviving spouse in the amount of $255
104
What is the penalty got failure to distribute RMDs for an IRA and 401k?
25% penalty tax on undistributed amount
105
Deadline for first rmd for an IRA
April 1 of following year after turning 73, even if still employed
106
Deadline for first rmd of 401k
later of 4/1 following year age attainment of age 73 or the year of actual retirement (only for hte current employers plan). Not available for greater than 5% owners.
107
calculation of RMD for IRA/401k
FMV of combined accounts as of 12/31 of previous year divided by age factor
108
RMDs for multiple accounts for IRAs
may distribute RMD for combined value from one or more IRAs
109
RMDs for multiple accounts for 401ks
each account RMD must be calculated and dsitrbuted separatrely
110
what accounts are RMDs not required for?
Roth IRAs
111
what happens if the first RMD is deferred until April 1 of the year following the attainment of age 73
the owner must make the second RMD by the end of that year, as well.
112
Taxpayers who make a QCD must be at least how old on the day of the distribution
70 1/2 years old
113
How must a QCD be executed?
using a direct transfer rollover to the eligible charity or charities.
114
2 benefits of a QCD
A QCD can be used to satisfy the required minimum distribution (RMD) for the year of the distribution if the taxpayer is age 73 or older; this reduces AGI which may have other tax benefits.
115
What is the max annual exclusion for a QCD
The maximum annual exclusion for QCDs is $100,000 to one or more charities
116
How much can a spouse have for a QCD
When filing a joint return, the spouse can also have a QCD and exclude up to $100,000.
117
How is the QCD reported on taxes? and on what form?
The full QCD is reported on Form 1040 as an IRA distribution.
The taxable amount of the distribution is reported as zero with “QCD” next to the line.
118
QCD age limit, amount limits, and requirements?
age requirement of 70 1/2+, $100,000 per person limit, and direct transfer requirement.
119
a QCD be made to a DAF account?
no
120
Net Unrealized Appreciation (NUA) tax treatment
If a qualified plan participant’s account holds employer securities, special tax-advantaged treatment is available in a qualifying lump-sum distribution,
121
when does Net Unrealized Appreciation (NUA) apply?
only to employer stock help in a qualified plan
122
how must a NUA be executed?
as part of qualified lump-sum distribution.
Qualified lump-sum distribution must be 100% of employee’s account within one year.
123
How are taxes trated when NUA at time of plan lump sum distribution?
tax-deferred
124
How to calculate NUA
is the difference at the time of the lump-sum distribution between the FMV of the employer stock and the employer basis in the contributed stock at the time of the contribution.
No step-up in basis at death for NUA portion remaining.
125
taxation when subsequently sold without regard to the holding period for a NUA election
taxed a LTCG
126
How is the subsequent appreciateiontaxed for a NUA election
Subsequent Appreciation is STCG/LTCG based on holding period after lump-sum distribution.
127
Is there a step up in bases at death for NUA portion remaining?
NO
128
The most likely testing application for NUA is the current (ordinary income) taxation of the stated employer basis at the time of the lump-sum distribution and the LTCG taxation of the NUA calculated at the time of the lump-sum distribution.
xxx
129
A Qualified Domestic Relations Order (QDRO)
a judgment, decree, or order for a qualified retirement plan to pay child support, alimony, or marital property rights to an alternate payee (spouse, former spouse, child or other dependent of a participant).
130
The QDRO must contain certain specific information, such as
the participant and each alternate payee’s name and last known mailing address, and
the amount or percentage of the participant's benefits to be paid to each alternate payee.
131
tax consequences If the QRDO payout is not rolled over into an IRA or another qualfied plan
income taxes to the former spouse but not penalty taxes
132
who pays taxes for A QDRO distribution that is paid to a child or other dependent
taxed to the plan participant.
133
what may the former spouse roll a QDRO into
a IRA or another qualified plan
