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CFP BIF > Retirement Savings / Income Planning > Flashcards

Retirement Savings / Income Planning Flashcards

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1
Q

“Traditional” Rollover

not something that happens often

A
  • Only one allowed a year
  • 60 days to deposit funds into an IRA or different employer plan
  • 20% federal tax withholding by the employer. When the amount is deposited it is given back. If it is not deposited within 60 days, it is considered a distribution and subject to 10% penalty.
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2
Q

Direct Transfer Rollover

The rollover that happens today

A
  • No annual limit to number of transfers
  • Transfers happen directly between institutions. Participent does not take possession of funds.
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3
Q

When can you rollover a Simple IRA

A

After two years… unless going directly to another Simple IRA.

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4
Q

Inherited IRA - Spouse as Beneficiary

A
  • Can be either Traditional IRA or Inherited IRA.
  • Can combine with current IRA.
  • If taken as Inherited IRA, they can take income for lifetime.
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5
Q

Inherited IRA - Non-Spouse Beneficiary

A

10 Year Rule

If the account was already in RMD status when inherited, it requires annual RMD’s and must be drained by the start of year 10.

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6
Q

Eligible Designated Beneficiary

For Inherited IRA

A

Can take distributions over life of beneficiary, except for minors

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7
Q

Who are Eligible Designated Beneficiaries?

A
  • Spouse
  • Chonically Ill Bene
  • Disabled Bene
  • Minor Children (under age 21)
  • Beneficiaries NOT more than 10 years younger than the IRA owner

Once minor child comes of age, they are no longer eligible and the 10 year rule applies

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8
Q

(Non-Eligible) Designated Beneficiary

Ten Year Rule Generally Applies

A
  • Non-Spouse Beneficiary
  • See-Through Trusts
  • Successor Beneficiaries
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9
Q

Non-Designated Beneficiaries

FIVE YEAR RULE APPLIES

A
  • Estate
  • Charities
  • Trust not qualifying as a designated beneficiary
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10
Q

Early Withdrawal Exceptions
(Qualified Plans)

Will NOT incur a 10% early withdrawal penalty

A
  • Medical Expenses (unreimbursed med exp up to 7.5% AGI) - Yes
  • Education Exp (qualified higher education exp) - No
  • Disability (total & permanent disabitlity) - Yes
  • Health Insurance (paid while unemployed) - No
  • SSEP - Yes
  • First Time Home Buyers Credit -** No**
  • Separation From Service (during or after the year they turn 55) - Yes
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11
Q

Early Withdrawal Exceptions
(Traditional, Roth, SEP, Simple IRA)

Will NOT incur a 10% early withdrawal penalty

A
  • Medical Expenses (unreimbursed med exp up to 7.5% AGI) - Yes
  • Education Exp (qualified higher education exp) - Yes
  • Disability (total & permanent disabitlity) - Yes
  • Health Insurance (paid while unemployed) - Yes
  • SSEP - Yes
  • First Time Home Buyers Credit - Yes
  • Separation From Service (during or after the year they turn 55) - No
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12
Q

Qualified Roth IRA Distributions

A
  • Must be made after the five year period.. AND
  • The distribution must occur in relation to one of the following circumstances…
    1. Acct owners death
    2. Acct owners disability
    3. First time home purchase (lifetime, 10k max)
    4. Made on or after age 59 1/2
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13
Q

Non-Qualified Roth IRA Distributions

A
  • Acct Earnings - Subject to regular income tax and 10% penalty
  • Roth Conversion Contribution - No income tax, Distributions within 5 years of conversion = 10% penalty
  • Regular Roth Contribution Amt - No income tax or penalty
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14
Q

Nonqualified Deferred Compensation

A

These plans are used to provide retirement benefits to top executives. (top hat plan, excess benefits plan or supplemental executive retirement plan (SERP))

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15
Q

Excess Benefit Plan

A

Mirrors a qualified plan benefit formula but is not subject to fund or benefit amount limits

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16
Q

SERP

A

Promises to pay an executive additional compensation for achieving certain goals.

Can select which executives are included.

Merely a promise to pay, there is no formal funding.

Substantial Risk of forfeiture.

Occasionally informally funded using cash value life insurance policies

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17
Q

Rabbi Trust

A

Provide security to the executive for the payment of the unfunded promise of nonqualified deferred compensation benefits.

18
Q

Choice between a Qualified Plan and a Non-Qualified Plan can be determined by the employers ranking three common elements…

A
  1. Currently Deductible Employer Plan Contributions
  2. Benefits not currently taxable to the employee
  3. Employer can limit participation to select individuals
  • If Employer chooses options 1 & 2 = Tax Qualified Plan Tax - Advantaged Plan
  • If employer chooses options 1 & 3 = Non-Qualified Section 162 Bonus Plan
  • If Employer chooses 2 & 3 = Non-Qualified Deferred Compensation Plan
19
Q

Non-Qualified Stock Options (NQSOs)

A

Provides a right to purchase chase of company stock at a stated price that is the option price for a given period.

20
Q

NQSOs Tax Consequences

A
  • Difference between Strike Price/Exercise Price and FMV at Exercise = Taxed at Compensation Income
  • Difference between FMV at Exercise & FMV at Sale = Taxed at either STCG or LTCG
21
Q

Incentive Stock Options (ISOs)

A

a tax favored plan for compensating executives by granting options to buy company stock at specific prices.

22
Q

ISOs Tax Consequences

A
  • Difference between Strike Price/Exercise Price and FMV at Exercies = AMT (positive)
  • Difference between FMV at Exercise and FMV at Sale = AMT Adjustment (negative)

If Qualifying Disposition then the gain from Strike price to FMV at sale is taxed at Capital Gains rates.

23
Q

What is a Qualifying Disposition for an ISO?

A

The sale occurs at least…
* Two Years from grant AND
* One Year from Exercise

If not, it is considered a DISQUALIFYING Disposition and is taxed like an NQSO

24
Q

Primary Insurance Amount (PIA)

A

The Social Security payment paid at full retirement age (FRA)

Uses highest 35 years of earnings

25
Q

Average Indexed Monthly Earnings (AIME)

A

Based on 35 best years of social security earnings.

Used to calculate the Primary Insurance Amount (PIA)

Wage base limit of 160k

26
Q

Social Security Benefits are increased 8% each year ONLY between…

A

the ages of 67 and 70 if you waited to take social security at age 67.

They are called delayed retirement credits and they DO NOT apply beyond age 70.

27
Q

Decreased Social Security Benefit…

A

5/9% for each of the first 36 months prior to FRA (Max 20% reduction)
PLUS
5/12% for each month over 36 months worker is claiming benefits prior to FRA up to 24 months. (Max 10% Reduction)

Total Max Reduction is 30%! Remember, this applies to people taking social security earlier than age 67 which is FRA.

28
Q

Earned Income between age 62 and 67 and taking social security benefits…

A

$1 of social security benefits is withheld for ever $2 earned in excess of $21,240

29
Q

Claiming benefits while having earned income in the year FRA is attained…

A

$1 of Social Security Benefits is withheld for every $3 earned in excess of $56,520.

THERE IS NO INCOME LIMIT AFTER ATTAINMENT OF FRA

30
Q

In the first year of claiming benefits, income earned prior to claiming benefits is not considered… However, a special “First Year” rule applies…

A

Benefits can be paid in any month in which the earned cinome is less than 1/12th of the applicable yearly limit.

31
Q

What is the maximum amount of a workers Social Security that could be taxed?

A

85%

32
Q

Provisional Income =

A

50% of Social Security Benefits + tax-exempt income + AGI (without social security) = provisional benefit

MFJ: If Provisional Income is over 32k (50% taxable) if over 44k (85% taxable)
Single: If Provisional Income is over 25k (50% taxable) if over 34k (85% taxable)
MFS: All Provisional income is 85% taxable

33
Q

Elgibility for Social Security Spousal benefits…

A

Benefit amount: 50% of worker’s PIA (MAX is 50% at spousal claimant FRA)

If Divorced: Must have been married for at least 10 years and currently unmarried and at least age 62.

34
Q

Medicair Part A
(Hospital Insurance)

A
  • Covers inpatient hospital stays
  • Care in skilled nursing
  • hopsice care
  • home health care

No Premiums… must be age 65 or older.

35
Q

Medicare Part B:
(Medical, non-hospital)

A

Preventative Services
Outpatient Care
Medical Supplies
Certain Dr. Services

36
Q

Medicare Part C:
(Medicare Advantage/Medi-Gap)

A

Lower premiums than A & B
An “all in one” alternative with bundled plans with A, B & D.

37
Q

Medicare Part D:
(Prescription Drugs)

A

Prescription Drugs. Offered by private companies, approved by medicare.

38
Q

RMD’s

A

First RMD is delayed to April 1st following the year after they turn 73. But need to take 2nd by end of that same year.

25% penalty if not taken

Remember to divide end of year balance by RMD factor amount to determine RMD

39
Q

Qualified Charitable Distribution (QCD)

A

A non-taxable distribution from a Traditional IRA to an eligible charity.

Must be at least 70 1/2 to do this

At most $100,000 per taxpayer

Entered on form 1040

Not an itemized deduction

40
Q

Qualified Plan
Net Unrealized Appreciation (NUA)

A

If Qualified Plan account holds employer securites, special tax advantaged treatment is available.

Stock Basis Taxed at Ordinary Income Rate
+
Gain taxed at LTCG Rates
Subtracted from total balance
= NUA

41
Q

Qualified Domestic Relations Order
(QDROs)

A

A judgement, decree or order for a qualified retirement plan to pay child support, alimony or marital property rights to a former spouse or child.

If QDRO 401k, may roll it over into a IRA. If not rolled over, it is taxed as ordinary income.

Acct owner is not taxed on the distributions due on the order.

QDRO payment to a child is taxed to the owner.

42
Q

Traditional Defined Benefit Pension Plan

A

Employers have a whatever it takes funding ability and creates the largest tax deduction for employers

CFP BIF (6 decks)

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