RP & EB - Chapter 4 - Other Tax-Advantaged Plans Flashcards
Exceptions to 10% Early Withdrawal Pentalty - Qualified Plans vs IRAs (BOTH Traditional & Roth IRAs)
Roth IRA - Qualified Distributions & 10% Early WD Penalty
Qualified Distributions: must satisfy both..
1) made after 5-yr period
2) One of the other 4 Requirements:
a) When age 59½ or older
b) Made to beneficiary after owner’s DOD
c) Disabled
d) For first time home purchase (lifetime cap of $10,000 for first time homebuyers includes taxpayer, spouse, child, or grandchild who has not owned a house for at least 2 years).
Non-Qualified Distribution (order of withdrawal):
- FIRST from regular contribution ($6,500)
- NEXT from conversion contributions on FIFO basis
- FINALLY from earnings
10% WD Penalty:
- Generally applies to Conversions & Earnings (EXCEPT for exceptions list of both Trad & Roth IRA Early Withdrawals on other flashcard).
**KEY Distinction:
- Non-Qualified Distribution = distribution will be taxable
- 10% Tax Penalty = subject to penalty if does not meet one of the “Exceptions” waving the penalty
One can apply but not necessarily the other has to
Roth vs Traditional IRAs
RMD Rules:
- Roth IRA: only retirement account of all Qualified plans and IRAs NOT to be subject to RMD until after DEATH.
- **However: BOTH Inherited IRAs and Inherited Roth IRAs are subject to RMDs
AGI Phaseout for Contributions:
- Roth IRA: AGI phaseout regardless if active participant of another retirement plan. (Cannot make Roth contributions if make too much $).
- Traditional IRA: AGI is only subject to phaseouts dependent on active participation status
- Both: 50 and older: catch-up contribution
*EXAM tip:
- Generally, the choices for IRA investments is broad.
Although 2 main prohibited investments:
1) life insurance &
2) collectibles
HOWEVER - exceptions to this are gold, silver, platinum, or palladium which are permitted.
SEPs - Simplified Employee Pensions &
SARSEPs - Salary Reduction Simplified Employee Pensions
SEPs
- Primarily for Small Business Owners & Sole Proprietors
- created to replace SARSEPs
- Max contribution is lesser of 25% or $66,000
- Requires coverage for employees after short period of time. Even Part-time employees must be covered.
- Contributions always 100% vested. Contributions are Discretionary
- Operates similar to Profit Sharing Plan
SARSEPs: (disallowed after 1996)
- many still around, however
- Annual Deferral Limit: $22,500 (like 401k), $7,500 Catch-up
SIMPLEs - Savings Incentive Match Plans for Employees
SIMPLEs:
- Incentive to small employers (100 or less). 2yr Grace Period to stay within 100 employee limit.
- Early withdrawal penalty 25%. Requires participant to be in plan beginning 2 yrs.
- Less admin costs and no filing requirements.
- 100% vested immediately.
- Do not have to meet nondiscrimination rules
- CANNOT be established if contribute to any other type of retirement plan (unlike 401Ks)
Important to note
- Eligible if earn $5,000 for 3yrs (or 2 & reasonably expect in yr 3)
- Employee Deferral Limit: $15,500, $3,500 Catch-up (50 or older)
SIMPLE IRA:
- Employer: REQUIRED either
a) 2% non-elective contribution (compensation limit
of $330,000 applies, e.g. 330,000 x 2%) -OR-
b) 3% match salary ($ for $).
If match, then may reduce to 1% match for 1yr…
**EXAM NOTE - not available for SIMPLE 401Ks.
This why SIMPLE IRAs considered “more flexible”-
SIMPLE 401K:
- can take loan out (NOT available for SIMPLE IRA)
403(b) Plans (Tax Sheltered Annuities TSAs)
403(b) Plans: aka Tax Sheltered Annuity
- for certain tax-exempt orgs/non-profits & public educational system employees
- typically serves as a “supplemental” plan to other retirement plans
- investment options LIMITED - life ins annuity or MFs
- Roth Contributions can be made in 403(b). Significantly higher limit of $22,500 (unlike typical Roth’s). No income limitations.
- two types:
1) Salary Reduction Plan: only employee
deferrals
2) Employer-funded Plan: both employee &
employer contributions
- Employee elective deferral limit is $22,500.
- Catch-up Contributions are different NOTE!
The 2 Provisions are:
1) Age 50 Catch-up: lesser of $7,500 -OR- includable compensation subtracted by other elective deferrals for the year
2) 15-Year Rule Exception: 50 and older, HER company (Health, Education, Religious), and worked for same employer for 15yrs (not required consecutive). If so, limit is increased by $3,000
Max deferral limit as high as $33,000
($22,500 deferral + $10,500 Catch-ups)
457 Plans
457 Plans:
- Non-qualified deferred compensation plan that’s available to SALT gov employees
- employee deferrals don’t count against other deferral contributions (favorable)
- 3 types of plans:
1) 457(b) Eligible Government funded “Public” plan.
For all eligible employees
2) 457(b) Eligible Tax-Exempt unfunded “Private” plan.
For HCE or management.
3) 457(f) “Ineligible” Top-Hat plans
*NOTE main distinction btwn Eligible & Ineligible:
457(f) Ineligible plans allow for greater deferrals
- NOTEhave 2 Catch-up provisions (like 403b):
The 2 provisions are:
1) Age 50 or over $7,500 (public ONLY)
2) Final 3-Yr Addition: $22,500 (but cannot use $7,500
age catch-up simultaneously)
457 (continued)
characteristics of 3 different 457s
Social Security Integrations
Offset & Excess methods:
- Offset Method: for Defined Benefits Plans ONLY
- Excess Method for Defined Contribution (both?)
