Unit 18: Retirement Plans Including ERISA Issues and Educational Funding Programs Flashcards
Compensation for IRA purposes
Wages, salaries, and tips
Commissions and bonuses
Self-employment income
Alimony decreed before 2019
nontaxable combat pay
Not considered compensation (for IRA purposes)
Capital gains
Interest/divs
Pension/annuity income
Child support
Alimony decreed after 2019
income from DPPs
Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)
Allows individuals aged 50 and older to make an extra $1000 catch up contribution.
When can IRA contributions be made?
Through April 15th of the next year.
If the individual has received an extension to file, this does not mean they have an extension to contribute.
Excess contributions
subject to 6% penalty if not removed in a timely manner
Real Estate In IRA
It is allowed, but the person is not allowed to derive any benefit from the property. it must strictly be an invesment.
-people prohibited from benefitting: spouse, ancestors (parents and grandparents), children, grandchildren, great-grandchildren, and spouses of children, grandchildren, and great-grandchildren. (note: brother/sister are not included)
SEP IRA
-at least 21 and worked 3 of last 5 years
-must allow all employees to participate
-up to 25% of salary, max $58K
-vested immediately
exceptions to 10% early withdrawal penalty
-death/disability
-first time home purchase $10K/life max
-qualified higher ed exp (includes grandkids, but not niece/nephew)
-certain medical exp
-up to $5000 the year child is born/adopted (each spouse can w/d)
60-day rollover
-once per 12 month period
-must complete within 60 calendar days
-mandatory 20% withholding, client must come up with 20% cash to fully fund rollover
inherited IRA- spousal
can bring into own IRA, or leave in bene IRA, but must begin RMDs based on deceased age (but with spouses age)
inherited IRA- nonspousal
-take all cash now (will all be taxable income)
-or, cash it out within 10 years. no rules on frequency of distributions.
exceptions to non-spousal inherited IRA 10 year rule
-surviving spouse
-minor (10 years starts at age of majority)
-disabled
-chronically ill
-individual is not more than 10 years younger than deceased
Disclaiming an IRA
Individuals are allowed to disclaim IRAs if they are the beneficiary.
-must be within 9 months of death, in writing, and you cannot have taken the money.
-beneficiary cannot designate funds unless will allows for it
Keogh plan
qualified plan for sole-proprietorships.
income is only calc from sole-prop income; cannot use any corporate work income.
Profit-sharing plans
offer employers greatest amount of flexibility; can skip contributions
401k plan
-a form of defined contribution plan
-employee contribution and employer can match up to a certain amount (not required)
Roth 401k
employee can opt to contribute to a roth 401k, but employer match must still go into regular 401k
-no income limit like Roth IRA
SIMPLE IRA
For businesses with 100 or fewer employees who earned $5K+
-either 2% employer contribution, or 3% match.
-employee can contribute up to $13,500 ($3K catch up)
-early withdrawals within first two years subject to 25% penalty
403b (tax sheltered annuity)
-for employees of public schools/501c3.
-normal trad IRA benefits
-funds invested into annuity/mutual fund
457b
-nonqualified
-for highly compensated employees of state/local govt, and certain non-profit orgs (but not churches)
-no w/d penalty
nonqualified retirement plans
-not subject to ERISA
-flexibility with who is on plan, when/if contributions are made, and how much is made.
-plans must still be in writing and uphold fiduciary responsibility
Payroll Deduction Plan
Deduction, after taxes, authorized by the employee. Only gains are taxable
NQ Deferred Compensation plan
Employee agrees to defer receipt of payment until retirement
-clauses for employee moving to competing firm
-employee is not entitled to claim against employer’s assets until retirement
-disclaimer that agreement may be void if business is bankrupt
Supplemental Executive Retirement Plan (SERP)
Rewards continued employment, early retirement, and protects from involuntary termination. Might require years of service to qualify.
Hardship withdrawal
amount withdrawn is taxable as income; the benefit is the 10% penalty is (most likely) waived.
401k loan
not treated as distribution, unless the rules are not followed. allowed to borrow up to the smaller of 50% balance, or $50K. Loans are charged “reasonable” interest rate, which should be paid back over max of 60 months
Net Unrealized Appreciation (NUA)
Buying employer securities within retirement plan.
Eligible for special tax treatment if due to separation from service, 59.5, and death
Must do entire distribution within one calendar year, only original cost basis is ordinary income, and gains are LTCG.
Qualified plans & IRA RMDs
IRA’s are fungible for RMD purposes, but Qualified plans are not. If qualified plans are still maintained at 73, funds must come out of the plan.
QDRO
Court ordered way to split assets in divorce
Recipient can avoid 10% penalty if follows rollover rules
Sometimes judge orders funds to go to someone who cannot follow the rules and has no choice but to incur penalty
72t restriction
While receiving payments, cannot contribute, transfer, or rollover funds.
RMD penalty
if client fails to withdraw RMD, 50% tax on amount
-no RMD required for the plan of an employer you are still employed by.
Automatic withholding
if the distribution is paid to the employee, there is an automatic 20% withholding. can be avoided by doing a direct rollover
Allowable Payee’s under a QDRO
Spouse, former spouse, child, or other dependent of a participant
ERISA Eligibility
If offered, must be offered to all employees with the following criteria:
-21 and older
-1 year of service
-works 1000+ hrs a year
-OR 500 hrs for part time, three previous years
ERISA Funds
Must be separated from other corporate assets; trustees have fiduciary responsibility
ERISA Vesting
Employees must be entitled to their entire retirement benefit amounts within a certain time frame.
ERISA plan agreement
must be in writing, and employees kept updated on any changes no less than annually
ERISA nondiscrimination
Uniformly applied formula determines employee benefits
Fiduciary responsibility ERISA
subject to Uniform Prudent Investor Act (UPIA) 1994
Prudent Man replaced by Prudent Expert
Expectation that the fiduciary will be an expert rather than a prudent man, to account for all portfolio considerations
Section 404 of ERISA
Trustee can delegate investment management responsibilities, but cannot delegate fiduciary responsibilities.
Fiduciary- transaction cost/commissions
don’t matter when determining appropriateness
IPS for ERISA includes:
-investment objective;
-future cash flow needs;
-investment philosophy;
-investment options criteria (but not the specific securities themselves)
-monitoring procedures and performance
Prohibited transactions for fiduciary
-self-dealing
-parties with an adverse interest to the plan
-receiving personal compensation from contra party in plan transaction
Safe Harbor Provision Section 404c ERISA
Trustee is not liable for losses if participant has:
-investment selection
-investment control
-required information is communicated
404c participant has “investment selection” if they can:
-materially affect portfolio risk/return;
-choose between at least three investment alternatives;
-diversify the investment to minimize the risk of large losses.
404c participant has “investment control” if:
-participant has opportunity to exercise control among options available;
-participant can change allocation at least quarterly;
-the plan fiduciary still monitors the performance of the investment options offered and replaces them when necessary.
404c participant has been given required information when:
-certain information is available upon request, such as prospectuses, financial statements, and/or reports;
-the plan is intended to constitute an ERISA Section 404(c) plan and that plan fiduciaries may be relieved of liability for investment losses;
-a description of the risk and return characteristics of each of the investment alternatives available under the plan;
-instructions and access to participants is given.
If client is seeking “control” for retirement assets:
IRA is the most suitable.
-has more options than 401k/403b
Summary Plan Document (SPD)
-the plan administrator is legally obligated to provide to participants, free of charge, the SPD.
-document provides all information regarding how the plan works.
top-heavy 401(k) plan
a disproportionate amount of the benefit goes to KEY employees (not necessarily highly compensated employees)
-does not need annual testing if: max match is 4% (100 for 3, 50 for 2) or nonelective formula, minimum of 3% for all eligible employees.
Coverdell ESA
-after tax contributions until child is 18, unless special needs
-gains are not taxed if used on education expenses
-must be used by age 30, unless special needs
-$2000/yr limit, there is annual income limits, but anyone can contribute
Section 529 Plans
Include both:
prepaid tuition plans- lock in today’s tuition prices and make contributions through childhood
college savings plan- contribute and invest funds through childhood, and then use proceeds to pay for qualified expenses.
CSP withdrawal restrictions
funds must be used for qualified expenses for the beneficiary, but plan can also be rollover over to someone else in the family:
-any legal child and their descendants
-legal brother or sister
-any legal parent or ancestor
-niece/nephew
-half brother/sister
-immediate in-laws
-spouse of any of the above
-first cousins
529 assets and financial aid
529 assets are included in FAFSA calc, but are treated more favorably than UTMA or any assets held directly by child.
529 contributions
-after tax
-can be made by any one, but becomes an asset of the owner
-gift tax rules apply; can use up to 5 years at once (80K contribution), but have to wait 5 years for next contribution
529 offering circular
The 529 plan itself is considered a municipal fund security
-has offering circular, not prospectus
ESA/529 Investment options
ESA operates like a self-directed IRA, can invest in any IRA options.
529 is subject to plan options.
TCJA 2017 and 529
Up to $10K/year can be used on K-12 public, private, religious, or secondary school
UGMA/UTMA account
Custodial account for a minor
-assets belong to minor, but are managed by custodian (with fiduciary responsibility) until age of majority
UGMA/UTMA Custodian
has full control over account to transact securities, and can use funds to pay for items of general use for the beneficiary, but cannot use them for three basic needs of raising the child: food, clothing, shelter.
UGMA/UTMA Fiduciary
-cash accounts only
-no margin, pledging for loans, or options (except covered call writing)
-must reinvest all cash proceeds, dividends, and interest within a reasonable period of time
-examples of inappropriate investments are commodity futures, naked options, and high-risk securities
-rights/warrants must be exercised or sold
-custodian may be reimbursed for reasonable expenses incurred managing the account
UGMA/UTMA custodial account rules
-gifts are irrevocable; cash or fully paid securities
-only one custodian and one minor/beneficial owner
-donor of securities can act as custodian or appoint one
-if not custodian, parents have no legal control over a UGMA/UTMA account
-minor can be the beneficiary of more than one account, and a person may serve as custodian for more than one UGMA/UTMA
-minor can sue the custodian for improper actions
additional feature of UTMA
can hold real estate, partnership interests, and other intangible property.
Taxation for UTMA/UGMA
minor must file taxes for any earned income, earnings over $2300 taxed at parents marginal rate
HSA
-tax deductible contributions
-tax free growth
-tax free distributions on qualified medical expenses
HSA Eligibility
-HDHP for at least one month of that year (by Dec 1)
-no other health coverage
-not enrolled in medicare
-cannot be claimed as dependent
-each spouse can have their own, cannot have joint
HSA Contributions
an employee’s HSA- both employee and employer contribute
self-employed or unemployed can also have HSA
-others can contribute to an individuals HSA
-limit depends on family/individual coverage, and how many months you were covered.
HSA expenses
-cost of medical care
-LTC premiums
-COBRA/unemployment premiums
-medicare
IPS does not include
fee disclosure, but can include expected returns of recommended strategy
When asked about contribution amounts to IRAs
do not confuse contributing with deducting.
You can always contribute to IRA, but what you can deduct has other criteria.
$10K total lifetime distributions for purchase of principal residence
can be made penalty free from IRA, but not from a qualified plan such as 401k
safe harbor 401k, nonelective formula
employer must contribute minimum of 3% to each employee, whether employee contributes or not
QDRO distributions
are exempt from 10% early distribution penalty for qualified plans
-QDRO does not apply to IRA, ex-spouse can still avoid taxes by doing 60 day rollover
