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CFP > Retirement > Flashcards

Retirement Flashcards

1
Q

Non Governmental 457

A

CANNOT be rolled into Roth or IRA

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2
Q

Secular Trust

A

Assets beyond reach of creditors

Taxation occurs:
- At funding
or
- Risk of forfeiture no longer exists

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3
Q

Rabbi Trust

A

Efficient for:
- Hostile takeover
- Mergers
- Acquisitions

  1. Subject to claims of creditors
  2. Taxed as ordinary income @ distribution
  3. Risk of forfeiture considered substantial
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4
Q

ESOPS

A

NO SS
No cross testing

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5
Q

Workers Compensation Benefits

A

Benefits received free of Fed Income Tax

Eligible for Medicare after getting SS benefits for 24 months

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6
Q

Funded vs. Unfunded Plan

A
  1. Unfunded – can be naked promise
  2. Funded – cannot be naked promise
  3. Unfunded – Within reach of creditors
  4. Funded – Beyond reach of creditors if bankruptcy or insolvency

Its FUN to be beyond reach of parents
Unfun being naked in public

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7
Q

Gifting ISO’s

A
  1. Gifting before exercise – Disqualifying – becomes NSO
  2. The gifter will be charged with income
  3. If ISO holder dies, Benie KEEPs ISO status
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8
Q

ISO’s

A
  1. No income on grant (becomes basis)
  2. No tax on exercise
  3. Tax due when stock is sold

EGG

2 Years after grant 1 year after exercise = capital gain

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9
Q

Unit Benefit

A

Percentage of earnings per-year of service

1.25% x salary x years of service

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10
Q

Cafeteria Plans

A
  1. Cash benefit
  2. Group term life insurance
  3. Accident & health benefits

NO Nonqualified compensation plan

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11
Q

Only Qualified Plan Allowed In Cafeteria Plan?

A

401(k)

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12
Q

FSA Cannot Pay For?

A

Health insurance premiums
Cosmetic items
Cosmetic surgery
Items than can improve “general health”

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13
Q

FSA Caps

A

Dependent Care $5,000 —per year

Health $2,750 — year year

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14
Q

Max Deductible Contribution In Target Benefit Plan

A
  1. Max 25% of aggregate eligible compensation of all participants
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15
Q

Can Be Integrated With Social Security

A

Stock bonus plan
SEP
Defined benefit plan
Target benefit plan

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16
Q

Constructive Receipt For Nonqualified Plans

A

Occurs when funds available to employee

Results in taxation to employee

If company owns assets, employee will not have constructive receipt

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17
Q

How do cash balance plans differ from traditional defined benefit plans?

A
  1. DB plans – defined as series of monthly payments for life to begin @ retirement
  2. Cash balance plans – defined in terms of a stated account balance
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18
Q

Required to be sent out annually from ERISA for DB plan participants?

A
  1. Plans summary annual report
  2. Terminating employee’s benefit statement
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19
Q

Plan - Unit Benefit Formula
(Most Common)

A

Also known as percentage of earnings - per year of service

  • Factors both service & salary in determining pension benefit

Example:
1.5% of earnings for year of service
Annual comp $100,000 - 30 years of service

(1.5% x 30) x 100,000 = $45,000

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20
Q

Final Average Method

A

Usually 3-5 years prior to retirement

Example: making 170k + 245k + 285k = 700,000 /3

= $233,333

Max benefit = $230,000

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21
Q

Past Service Credits

A

Example
Pension plan provides life annuity equal to 3% of earnings up to 30 years of service

What amount will employee get with annual comp 300k?

30 years x 3% = 90%

90% x 290,000 = $261,000

BUT $230,000 = benefit CAP

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22
Q

Currently Insured

A

Entitled to survivor benefits but not retirement benefits

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23
Q

Fully Insured

A

Retirement benefits

Survivor benefits

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24
Q

Simple IRA

A

NO mandatory 20% withholding

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25
Q

Capital retention calculation

A

Example:

Need 36,000 income to increase with inflation 4% can get 7% return

7% - 4% = 3%

36,000 / .03 = 1,200,000

+ Money for one year = $1,236,000

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26
Q

Cannot offer ESOP or Stock Bonus?

A

Partnerships (Keogh)

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27
Q

Unit Benefit Formula

A

Uses service & salary to determine participants pension benefits

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28
Q

Profit Sharing Favors?

A

Younger employers

More time to accumulate retirement savings

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29
Q

SS Benefits if one spouse dies

A

Surviving spouse gets greater of their benefits or 100% of spouses

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30
Q

SIS Benefit

A

Extra SS benefit until SS pays

Example:
SIS benefit $1,000
Disabled person receives SS disability benefit of $800

The $1,000 SIS benefit is reduced to $200

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31
Q

QDRO’s

A

Only apply to qualified plans

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32
Q

Funded vs. Nonfunded

A

Unfunded — naked promise to pay “unfun to be naked”

Funded – beyond reach of employers insolvency & bankruptcy “fun to be beyond reach of parents control”

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33
Q

Employee requirements to access a plan

A

ERISA
- 1,000 hours / one year
- Profit sharing
- Group health insurance 30 hrs / week
- Simple 401k

SEP
- 3 year rule
- Many part timers can access

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34
Q

Deferred Comp Plan Included In Cafeteria Plan?

A

401(k) profit sharing plans ONLY

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35
Q

Self Employed SEP Contributions

A

25% short cut

Net Income x 18.59% = Contribution

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36
Q

Maximum deductible contribution in target benefit

A

Maximum of 25% of the aggregate eligible compensation of all covered employees

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37
Q

Defined Benefit Formulas

A

Percentage- of earnings - per year of service
aka unit benefit formula
- most common
- looks at prior year service

Flat amount per year
- solely looks to service

Flat Percentage of earnings
- solely to salary
- % of $ salary

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38
Q

Rabbi Trust

A
  1. Informally funded
  2. Employer can use general assets of company to fund
  3. Employer contributions NOT subject to payroll taxes
  4. Assets may be used for other purposes than discharging obligations of employee
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39
Q

Taking Social Security Before FRA?

A

First determine the workers PIA
PIA is then reduced by 5/9 of 1% or 1/180

PIA - ( number of months before FRA / 180) x PIA

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40
Q

Social Security Benefits Before FRA Example:

A

Wally Woker’s PIA is $1,000 and he elects to retire and then start receiving benefits 24 months before FRA. Wally’s reduced benefit will be $866

$1,000 - (24/180) x $1000

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41
Q

Working After Retirement

A

Workers who attained FRA may keep their benefits no matter how much is earned

If there is a worker younger than FRA, there is a limit to how much the worker can earn and still receive full SS

Younger than FRA — Deduct $1 from benefits for each $2 earned above $18,960

Workers who reach FRA during 2021 — deduct $1 for every $3 of earned income above $50,520

42
Q

$1 for Every $2 Example

A

Mary begins receiving SS benefits at age 62 in January. Her payment is $600 per month ($7,200 per year)

During the year she works and earns $23,960 ($5,000 above $18,960)

SS would withhold $2,500 — $1 for every $2 she earns over the limit

1/2 x 5000 = $2,500

43
Q

$1 for Every $3 Example

A

Andy had not yet reached FRA at the begining of the year but will reach it in November 2021

He earned $53,520 in 10 months from Jan-October

SS would withhold $1,000 — $1 for every $3 he earns above $50,520

1/3 x 3,000 = $1,000

44
Q

Taxation of SS Benefits

A

If a person’s income plus half of his/her SS benefits is more than

$25,000 Single
$32,000 MFJ

50% of benefits taxed

Muni bond interest considered income for tax purposes determining SS benefits. AGI + tax exempt interest + 1/2 SS income

45
Q

Taxation of SS Benefits

A

If a person’s income plus half SS benefits is more than

$34,000 Single
$44,000 MFJ

85% of benefits taxed

Muni bond interest considered income for tax purposes determining SS benefits. AGI + tax exempt interest + 1/2 SS income

46
Q

Taxation of SS Benefits Example 1:

A

Mrs. A’s income for the tax year consists of
$15,000
$12,000 SS

$15,000 + $6,000 = $21,000

its less than $25,000, she is a single tax payer
no part of SS is included in gross income

47
Q

Mr. B is Single. Only Income is $3,000 per month from SS. Is his SS taxable?

A

No

$36,000 / 2 = $18,000 (less than $25,000)

48
Q

Patty’s husband died last year. She received $250,000 in life insurance benefits. She has two children, 12 and 10. She will receive her spouses benefit of $1,000 per month and a children’s benefit of $1,200 per month. She invested the insurance money in growth mutual funds. She withdraws $2,000 per month. The mutual fund company sent her a 1099 for $14,000 the taxable portion of $24,000 are her SS benefits taxable?

A

No

$14,000 + $6,000 = Less than $32,000 MFJ

She qualifies as a widow for two more years

49
Q

Social Security Disability Benefits

A

Workers entitled to disability benefits if they meet the following:

  1. Insured for disability benefits, is UNDER age 65
  2. Been disabled for 12 months, expected to be disabled for at least 12 months or suffered from a disability which is expected to result in death
  3. Filed for disability benefits and completed 5 month waiting period
50
Q

Laura Peters, age 63 has been divorced for 12 years. She earned $15,000 annually when she begun working 20 years ago and now makes $150,000. She is debating to retire now, wait until her FRA or see if she can elect more coverage from SS because her ex husband makes $1,000,000 per year. What do you reccomend?

A

Wait until FRA and collect her benefits

51
Q

File and Suspend Repealed

A

Prior to 2016 a fully insured worker was able to implement the file and suspend arrangement to maximize SS retirement benefits

52
Q

Withdrawing SS Application

A

A worker cannot file for one type of benefits then change to another

However - worker has ONE time right to withdraw the application for benefits within 12 months of initial claim.

Benefits received prior to the withdraw must be repaid

53
Q

Gale single at 64, reaches FRA at 66. She is deciding to retire and take SS early or work until FRA

What will the approximate rate of return in benefits be if she waits?

A

She will retire 24 months early

24/180 = 13.33 loss of benefits

She will get 13.33% more at FRA

54
Q

Fully Insured

A

40 Quarters of coverage

Eligible for both survivor benefits and retirement benefits

55
Q

Currently Insured

A

Only attained 6 quarters of coverage and eligible for the following

  • Lump sum death benefit $255 for spouse or dependent
  • Surviving spouses benefits (if children are under age 16)
  • A dependent benefit
56
Q

NOT Covered by SS benefits:

A
  • Federal employees who have been continuously employed since BEFORE 1984
  • Some Americans working abroad
  • Student nurses and students working for a college or college club
  • Railroad employees
  • A child, under age 18 who is employed by a parent in unincorporated business
  • Ministers, members of religious orders, and Christian Science practitioners if the claim an exemption
  • Members of tribal councils
  • Some state employees and teachers
57
Q

SS Eligibility and Benefits

A

A retired fully insured worker age 62 or over is entitled to retirement benefits

A worker is entitled to disability benefits if he/she is UNDER age 65 and disabled for 12 months, expected to be disabled for at least 12 months, or disability expected to result in death and completed 5-MONTH Waiting Period

58
Q

Spose Benefits

A

Spouse of retired or disabled worker qualifies for SS payments if he/ she meets the following:

Age 62 or over or at any age if spouse has:
- Child in care under age 16
- Child age 16 and over disabled BEFORE age 22

59
Q

Surviving Spouse (including a surviving divorced spouse) of deceased insured worker:

A

Qualifies for SS payments if the widower is 60 or over

60
Q

Divorced Spouse SS Benefits

A

Must have been married to worker for 10 years at least
Non remarried
Divorced spouse age 62 and has been divorced for 2 years can receive retirement benefits based on worker’s earnings even if the worker claims no retirement benefits

61
Q

Surviving Spouse of Deceased Worker

A

Regardless of age, qualifies for SS payments if caring for an entitled child of the deceased whos is either under 16 or became disabled before age 22

62
Q

Dependent Benefits

A

Surviving dependent, unmarried child of a deceased, disabled or retired insured worker

Qualifies for:
Under 19 and full-time elementary or secondary student
Age 18 or over but has a disability which began before age 22

63
Q

Lump-Sum Death Benefit

A

A spouse who was living in the same household as the deceased at the time of death or a dependent child is eligible for one-time lump sum benefit

Death benefit is only $255

64
Q

Pure Annuity vs. Capital Preservation

A

Pure life (straight life) - provides highest payout to the retiree for his or her lifetime but no benefits to spouse

Need to provide retirement income to a spouse or other dependent, a joint and survivor annuity provides continuation of retirement income

65
Q

Nonqualified Plan

A
  • May discriminate
  • Exempt from most ERISA requirements
  • No employer tax deductions for contributions until employee is taxed
  • Plan earnings are taxable to employer
  • Distributions taxable at ordinary tax rates
66
Q

Qualified Plan

A
  • May NOT discriminate
  • Many ERISA requirements
  • Immediate tax deduction for contribution
  • Earnings accrue tax deferred until distribution
  • Distributions are taxable at ordinary tax rates with the exception of 10 year averaging and NUA under stock bonus, ESOPs, and 401ks
67
Q

Defined Benefit Plan

A
  1. Favors older employee or owner
  2. Guaranteed retirement benefit amount
  3. Requires stable cash flow
  4. Past service credits allowed
  5. Vesting schedule, admin costs exempt form creditors, integrated with SS
68
Q

Cash Balance Plan

A

Favors younger participants

69
Q

SEP Eligibility

A

21 + years old, paid at least $600 and worked 3 of the 5 prior years

70
Q

SARSEP

A

May have up to 25 employees and 50% of the eligible employees must defer

Must have been in existence before 12/31/96

Salary deduction limit $19,500 FICA

New employees may participate in a SARSEP if established before 1/1/97

71
Q

403b / TSA / TDA

A

Subject to ERISA ONLY if EMPLOYER contributes

Salary reduction limit up to $19,500 FICA
Employer contributions may be subject to vesting schedule

72
Q

Stock Bonus Plan

A
  1. Considered qualified plan
  2. Up to 25% employer deduction
  3. Flexible contributions
  4. 100% of contribution CAN be investing in company stock
  5. ESOP CANNOT be integrated with SS or cross tested
73
Q

Keogh Plans (HR10)

A
  1. Qualified plans for self employed
  2. Can be DB or DC plan
  3. Unincorporated businesses, such as sole proprietorships and partnerships
  4. Can operate as a money purchase plan, profit-sharing plan, or db
  5. Keogh plans have more administrative burdens and higher upkeep costs than Simplified Employee Pension (SEP) or 401(k) plans, but the contribution limits are higher, making Keogh plans a popular option for many high-income business owners.
  6. Owner-employee contribution or benefit is based on net earnings instead of salary
74
Q

Keogh Contribution Example:

A

12.12% for 15% contribution for non-owner employees

18.59% for 25% contribution for non-owner employees

75
Q

George’s Plumbing established a 25% money purchase plan. His business produced $50,000 of net schedule C earnings. What can he contribute to a Money Purchase plan?

A

$50,000 x .1859 = $9,295

76
Q

Top Heavy Plans

A

More than 60% of total amount in the accounts of all employees is allotted to KEY Employees

“60 top hats are the KEY”

77
Q

Key Employee

A

Greater than 5% owner
Officer and compensation greater than $185,000
Greater than 1% ownership and compensation greater than $150,000

“Officer 185 is KEY”
“1% own 150 KEY”
“5% owner KEY”

78
Q

Effects on contributions or benefits:

A

Top Heavy plan must provide minimum benefits or contributions for non-key employees

79
Q

Defined Benefit Plan

A

Must be at least 2% of compensation multiplied by number of employee’s years of service in which the plan is top heavy up to the MAXIMUM of 10 years

B second letter of alphabet is 2%

80
Q

Defined Contribution

A

Top Heavy - no less than 3%

C 3%

81
Q

Loans From Qualified Plans

A

Total loans do not exceed the lesser of 50% of the participants vested plan benefit or $50,000

Special rule for participants with small account balances can borrow up to $10,000 - no limitation

Loan repaid over 5 years unless
- used to acquire principle residence
- leave of absence (less than one year)

82
Q

If Participant Fails to Follow Loan Repayment

A

If participant does not follow repayment schedule, entire balance is deemed a taxable distribution

Also 10% penalty if under 59.5

83
Q

Interest on 401k Loan

A

Non Key:
Only deductible if for primary residence
Loan is secured by the primary residence

KEY employee’s - interest is NEVER EVER deductible

84
Q

Qualified Plan Loans

A

Not required to provide loans

403b and TSA’s can take loans

85
Q

Definition of Key Employee in a Top-Heavy Plan

A

$185,000

86
Q

Definition of Highly Compensated Employee

A

$130,000

87
Q

When, if ever, can a corporation that issues qualified stock options (ISOs) receive a tax
deduction for the ISOs?

A

C. Yes, if the ISO is disqualified

If the stock that was acquired under the option (right to buy) is sold before the two year
/one year holding period, the excess of the fair market value of the shares at the time of
exercise over the exercise price is treated as compensation to the option holder. That creates a
corresponding deduction for the issuing corporation.

88
Q

Todd wants to defer the distributions from the money purchase plan in which he
participates for as long as possible. He works for RJ, Inc. RJ wants him to continue working
for it beyond the plan’s stated retirement age 65. If he continues to work beyond 72 and
contribute to the plan, what is the latest time when he can take his first distribution and not
be penalized?

A

By April 1st of the year following the year when he retires from his job with RJ, Inc.

Todd is a rank‐and file‐participant in the money purchase plan and clearly not a 5% owner.
Thus, he may delay his required beginning date (RBD) from the plan until April 1 of the year
following the year when he retires from service with this employer.

89
Q

Cannot deduct any premiums for group health insurance for owners

A

S Corporations and proprietorships cannot deduct any premiums for group health insurance for owners. Non-owner employee health premiums are fully deductible to both entities

90
Q

income tax implications of employer premium payments for group health insurance?

A

S Corporations and proprietorships CANNOT deduct any premiums for group health insurance for OWNERS

Non-owner employee health premiums are fully deductible to both entities.

91
Q

Which of the following types of business cannot establish an ESOP?

A

Partnerships

They may offer other types of qualified plans, but they cannot have stock bonus or ESOP plans because partnerships do not issue stock. Any business established as a corporation may establish ESOPs.

92
Q

Which of the following is true about cash balance plans?

A

Past service credit is available.

The plan works somewhat like a money purchase plan.

Forfeitures must be used to reduce employer contributions.

The plan has a minimum rate of return.

93
Q

25 or Fewer employees in pension plan

A

Does NOT need PCGB coverage

94
Q

New Comparability Plan

A

When the major shareholders are of vastly different ages, the new comparability plan allows them to be grouped together to skew larger contributions to the owners

95
Q

A nonowner employee of ABC Corporation turned age 72 on July 30 of Year 1. He continued to work until he retired on February 5 of Year 5. What is his required beginning date for minimum distributions from his qualified plan?

A

Because the employee is not a greater than 5% owner of the corporation, he can delay his required beginning date to April 1 of the year following the later of the year in which he turned age 72 or the year he retired, which in this case is April 1 of Year 6. This provision only applies to the plan of the employer with whom he remains employed.

96
Q

Gina, age 40, works for Best Place, Inc. She enjoys traveling, and as a result, her cash flow is such that she is living paycheck to paycheck. Twelve years ago, she rolled over a Section 401(k) plan (from a former employer) to a traditional IRA. The IRA balance has grown to $80,000, which represents her only savings. In 2021, she incurred some unexpected medical expenses and was forced to take a $7,500 distribution from her traditional IRA to pay for the expenses. Gina’s adjusted gross income was $100,000, and she has never been an active participant in her current employer’s qualified plan. Which of the following statements is CORRECT?

A

The entire distribution is subject to ordinary income tax and the 10% early withdrawal penalty tax because Gina is under age 59½ and her medical expenses do not exceed 7.5% of her AGI. If her distribution would have been for $10,000 to pay for unreimbursed medical expenses, she would have owed the 10% EWP on $7,500 that was below 7.5% of her AGI and not owed the 10% penalty on the $2,500 that was above the 7.5% of her AGI.

97
Q

Simple and SEP IRA Non elective contribution example:

Tom, age 30, earns $300,000 annually as an employee for Waste Distributors. His employer sponsors a SIMPLE IRA, and provides nonelective contributions to the plan. Tom has participated in the SIMPLE for two years. What is the maximum contribution (employer and employee) that can be made to Tom’s SIMPLE IRA in 2021?

A

The maximum total contribution is $19,300 ($13,500 employee + $5,800 employer). The maximum employee contribution for 2021 is $13,500. Tom’s employer has chosen to make a nonelective contribution. If his employer chooses a nonelective contribution to the SIMPLE, its required contribution is 2% of annual compensation up to a compensation cap of $290,000 (2021). Therefore, the employer must make a contribution of $5,800 ($290,000 compensation × 2%). The compensation limit that applies to SEP plans and qualified plans also applies to SIMPLE nonelective contributions. This compensation limit does not apply to SIMPLE IRA matching contributions, but it does apply to SIMPLE 401(k) matching contributions.

98
Q

Plan Trustee Responsibilities

A

Invest in a prudent manner
Monitor & Review performance of plan assets

99
Q

Social Security

A

Uses best 35 years of salary

100
Q

Salary Limit That Applies To SIMPLE IRA’s

A

$305,000

101
Q

ESOP Rule

A

55 Years Old / 10 Years or service = 25% of account balance diversified

ESOP’s CAN Use NUA

CFP (16 decks)

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