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CFP® > Retirement Planning > Flashcards

Retirement Planning Flashcards

1
Q

Section 415 annual additions limit

A

Lesser of 100% of compensation or $58k (2021)

  • Includes ER contributions, EE salary deductions, and plan forfeitures
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2
Q

Safe Harbor Nondiscrimination

A

A safe harbor 401k plan automatically satisfies nondiscrimination tests involving HCE’s w/ ER matching contribution or a nonelective contribution

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3
Q

Safe Harbor Match/Vesting

A

The statutory contribution using a match is $1 for $1 on first 3% EE deferral and $0.50 for $1 on next 2% EE deferral.

If ER chooses to use nonelective deferral method, ER must contribute 3% of all eligible EE’s compensation regardless whether EE is deferring or not.

ER contributions must be immediately vested

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4
Q

Stock Bonus/ESOP - qualified plan

A
  • Up to 25% ER deduction
  • Flexible contributions
  • Max annual contribution is lesser of 100% salary or $58k (2021)
  • 100% of contribution can be vested in ER’s stock
  • ESOP cannot be integrated with SS or cross tested.
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5
Q

Net Unrealized Appreciation (NUA)

A
  • Preferable tax treatment of ER stock held in an ER retirement plan. Upon distribution, gains inside the plan are not realized until sold.
  • Basis is taxed when distributed as ordinary income.
  • Further gains after distribution is STCG or LTCG depending on holding period after distribution.
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6
Q

Keogh Contribution

A
  • Only for sole proprietors and partnerships
  • SE tax must be computed and a deduction of 1/2 SE tax must be taken before determining the Keogh deduction.

Shortcut:

  • If contribution 15% - multiply by 12.12% of net earnings
  • If contribution 25% - multiply by 18.59 of net earnings
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7
Q

SIMPLE IRA requirements

A
  • <100 EE’s
  • ER cannot maintain any other plan
  • Participants fully vested immediately

Note: Easy to administer and funded by EE salary reductions and an ER match

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8
Q

SEP IRA requirements

A
  • NO salary deferrals – ER contributions only
  • up to 25% contribution for owner
  • Max of $58k (2021)
  • Immediately invested
  • Can be integrated with SS
  • Special eligibility: 21+ years old, paid at least $650 (2021), and worked 3 of 5 prior years.
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9
Q

Tax-deferred annuity (TDA)/Tax Sheltered Annuity (TSA)/403(b)

A
  • for 501(c)(3) organizations and public schools
  • Subject to ERISA only if ER contributes
  • Salary reduction limit up to $19,500 (2021) (plus $6,500 catch-up if 50 or over)
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10
Q

IRA Keys (SIMPLE, SEP, SARSEP)

A
  • No loans
  • No life insurance
  • Immediate vesting
  • May not be creditor protected (depending on state)
  • 59.5 not 55 for no 10% penalty
  • Must take RMDs at age 72 (even of not an owner)
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11
Q

Age and service rules - qualified plans

A
  • Max age and service are age 21 and one year of service (21-and-one-rule)
  • Special provision allows up to 2-year service requirement, but then EE is immediately vested (2 year/100%)
  • Year of service is 1,000 hours (includes vacations, holidays and illness time) or 500 hours and worked for the company for 3 years
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12
Q

Highly Compensated Employee (HCE)

A
  • > 5% owner, OR

- An EE earning >$130,000 during preceding year (2020)

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13
Q

Key EE

A

If at any time during current year they have been one of the following:

  • > 5% Owner
  • An officer AND compensation > $185,000 (2021), OR
  • > 1% ownership AND compensation >$150,000 (2021)
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14
Q

Vesting - Fast / Slow

A

Fast: DB Top-Heavy Plans / All DC Plans

  • 3 year cliff, OR
  • 2-6 year graded, OR
  • 100% vested after 2 years

Slow: Non-top-heavy DB Plans only

  • 5 year cliff, OR
  • 3-7 year graded, OR
  • 100% vested after 2 years
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15
Q

Defined Contribution Plans (integration w/ SS)

A

Base % + Permitted Disparity = Excess %

  • Base %: DC Plan contribution for compensation below integration level
  • Permitted Disparity: Lesser of base % or 5.7%
  • Excess %: DC Plan contribution for compensation above integration level.
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16
Q

Defined Benefit Plans (integration w/ SS)

A

Base % + Permitted Disparity = Excess %

  • Base %: DB Plan contribution for compensation below integration level
  • Permitted Disparity: Lesser of base % or 26.25%
  • Excess %: DB Plan contribution for compensation above integration level.
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17
Q

Multiple Plans 2021 Elective Deferrals

A

Elective Deferrals: More than one (ER 2021)
Elective deferrals to multiple plans are always aggregated (Except 457 plans)

401(k)/403(b)/SIMPLE/SARSEP: $19,500 + $6,500 catch-up
SIMPLE and other SIMPLE: $13,500 plus + $3,000 catch-up

18
Q

Life Insurance as a funding vehicle - Incidental Tests

A

LI benefit must be “Incidental” to primary purpose of the plan. If following tests met, considered “Incidental”:

  1. Aggregate oremiums paid for participant’s insured death bene are all times less than following percentages of the plan cost for the participant:
    Ordinary Life Ins: 50%
    Term Ins: 25%
    Universal Life: 25%
  2. Participant’s insured death benefit not more than 100x expected monthly benefit.
19
Q

Rollovers NOT permitted

A
  • Transfers to another 457 plan remain only option for non-governmental tax exempt organizations
  • Hardship distributions cannot be rolled into any other qualified plan
  • RMD’s
20
Q

Qualified plan early distribution 10% penalty exceptions

A
  • Death
  • Disability
  • Substantially equal periodic payments following separations from service
  • Dist following from service at age 55
  • Dist in accordance with QDRO (to any alternative payee)
  • Medical expenses >10% of AGI or health insurance costs while unemployed
  • Distribution used to pay insurance premium after separation from employment (must file for unemployment)
  • $5,000 withdrawal for birth or adoption of a child
21
Q

Required Beginning Date (RBD) for IRA/SEP/SARSEP/SIMPLE

A

April 1st of year following year age 72 obtained. Subsequent dist must be made by December 31st of each year thereafter.

22
Q

RBD for Qualified plans/403(b)/457

A

Except for 5% owners, April 1st of year following year age 72 obtained. Subsequent dist must be made by December 31st of each year thereafter.

5% owners RBD is same as IRA/SEP/SARSEP/SIMPLE

23
Q

IRA Deductibility Keys

A
  • If neither spouse (or single person) is active participant in an retirement plan, IRA is deductible. All plans affect participant status except 457 .
  • If one spouse is active participant, other spouse (not active) can do deductible IRA if combined AGI < $198k-208k (2021)
  • If both active, AGI limits apply $66k-76k (S), $105k-125k (MFJ) (2021)

Note: Annual additions to DC account or benefits accrued to a DB plan.

24
Q

IRA early distribution 10% penalty exceptions

A
  • Death
  • Substantially equal payments
  • Disability
  • First home expenses up to $10k
  • Qualified education expense
  • Medical expenses >$10k AGI
  • Distribution used to pay insurance premium after separation from employment (must have received unemployment compensation for 12 weeks)
  • $5,000 withdrawal for birth or adoption of a child
25
Q

Roth IRA ordering rules for distribution

A
  1. Any contributions (not conversions) are withdrawn first
  2. Conversions withdrawn second
  3. Earnings withdrawn last
26
Q

Roth IRA minimum distributions (after death)

A
  • Distributed within 5 years of death OR 10 distributed by end of 10th years following death
  • Where spouse is sole beneficiary, distributions may be kept in the IRA and delayed until age owner would have reached age 72. RMD based on surviving spouse life OR rolled and treated as own IRA and own RBD rules apply
27
Q

NQ deferred compensation plans

A

Salary reduction plan: uses some portion of EE’s current compensation to fund the ultimate compensation benefit (aka “pure deferred”)

Salary continuation plan: uses ER contributions to fund ultimate benefit

28
Q

Rabbi Trust

A

Key words: merger, acquisition, change of ownership

  • Assets in rabbi trust not protected from company creditors
  • Fear that ownership or management may change before deferred compensation is paid
29
Q

Incentive Stock Option (ISO) Holding Period

A

1 year from exercise date AND 2 years from grant before selling ISOs. Violating either rule results in disqualifying disposition (less favorable tax treatment)

30
Q

Section 457 Deferred Compensation Plan

A
  • NQ DC plans of gov. agencies and non-church controlled tax-exempt organizations
  • Deferral limited to $19,500 or 100% of compensation (2021)
  • $6,500 catch-up ONLY for gov plans (2021)
  • Salary deferrals NOT aggregated with other plans (401k, etc)
  • Non-gov plans can only be rolled to another 457 plan.
31
Q

Basic concepts of Social Security

A

Nearly every worker is covered under OASDI

Employment categories not covered by SS include:
A: Federal EE’s who’ve been continuously employed since before 1984
B: Some Americans working abroad
C: Student nurses and students working for a college or college club
D: Railroad EE’s
E: A child, under age 18, who’s employed by a parent in an unincorporated business
F: Ministers, members of religious orders and Christian Science practitioners if they claim an exemption
G: Members of tribal councils

32
Q

Social Security - Reduction of benefits

A

Age 62 up to FRA, benefits reduced $1 for every $2 earned over $18,960 (2021)

33
Q

Social Security - Taxation

A
  • Must include muni bond income to calculate MAGI
  • If income (MAGI) plus 1/2 SS benefit is:
    1. >$25k (S), then 50% total SS included in income
    2. >$44k (MFJ), $85% total SS included in income
34
Q

Types of Qualified Plans/ERISA (Vesting/admin costs/exempt from creditors/integrate with SS)

A
  • DB
  • Cash Balance
  • Money Purchase
  • Target Benefit
  • Profit Sharing
  • Profit Sharing (401K)
  • Stock Bonus
  • ESOP (NOT integrated w/ SS or cross tested)
35
Q

Types of Retirement Plans (no vesting/limited admin costs)

A
  • SEP IRA
  • SIMPLE IRA
  • SAR-SEP
  • Thrift or savings plans
  • 403(b)
36
Q

Defined Benefit (DB) - Qualified Plan

A
  • Favors older EE/Owners (50+)
  • Certain retirement benefit; max $230k (2021). Meet a specific retirement objective.
  • Company must have very stable cash flow
  • Past service credits allowed
  • Forfeitures MUST be applied to reduce ER contributions
  • PBGC insured (along with Cash Balance plan)
37
Q

Money Purchase - Qualified Plan

A
  • Up to 25% ER deduction
  • Fixed contributions - need stable cash flow
  • Max annual contribution lesser of 100% salary or $58k (2021)
38
Q

Target Benefit - Qualified Plan

A
  • Up to 25% ER deduction
  • Fixed contributions - need stable cash flow
  • Max annual contribution lesser of 100% salary or $58k (2021)
  • Favors older workers
39
Q

Profit Sharing - Qualified Plan

A
  • Up to 25% ER deduction
  • Flexible contributions (must be recurring and substantial)
  • Max annual contribution lesser of 100% salary or $58k (2021)
  • Can have 401(k) provisions
  • SIMPLE 401(k) exempt from creditors
40
Q

Section 401(k) Plan

A
  • Qualified profit sharing or stock bonus plan that allows plan participants to defer salary into plan
  • Max $19,500 (2021) deferral for participants under 50 (subject to FICA)
  • Additional $6,500 catch-up for participants 50+ (2021)

CFP® (3 decks)

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