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CFP Extra > Retirement > Flashcards

Retirement Flashcards

1
Q

Excise tax for over contributing

A

6% tax on amount above

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2
Q

Defined contribution plans

A

qualified plans
Individual account for each participant
Subject to ERISA
Vesting schedule
May not be enough benefits for people who enter at older ages
Forfeitures are reallocated or applied to reduce employer contribution

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3
Q

Money purchase plan

A

DC plan
Benefit formula: annual employer contribution that’s a flat % of each employees salary
Salary cap is $305k
Max contribution is lessor of 100% of compensation or $61k
Employer can only deduct 25% of total comp

SELECT IF:
Stable CF
mandatory contributions
Retain key employees
Employees young and well paid
Simple to explain

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4
Q

Target benefit plan

A

DC plan
Shares some features of DB plans
Max contribution is lessor of 100% of compensation or $61k
Benefits older employees
Actuary determines initial contribution
Fixed mandatory contributions
No guarantee that target among will be reached
Employer can deduct 25% of contribution

SELECT IF:
stable CF
provide adequate retirement to older employees
Lower cost
Simple

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5
Q

Profit sharing plan

A

DC plan
Flexible employer contributions
Contributions must be substantial and recurring or else IRS can disqualify or terminate
Forfeitures are invested terminated employer accounts which are reallocated to participants

SELECT IF:
financial stability varies from year to year
Incentive feature to motivate employees to make company profitable
Young and well paid

NOT EASY to install expensive

Types: 401k, solo 401k, safe harbor or ESOP

Hardship withdrawals allowed

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6
Q

401k

A

Type of profit sharing plan

Employees can defer $ to plan subject to FICA and FUTA not federal

Max contribution is $20,500 with catch up of $6,500 if age 50 or older

SELECT IF:
employees can only afford minimal extra expenses
Employees want to increases saving on a tax deferred basis

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7
Q

Solo 401k

A

Profit sharing plan

Not subject to coverage testing or non discriminatory rules

Allowed for owner and spouse or 2 partners

Max employee contribution is same as 401k

Max corporate contribution is 25% of owners compensation with max of $61k

May produce larger contribution amounts when compared to KEOGH plans

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8
Q

Safe harbor 401k

A

Profit sharing plan

Satisfies non discrimination tests by either:
1. Match $1 for $1 on first 3% of employee contribution and $0.50 for $1 on next 2%
2. Non elective employer must contribute 3% or all eligible employees regardless of if employee defers anything

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9
Q

ESOPS

A

Profit sharing plan

Stock bonus may invest in employer stock
ESOP MUST invest in employer stock

ESOP dividend deduction if received in cash or reinvest

Employees 55 and older may diversify 50% or assets. Plan must provide 3 alternative investment options

ONLY corporations can establish NOT partnerships

SELECT IF:
company wants to broaden ownership of stock shareholder or provide business continuity
Tax advantage mean to acquire stock
Employees feel sense of ownership
Means to finance company operations

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10
Q

Cross testing

A

ALL DC plans (except esop and solo) are tested for non discrimination on the basis of contributions

Differentiate highly compensated employees with non

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11
Q

Defined benefit plans

A

Qualified plan
Guaranteed specific amount at retirement

Required to carry PBGC insurance even if business fails insurance will cover

Maximum annual life benefit is lessor or:
1. $245k
2. 100% of participants compensation over their 3 highest earning consecutive years

SELECT IF:
Employer wants to maximize plan contributions
Older employee controlling me ever want to maximize tax deferred retirement savings for their own benefits

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12
Q

Cash balance pension plans

A

DB plan

Provides annual employer contribution at a specified rate to hypothetical individual accounts for each participant

Guarantees contribution level and minimum rate of return

Older employees get less of a payout

SELECT IF:
Less expensive and simple
When a company can no longer afford benefit guarantees under a DB plan or a small employer with high earners.

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13
Q

Factors for DB plan contributions

A

Age of employee older the more money

Past service you get a credit for it

Forfeitures must be applied to reduce employer contributions

Investment return assumptions lower then higher contribution amount

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14
Q

Qualified plan age and service requirements

A

21 AND 1 years of service
21 AND 2 years of service but 100% immediate vesting

Year of service = 1,000 hours during initial 12 month period
Employees worked 500 hours for at least three consecutive years

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15
Q

Coverage testing for qualified plans

A

Ratio % test: plan must cover % of non highly compensated employees that is 70% of highly compensation employees that are covered if not then average benefit test
((100% of HCE covered)*70%=x
100-x= percentage of NHCE that can be excluded
x= percentage of NHCE that must be included

Average benefits test: average benefits for all NHCE must be at least 70% of those for HCE

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16
Q

Minimum participation for DB plans

A

Lessor of:
1. 50 employees
2. Greater of 40% of all employees or two employees

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17
Q

Highly compensated employee “HCE”

A

Relates to discrimination testing

Greater than 5% owner or made 135k in previous year

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18
Q

Key employees

A

Relates to vesting; same as rank and file employees

-Greater than 5% owner
-Officer and has comp of more than $200k
-Greater than 1% owner and comp more than $150k

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19
Q

Top heavy plans

A

More than 60% or accrued benefits to key employees

HCE salaries up to $305k divided by HCE salaries up to $305k plus NHCE salaries

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20
Q

Vesting schedule

A

Top heavy DB plans and ALL DC plans (faster)
- 3 year cliff
- 2-6 year graded
- 100% vested after two years

Non top heavy DB plans
- 5 year cliff
- 3-7 year graded
- 100% vested after two years

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21
Q

Family attribution

A

Family member of a key or HCE will be deemed the same for testing

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22
Q

ADP/ ACP testing

A

Adp: percentage of deferral
ACP: contribution testing non discrimination

IF NHCE defers 0-2% then HCE can defer X2 of NCHE contribution

If NCHE defers 2-8% then HCE can defer +2% of NCHE contribution
If HCE is 50 or older they can defer additional catch up

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23
Q

Social security integration

A

Equalize employers contributions to benefits higher paid employees

DB plans: based % given
Permitted disparity: base % + lessor of base % or 26.25%
Excess: base plus permitted disparity

DC plans: base % given
Permitted disparity: base % + lessor of base % or 5.7%
Excess: base plus permitted disparity

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24
Q

KEOGH plan

A

Qualified plan for sole proprietorships and partnerships

Owner contribution based on net earnings
Self employment tax should be deducted

For 15% non owner employer contributions; owner can contribute salary times 12.12%

For 25% non owner employer contributions; owner can contribute salary times 18.59%

Salary is schedule c income

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25
Q

Top heavy contributions or benefits

A

Top heavy plans provide minimum before for non key employees

DB: minimum benefit for non key employees is 2% * number of years of employment - max 10 years

DC: 3% of each non key employees compensation

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26
Q

Loans from qualified plans

A

Requires repayment

Total loans don’t exceed lesser of 50% vested plan benefit or $50k
Small accounts can borrow $10k without regard to percentage

Loan has to be repaid in 5 years unless money is used to buy primary house

Repayment = level installments at least quarterly

If person doesn’t make payments then entire balance is taxable distributions ordinary income plus 10% penalty if under 59 1/2

Interest is never deductible for key employees

Non key employees can deduct id
Loan is for primary house
Loan is secured by house

No loans allowed for: IRAS, SEPS, SIMPLE, ROTH

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27
Q

Early distributions for IRAs

A

Before age 59 1/2 there is a 10% penalty UNLESS one of the following:

  1. Death
  2. Permanent disability
  3. Qualified education expenses
  4. Substantial but equal payments
  5. First home expense up to $10k
  6. Medical expenses greater than 10% of AGI
  7. Birth or adoption up to $5k
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28
Q

Roth IRA conversion distributions

A

Contributions then converted assets then earnings

Conversion assets that meet 5 year holding period - No income tax or penalty

Fail to meet 5 year holding period but distribution for special purpose then no income tax or penalty

Fail to meet 5 year but no special purpose no income tax but 10% early withdrawal penalty

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29
Q

Withdrawal from Roth earnings distributions

A

Meets 5 year holding and qualifying event (59 or older, death, disability and first time home purchase) no income tax or early withdrawal

Meets 5 year and special purpose (medical expenses, medical insurance, substantial but equal, higher education, birth or adoption) then income tax but no penalty

Meets 5 year but no triggering event then income tax and penalty

Fails to meet 5 year holding but special purpose (all 9 items) then income tax but no penalty

Fails to meet 5 year holding without a special purpose then both income tax and penalty

30
Q

SEP simplified employee pension

A

Employer contributions only, no fica or futa

Easy to adopt

Contributions lessor of 25% of comp (max $305k) or $61k

Self employment KEOGH rules (12.12 18.59)

Contributions can be flexible but substantial and recurring

100% vested

Must cover all employees 21 and older that worked 3 out of 5 years includes part in time that earn $650 or above

Don’t need to make contributions if person makes less then $650 a year

SELECT IF:

numerous short term employees and unstable CF, simple to establish

31
Q

Simple IRA

A

25% penalty for a distribution in first 2 years

Employees make pre tax contributions of $14k with a $3k catch up

No more than 100 employees

Must match 3% of employees comp (no deferral no match) or not less then 1% in no more than 2 out of the 5 years or 2% non elective to all employees

Max is $466k salary

Can’t maintain another qualified plan

Plan must cover people who earned 5k in any 2 previous years

Employer must notify of 60 day election period

100% vested

32
Q

ERISA

A

Body of legislation that regulates qualified plans
Protects interest of participants

33
Q

Department of labor

A

Enforces ERISA
issues interpretive guidelines on regulations
Issues advisory options

34
Q

Internal revenue code

A

Control operation of qualified plans

Dispenses favorable tax treatment to those plans that qualify

35
Q

Treasury department

A

Interprets and admins tax laws

Dispenses requirements through procedures through revenue rulings and private letters

36
Q

UBTI

A

Exceeds $1k income from a LP or dividends from a margined account

37
Q

Life insurance

A

Merely incidental to primary purpose of plan

Dc plans: premiums paid are less than 50% for whole and 25% for term/universal

Db plans: death benefit no more than 100 times the expected monthly benefit

All qualified plans can hold disability insurance

ONLY profit sharing can hold 2nd to die

38
Q

Premature distributions from qualified plans while still working

A

In service distributions from qualified plan when still working allowed if:

  1. Attained 59 1/2 for 401k deferrals or NRA for money purchase pension plans
  2. Hardship withdrawal from any profit sharing plan if under financial need only for vested amounts subject to ordinary income and penalty if under 59 1/2 and not disabled
  3. Pension protection act distributions as early as 62 for DB plans
39
Q

Qualified plan penalty exceptions

A

For ppl under 59 1/2

Death
Disability
Substantial but equal payments following separation of service
55 and older following separation of service
Medical expense greater than 10% AGI
$5k adoption and birth

40
Q

Substantial but equal payments

A

Must meet:

Not less frequent than annually
Paid without changing amount for 5 years or until 59 1/2
Based on life expectancy
Reasonable interest rate
If any modifications are made all payments made before 59 1/2 are subject to 10% penalty
Can change from RMD to annuity without a penalty

41
Q

Net unrealized appreciation NUA

A

produces phantom income

Basis of stock is taxed at ordinary income rates when distributed to an employee at retirement

If sold within a year: long term gain is calculated by taking the FMV day received - basis
Short term gain: price sold - long term gain

If sold after a year ALL long term gains

If under 59 1/2 and not part of separation of service then 10% penalty applies

Beneficiaries are eligible to elect NUA without penalty tax treatment on deceased employees securities provided they take a lump sum distribution of deceased employees account. It is lost if the shares are rolled over to an IRA.

42
Q

Non qualified deferred compensation

A

May discriminate
Exempt from ERISA
Non deductions for employer until employee is taxed
Distributions taxable at ordinary income

43
Q

Salary reduction plans

A

Uses employees current compensation to fund ultimate benefit

44
Q

Salary continuation plans

A

Uses employer contributions to fund ultimate benefit

45
Q

Un funded plans

A

Naked promise
Or informally funded with life insurance, annuities and mutual funds
Subject to employers creditors

46
Q

Life insurance and section 162

A

Informally funding when

Owner and beneficiary = employer
Premiums not deductible
Tax free DB to employer
Benefit to employee or benes = taxed
PV of payments includable in estate

47
Q

Rabbi trust

A

Informally funded
Assets available to all creditors
For ownership management change or merger

48
Q

Secular trusts

A

Funded non qualified irrevocable trust
Funds beyond reach of creditors
Taxed year compensation is transferred to trust

49
Q

Constructive receipt

A

Income taxed in the year is paid or made available to employee unless substantial risk exists

50
Q

Substantial risk of forfeiture

A

Employees rights to property are conditioned upon performance or services for period of time
Relationship to other stock holders and control
Relationship or corporate officers

51
Q

ISOs

A

Tax favored option plan only on first $100k that vest in one year

Must hold shares 1 year from exercise date
Make hold shares 2 years from grant date before sold

At exercise: Bargin element = amount exercise price - cost basis

Sale: excess above basis is cap gain

If sold within same year of exercise then bargain element taxable compensation FICA FUTA

If sold within 12 mod of exercise but next calendar year then bargain element is taxed as ordinary Income not subject to FICA FUTA

Sold next calendar year from exercise date but less than 2 years from grant then bargain element is taxed as ordinary income not subject to FICA FUTA.

If both rules broken then disqualifying event bargain element is taxable as compensation and FICA and FUTA

52
Q

NSOs

A

At exercise Ordinary income is exercise price - cost basis

At sale excess above basis = cap gain

53
Q

Fully insured vs currently insured

A

Fully insured if you have 40 social security credits

Currently secured if you have at least 6 quarters during the full 13 quarter period

54
Q

Attribution rules HCEs

A

Children, grandchildren and parents are subject to ownership attraction rules but not siblings Christmas

55
Q

Top heavy 401k

A

Must provide minimum contributions for non key employees

56
Q

Top heavy plan minimum benefits

A

DB: benefit must be 2% of compensation multipled by number of service years max 10

DC: employer contribution must be no less than 3% of each non key employees compensation

57
Q

Spouse controls what plans

A

ALL PENSION PLANS

DB
CASH BALANCE
MONEY PURCHASE
TARGET BENEFIT

58
Q

Social security integration calc example

A

For dc

Step one: calculate the amount before SS threshold $147k times base
Step two: calculate contribution for amount above threshold max $305k - $147k
Step three: add both one and two together

59
Q

Simple 401k

A

Simple Ira provisions

Match of 3% has a different salary cap of $305k

60
Q

83 (b) election

A

For NSOs and restricted stock

Ordinary income at grant date on basis
Then all cap gains at sale

61
Q

QDRO

A

includes
Alimony
Child support
Martial property
Qualified plans NOT IRAs

62
Q

Integration with SS

A

401ks that don’t match can’t be integrated with SS

63
Q

Anti alienation

A

Protects qualified plans from creditors in the accumulation period NOT after payout begins

64
Q

QDRO

A

Valid when the plan administrator has approved the QDRO that has entered with the court and singed by Judge

65
Q

KEOGH DB Plan

A

There are no self employment rules for contributions to a DB plan

66
Q

Rolling to a Roth

A

Qualified plans can be directly rolled over to a ROTH

67
Q

S corps and deferred compensation

A

CANT OFFER!

Can’t select 162 double bonus arrangement - the first bonus goes to annuity life insurance second one pays phantom tax

68
Q

Self employment and retirement plans

A

Don’t assume self employed individual will be a sole proprietorship - any retirement plan is available rather than just KEOGH plans

69
Q

Retirement plans without match

A

Still means you’re an active participant

70
Q

Plan to effect in the Employers fiscal year end plan must be established by what date

A

Sep: by due date of business tax return including extensions

Qualified plan: within the tax year for which the employer wishes to take the tax deduction

SIMPLE: on or before the first date by which a contribution is required

IRAS: by April 15th of the year following the year for which a tax deduction is to be attributed

71
Q

Changing beneficiary of IRA when going thru a divorce

A

Change can be made even if community property

CFP Extra (8 decks)

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