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CFP July 2023 > Retirement > Flashcards

Retirement Flashcards

1
Q

When to select a Money Purchase Pension Plan

A
  • employer wants a stable work force
  • employer wants a plan simple to administer and explain
  • employees are relatively young and well paid
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2
Q

Requirements to use a Money Purchase Pension Plan

A
  • must have stable cash flows
  • must make fixed contributions
  • up to 25% employer deductions
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3
Q

When to select a Target Benefit Plan

A
  • wants an alternative to a defined benefit plan
  • wants to provide adequate retirement benefits to older employees
  • wants lower costs and simplicity
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4
Q

When to select a Profit-Sharing Plan

A
  • when employers profit margin or financial stability varies from year-to-year
  • when employer wants to adopt a qualified plan with an incentive to motivate employees to make the company more profitable
  • when employees are young and well-paid
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5
Q

When to select a 401(k) plan

A
  • when employer wants to provide a qualified retirement plan but can only afford minimal extra expenses
  • when employees want to increase savings on a tax-deductible basis
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6
Q

When to select a stock bonus or an ESOP

A
  • company wants to broaden ownership of stock, create a market for stock, or provide liquidity for shareholders
  • company wants to provide a tax advantage mean to acquire company stock
  • employer wants its workers to feel a sense of ownership
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7
Q

When to select a defined benefit plan

A
  • employer wants to maximize contributions to older employees
  • an older employee wants to maximize tax-deferred retirement savings for their own benefit
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8
Q

When to select a Cash Balance Plan

A
  • employer is looking for a less expensive and simpler Defined Benefits plan.
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9
Q

Disadvantages of Cash Balance Plans

A
  • older, long-service employees receive lower pension benefits when a DB plan is converted to a Cash Balance Plan.
  • lump-sum payout at termination is considerably smaller
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10
Q

When to select a 412(i) plan

A
  • when employer has some need for life insurance
  • allows large contributions but lower returns
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11
Q

ADP/ACP Testing Shortcut

A
  • 0-2% = times 2
  • 2-8% = plus 2
  • times/plus is added to NCHE value
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12
Q

Parent Subsidiary

A
  • One entity (the parent company) owns at least 80% if one or more other entities
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13
Q

Brother-sister

A
  • five or fewer owners of 2 or more entities own 80% or more of each entity
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14
Q

Affiliated Service Group

A
  • apply to service organizations in health, law, accounting, engineering, etc.
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15
Q

Employee Leasing

A
  • reduce the discrimination potential from an employer choosing to lease employees rather than employ.
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16
Q

Defined Benefit Plan Integration

A
  • permitted disparity = lessor of base benefit percentage or 26.25%
  • base percentage + permitted disparity = excess percentage
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17
Q

Defined Contribution Plan Integration

A
  • permitted disparity = lessor of base or 5.7%
  • base percentage + permitted disparity = excess percentage
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18
Q

PIA Calculation if Social Security is taken before Full Retirement Age (FRA)

A
  • [# of months before FRA/180] x PIA = Benefit
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19
Q

Taxation of Social Security Benefits

A
  • if income + 50% of social security is more than $25,000 (single) or $32,000 (MFJ), social security is taxable at 50%
  • if income + 50% of social security is more than $34,000 (single) or $44,000 (MFJ), social security is taxable at 85%
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20
Q

Keogh Plan Deductible Contribution Shortcut (also used for Self-Employed SEP Contribution)

A
  • multiple net schedule c income by 12.12% for 15% contribution
  • multiple net schedule c income by 18.59% for 25% contribution
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21
Q

When to select a Simplified Employee Pension (SEP)

A
  • employer wants an alternative to a qualified profit-sharing plan
  • employer wants a plan that is easy and inexpensive to install
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22
Q

Simplified Employee Pension (SEP) Characteristics

A
  • lessor of 25% (not 100%) of compensation up to $330,000 or $66,000
  • easy to adopt by filing Form 5305-SEP
  • permits employer contributions only
  • must cover all employees over 21 and have worked 3 out of last 5 years. (Part time counts)
  • contributions do not beed to be made for employees whose compensation for the year was less than $750
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23
Q

When is an Simplified Employee Pension (SEP) advantageous

A
  • when employer has numerous short-term employees.
  • if employer has numerous long-term or part-time employees an SEP is a major disadvantage.
24
Q

When to select a SIMPLE plan

A
  • employer is looking for an easy to administer plan through salary reduction and employer match.
  • employer has no more than 100 employees
  • cannot obtain any other qualified plan
25
Q

SIMPLE plan Eligibility

A
  • plan must cover any employee who earned $5,000 in any two previous years and is reasonably expected to earn $5,000 in the current year
26
Q

Minimum Participation (Defined Benefit Only)

A
  • lessor of 50 employees or [greater of 40% of all employees or 2 employees]
27
Q

Social Security Integration Calculation

A
  • integration level x base contribution
  • [total salary - integration level] x excess contribution
  • add above two
28
Q

Investment Considerations for Retirement: Money Market Accounts

A
  • short term
  • low risk, low return
29
Q

Investment Considerations for Retirement: Fixed Income Bonds

A
  • short to medium term
  • may lose value, but has a fixed return
30
Q

Investment Considerations for Retirement: Common Stock

A
  • long term
  • volatile, income/growth
31
Q

Investment Considerations for Retirement: Mutual Funds

A
  • long term
  • more diversification
32
Q

Investment Considerations for Retirement: Real Estate

A
  • long term
  • above average return during inflationary periods
33
Q

Investment Considerations for Retirement: GIC’s

A
  • 2 to 7 years
  • low risk, fixed return
34
Q

Life Insurance incidental to Plan must be lower than:

A
  • ordinary life/whole life: 50%
  • term life: 25%
  • universal life: 25%

*Defined Benefit can be no more than 100x the expected monthly benefit

35
Q

When are Rabbi Trusts often used

A
  • possibly that ownership or management might change before the deferred compensation benefits are paid
  • new management might be hostile to the key employee in the future and fail to honor the compensation agreement
  • risk that litigation to enforce payment of deferred compensation in the future would be too costly to be practical
36
Q

When to choose to offer SARs and phantom stock

A
  • the company’s owners want to share the economic value of equity, but not equity itself
  • the company is a division of another company but can create a measurement of its equity value and wants employees to share in that
  • the company is a nonprofit or government entity
  • the company cannot offer conventional kinds of ownership because of restrictions
37
Q

PIA Calculations

A
  • two reductions: early benefits, earned income under FRA.
  • months before FRA = percentage reduced
  • 12 mo = 6.67%
  • 24 mo = 13.34%
  • 36 mo = 20%
  • 48 mo = 25%
  • 60 mo = 30%
38
Q

IRA Keys (SIMPLE, SEP, SARSEP)

A
  • no loans
  • no life insurance
  • must take RMDs at 73
  • 59.5 not 55 for no 10% penalty
  • immediate vesting
  • may not be creditor protected
39
Q

DB/DC Limits

A
  • DB/DC salary cap = $330,000
  • SIMPLE IRA cap = $516,667
  • DC max contribution = $66,000 (73,500 if 50+)
  • DB max contribution = stuff it like a pig
  • tandem plan is a wrong answer
40
Q

When to Recommend Defined Benefit Plan

A
  • when older controlling employee wants to maximize tax-deferred retirement savings for their benefit and company has very stable cash flow.
41
Q

When to Elect a Cash Balance Plan

A
  • when company can no longer afford the benefits guaranteed under a defined benefit plan
42
Q

Implementing a Money Purchase Pension Plan

A
  • when employer wants stable work force
  • a plan simple to administer and explain
  • employer must have stable cash flows and profits to make fixed contributions
43
Q

401k Deferral Meaning

A
  • maximum $22,500
44
Q

401k Contribution Meaning

A
  • deferrals and catch up ($30,000)
45
Q

When to select stock bonus or employee ownership plans

A
  • want to broaden ownership of its own stock
46
Q

SIMPLE Employer Max Contribution

A
  • 3% of salary up to $330,000 limit (401k)
47
Q

When to choose SEP

A
  • easy and cheap to install
  • alternative to profit sharing plan
48
Q

403(b) Max Contribution

A
  • lesser of $66,000 or SALARY
49
Q

Minimum Benefits and Contributions

A
  • DB = 2% of compensation
  • DC = 3% of contributions
50
Q

Vesting Calculation

A
  • ignore year 1
  • add up remaining
  • multiply by contribution
  • multiply by vesting %
51
Q

Salary Reduction Plans

A
  • defers some portion of the employees current compensation to fund the ultimate benefit
52
Q

Salary Continuation Plans

A
  • plan uses additional employer contributions to fund the ultimate benefit
53
Q

Unfunded Plans

A
  • owned by company
  • subject to creditors of company
  • holds regular investments
  • no tax deduction until employee is taxed which occurs when employee has constructive receipt
54
Q

Indications of Ownership

A
  • if able to name beneficiary, ownership exists
55
Q

Social Security Integration Calculations

A
  • base % is multiplied by $160,200
  • permitted disparity is multiplied by amount above $160,200

CFP July 2023 (8 decks)

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