Retirement Flashcards
Who is not eligible for Social Security benefits?
- Railroad employees and their dependents (are covered by Medicare)
- Members of tribal councils
- Children under 18 employed by parents in an no incorporated business (sole prop/partnership)
- Typically taxed at the child’s own tax bracket
Social Security Eligibility: Worker
- Insured workers age 62+
- Entitled to disability benefits and has been disabled for 12 months (or expected to be). “5 month waiting period - paid in 6th month”
one time right to withdraw application if made within 12 months after they begin
Social Security Eligibility: Spouse
Worker Alive
- Spouse of retired/disabled worker & 62+ & the worker is receiving benefits
- Has child in care under 16 (15 years old)
- Has child disabled before age 22
Worker Dead
- Age 60+ (includes divorced spouse)
- Any age if child is under 16 or disabled before 22
Divorced spouses must be divorced for at least 10 years & not remarried. If Divorce spouse is 62+ and divorces for 2+ years, benefit eligible if worker is still working
Social Security Eligibility: Child
Worker must be retired, disabled, or dead:
- Under age 18 (age 17) or under 19 (age 18) and full time student
- Disabled before age 22
Loan From Qualified Retirement Plan
Watch out for questions asking for larger loan then allowed (ex. Loan for more than $50k)
- Loans cannot exceed the lesser of 50% or $50k of participants VESTED balance
- Special rule allows for participants with balances with small accounts to borrow up to $10k (assuming they have $10k)
- Loans must be paid back in 5 years (with the exception of using it to buy a home)
How are SS Benefits Calculated?
Primary Insurance Amount (PIA) - 100% of PIA is paid to worker at FRA
- Spouse or divorced spouse is entitled to their own benefit or 50% of the workers benefit
- Death = spouse gets greater of own benefits or 100% of spouses benefits
Claiming Retirement Benefits While Working (Temporary Reduction)
If you work @ FRA you are allowed to keep your full benefits; below the benefits are reduced below:
- Under FRA: reduced $1 for every $2 above $21,240 (on sheet)
- SS Benefit - $21,240 = Excess / 2 this is the reduction amount
- Year of FRA: reduced $1 for every $3 above $56,520 year in which you reach FRA (months before FRA)
Permanent Reduction to SS
1/180 * amount of months taken early = permanent reduction %
Provisional Income
Provisional Income = AGI (Income) + 1/2 SS + tax exempt Interest (municipal bond income)
50% Reduction
- Single = $25,000 (to next reduction)
- MFJ = $32,000 (to next reduction)
85% Reduction
- Single = $34,000+
- MFJ = $44,000+
SS disability insurance are subject to the same tax rules as SS benefits
Types of Plans That Favor Older Employees
Defined Benefit Plan
- Qualified plan (ERISA / PBGC)
- Guarantees a specific benefit at retirement (you get X amount)
- Need very stable cash flows (yearly contributions that are based off an actuary)
- Benefit Limit
- Company contributes whatever is needed to meet benefit (determined by actuary)
- Maximum benefit an employee can receive is the lesser of $265K or 3 highest consecutive average salary years ($330k is the max compensation taken into consideration)
- Watch out for the 3 year average being more that the $265k
- Factors affecting employer contribution
- Participants proximity to age (older employees will need larger contribution)
- Investment return assumptions (if return is low, you will have to contribute more) (sometimes lower assumptions are good if business owner wants max contribution)
- Employee turnover (forfeitures offset employer contribution)
- Salary scale assumptions (higher salary = higher contribution)
- Inflation (higher inflation, higher salaries, higher contribution)
- Unit Benefit Formula
- Most frequently used formula
- AKA percentage-of-earnings-per-year-of-service
Cash Balance Plan
- Qualified Plan (ERISA / PBGC)
- Individual accounts for each participant - employer contributes annual amount and guarantees a hypothetical rate
- Both the contribution level and hypothetical rate are guaranteed
- 3 year cliff vesting
** Target Benefit Plan (pension plan / DC plan)**
- ERISA only
- Not guaranteed benefits
- Actuary determines initial contribution amount (REMEMBER to not go above $66k per year)
- Employer tries to give a certain benefit but that is not guaranteed
- Up to 25% employer deduction
- Characteristic shared with DC plan
- Max contribution limit of $66k
- Retirement amount determined by account balance
- Employee assumes investment risk
- NO ANNUAL actuarial determination
- Forfeitures may be reallocated to participants or reduce employer contribution
Social Security Integration
Plans that CAN be integrated with Social Security
- Defined Benefit
- Cash Balance
- Money Purchase Plan
- Target Benefit
- Profit Sharing
- Stock Bonus
- SEP (watch out)
- some plans can be but are harder to such as: 401(k) regular and safe harbor (difficult without profit sharing contributions)
Plans that CAN NOT be integrated with Social Security
- ESOP
- SIMPLE IRA & 401(k)
Plans that Favor Younger Employees: Qualified
Money Purchase Pension Plan
- DC pension plan
- Fixed benefit formula (12% of compensation) - only first $330k taken into account
- Employer may deduct up to 25% of covered compensation
- Annual additions limited to lesser of $66k or 100% of compensation
- Want a stable workforce and retain key young employees
- simple to administer and explain
- stable cashflow and profit to make annual fixed contributions
Profit Sharing Plan - NEED 401(k) component for employee deferrals
- DC Plan featuring flexible employer contributions
- Employer contribution is discretionary; however, must be recurring and substantial
- Forfeitures can be used to reduce employer contributions / add to participant accounts
- Variable profits as contribution is variable
- Incentives employees to help company make a profit
- Employees have substantial time to accumulate retirement savings
- Employer can only deduct a maximum of 25% of compensation
Section 401(k) or CODA
- added to profit sharing plan for EMPLOYEE contributions
- 415 Limits - catch up limits are not included
- Subject to FICA and FUTA (opposite of employer contribution to HSA)
Safe-Harbor 401(k)
- Allows the plan to avoid ADP/ACP testing and Top Heavy Limits
- All contributions are immediately vested
- 3% non-elective
- 100% on first 3% and 50% on next 2% = 4%
- 100% on first 4%
Solo 401(k)
- No subject to coverage testing
- must only be you (you and spouse or two partners)
- Not limited by Keogh rules
- Part-time employees under 1,000 hours do not count*
Stock Bonus / ESOP Plans
- Benefits invested in employee stock (ESOP MUST)
- Appropriate when company wants to give ownership to employees
- Company has limited cash resources
- ESOP CAN NOT be integrates with SS
- Flexible contributions
- up to 25% employer deduction
- No cross testing
Hardship Withdrawls
Section 401(k) Plans
- A financial hardship is defined as immediate and heavy with no other resources reasonable available to meet this need
- Subject to 10% penalty
- Required for 401(k), 403(b), and 457(b) plans
- Boats and TV’s do not qualify for a hardship
- Medical expense, funeral costs, purchase of primary residence, qualify for casualty loss, disaster zone, etc.
Net Unrealized Appreciation (NUA)
Applies to ESOP’s or distributions of employer stock from other qualified plans
Rules:
- Must be lump sum distribution (transfer stock to brokerage account and rest of funds to IRA)
- 72(t) distribution would disqualify this transaction
- dont roll over employer stock to IRA (NUA will be lost)
- 10% penalty if under 59 1/2 or dont have a waiver
How it works:
- Basis taxed @ Ordinary Income (taxed at distribution)
- Growth in plan not matter holding period is taxed @ LTCG
- Growth outside of plan is taxed dependent on holding period
- NO CAPITAL GAIN tax until sold
NO 20% withholding if distribution is taken in stock
Watch out for S-corp question - typically they force you to take the cash as ESOP is only one shareholder
Keogh Plan (Qualified Plans for Self-Employed - Sole Prop or Partnership)
Qualified retirement plan that covers business organization that are not incorporated is called a Keogh or HR-10 plan
- Plans are Defined Benefit, Money Purchase, or Profit Sharing
- SEP plans are not Keogh; however, contribution is calculated like Keogh for business owners
- 15% plan = 12.12% and 25% plan = 18.59%
- these are just for the owners
Plans that Favor Younger Employees: Not Qualified
Simplified Employee Pension (SEP)
- Contributions are made to employees IRA
- Provides Employer contributions only
- Not required to make contribution
- Vested immediately
- Form 5305-SEP
Employer Contributions
- Limited to 25% of compensation up to $330k or $66k
- Self-employed owners are subject to Keogh percentages
Eligibility Requirements
- Must cover all employees:
- Age 21
- 3/5 years of service (part-time employees count)
- $750 or more in salary
watch our for numerous returning employees
Savings Incentive Match Plan for Employees (SIMPLE)
- Term SIMPLE refers to the SIMPLE IRA plan
- Lower elective deferrals (see tax tables)
- No discrimination testing
- Salary deferrals are subject to FICA and FUTA
- 100 or fewer employees
- Can not maintain any other plan at same time as SIMPLE
-SIMPLE 401(k) is an ERISA plan exempt from creditors
Employer Contributions
- Typically dollar for dollar up to 3%
- Special 1% if done no more than 2 in 5 years
- 2% Non-Elective
- Matching contribution are mandatory and no salary cap
Who is eligible?
- plan must include any employee who received $5,000 in compensation during any of the preceding 2 years and is expected this year
Vesting / Distributions
- Immediately vested (IRA)
- Restrictions to typically IRA distributions apply
- 10% penalty is increased to 25% in first two years of participation
Tax Deferred Annuity Plan (TDA) / Tax-Sheltered Annuity Plan (TSA) / 403(b)
- 501(c)(3) - most non-profit institutions, churches, hospitals, private schools, and colleges
- Salary reductions subject to FICA and FUTA
- When employers contribute, subject to ERISA non-discrimination rules
-Special catch-up contribution of $3,000 for employees with 15 years of service (can take both catch up contributions)
Integration with Social Security
5.7%
