Retirement Flashcards
(108 cards)
1
Q
What does the Social Security Act cover?
A
Social Security (Old Age, Survivor, and Disability Insurance OASDI)
Medicare
Federal Unemployment Insurance
Supplemental Security Income (SSI)
2
Q
Definition of fully insured
A
- 40 credits of coverage (no more than four credits per calendar year)
- Attainment means fully insured for life
- Eligible for both survivor and retirement benefits
3
Q
Definition of currently insured
A
- Full 6 quarters during a full 13 quarter period
4
Q
Employment categories not covered by Social Security
A
Federal employees who have been continuously employed since before 1984
Americans working abroad
Student nurses and students working for a college or college club
Railroad employees
A child under 18 employed by a parent in an unincorporated business
Ministers, members of religious orders, and Christian Science practitioners
Members of tribal councils
State employees and teachers
5
Q
Worker’s eligibility for Social Security
A
- Retired fully insured worker age 62 or over
6
Q
Worker’s eligibility for Social Security disability benefits
A
- A worker under age 65 if disabled for 12 months, expected to be disabled for at least 12 months, or has a disability expected to result in death and has completed 5 month waiting period
7
Q
Spouse’s eligibility for Social Security
A
- Age 62 or older
- Any age with a child in care under age 16
- Any age with a child age 16 and over and disabled before age 22
8
Q
Surviving spouse’s eligibility for Social Security
A
- Widow age 60 or older
- Any age if caring for a child of the deceased under age 16 or disabled before age 22
9
Q
Divorced spouse’s eligibility for Social Security
A
Any age but must have been married to worker for at least 10 years and not remarry
10
Q
Dependent’s eligibility for Social Security
A
- Under age 19 and a full time student in primary or secondary school
- Age 18 or over but has a disability that began before age 22
11
Q
How does working and attaining FRA affect Social Security benefits?
A
It doesn’t. A worker who has attained FRA gets all benefits regardless of how much money is earned
12
Q
50% rule with Social Security
A
Spouse/divorced spouse will receive greater of 50% of spouse’s PIA or own PIA
13
Q
If spouse dies, how does surviving spouse determine who’s PIA she gets?
A
Greater of 100% of decedent’s benefit or her own benefit
14
Q
Rule for taking Social Security benefits before FRA when retired
A
Reduced monthly benefit = PIA – (number of months before FRA/180) x PIA
15
Q
Rule for taking Social Security benefits before FRA when still working
A
Government will deduct $1 from benefits for each $2 earned above $22,400
16
Q
Rule for taking Social Security benefits in the year of FRA is reached when still working
A
$1 deducted from benefits for each $3 of earned income above $62,160 until the month FRA is reached
17
Q
Taxation of Social Security benefits
A
If provisional income is greater than the provisional income base amounts, up to 50% of benefit is taxable
* $25,000 single, $32,000 MFJ
If provisional income is greater than the provisional income base amounts, up to 85% of benefit is taxable
* $34,000 single, $44,000 MFJ
18
Q
Provisional income calcuation
A
= AGI + muni bond interest + 1/2 of Social Security income
19
Q
General provisions of qualified plans
A
- Subject to code Section 401(a)
- May not discriminate
- ERISA requirements
- Immediate tax deduction for contribution
- Earnings accrue tax deferred until distribution
- Distributions are taxed at ordinary rates
- Cannot allow for past service credits
- Assets are fully creditor protected
20
Q
Who can be the beneficiary of a pension plan?
A
It has to be the spouse or spouse has to sign off if it’s not her
21
Q
Defined benefit pension plan
A
o Favors older employees/owners
o Guaranteed retirement benefit amount (can meet a set retirement objective)
o Requires stable cash flow
o Can allow for past service credits
o PBGC insured
o Employer assumes responsibility for inflation and investment results
22
Q
Section 415 limit for defined benefit plans
A
Lesser of 100% of compensation over the highest three years of earnings or $280,000
ONLY THE FIRST $350,000 OF COMPENSATION IS TAKEN INTO CONSIDERATION
23
Q
Unit benefit formula
A
= average compensation x percentage of earnings x years of service
24
Q
Proximity to retirement age and affect on employer contributions to defined benefit plans
A
Closer to retirement means more employer contributions
25
Forfeitures and effect on employer contributions to defined benefit plans
Increased employee turnover means reduced employer contributions
26
Return assumptions and effect on employer contributions to defined benefit plans
Higher return assumptions means less employer contributions
27
Salaries and effect on employer contributions to defined benefit plans
Older employees are paid more so employer is contributing more
28
Inflation and effect on employer contributions to defined benefit plans
Higher inflation means higher salaries which means employer is contributing more
29
Earnings and effect on employer contributions to defined benefit plans
Higher earnings means less employer contributions
30
Cash balance pension plan
o Annual employer contributions to hypothetical employee accounts for each participant
o Guaranteed minimum rate of return on each account
o Less expensive and simpler
o Base benefits on all working years (doesn’t provide flexibility that money purchase plan does)
o PBGC insured
o Employer assumes responsibility for inflation and investment results
o Past service credits may be available
31
What plans does the PBGC ensure
Defined benefit and cash balance
32
412i/412(e)3 plan
defined benefit plan funded strictly with life insurance or annuities
33
Annual additions limit for defined contribution plans
Lesser of 100% of compensation or $70,000
ONLY THE FIRST $350,000 OF COMPENSATION IS TAKEN INTO CONSIDERATION
34
Money purchase pension plan
Up to 25% employer deduction of all participants’ eligible compensation
Fixed contributions (stable cash flow needed)
Stable work force desired
Simple to administer and explain
Young and well paid employees
Forfeitures may be reallocated to remaining participants
Don’t offer guaranteed minimum return like cash balance plans do
YOUNG MONEY
35
Target benefit pension plan
Up to 25% employer deduction of all participants’ eligible compensation
Fixed contributions (stable cash flow needed)
Actuary required for initial contribution but not needed annually
Employee assumes investment risk
Favor older employees (BETTY WHITE WORKS AT TARGET)
Not as easy to administer and explain
36
Profit sharing plan
Up to 25% employer deduction of all participants’ eligible compensation
Flexible employer contributions but must be substantial and recurring
No employee contributions
Loans are allowed but hardship withdrawals aren’t
Favors young and well paid employees
Forfeitures are reallocated to remaining participants
Up to 10% of plan assets can be invested in company stock
No hardship withdrawals (must have 401k provisions)
37
Profit sharing 401k plan/CODA (cash or deferral arrangement)
Employer may contribute and deduct up to 25% in addition to the elective deferral
Minimal expense for employers
Subject to coverage testing and nondiscrimination rules
38
What is the elective deferral limit to a profit sharing 401k plan?
Just the $23,500 per year limit
39
What is a contribution limit to a profit sharing 401k plan?
25% of compensation as long as this figure plus the elective deferral and catch up contribution don't exceed $70,000
40
What is the maximum deductible amount that can be contributed to a profit sharing plan?
= 25% of compensation – employer match
41
Hardship withdrawals
Subject to 10% EWP and ordinary income tax
Allowed at any age from a profit sharing plan (immediate and heavy needs and participant must not have other resources available)
42
Can hardship withdrawals come from profit sharing plans?
No, must have 401k provision
43
Solo 401k/uni-401k
Not subject to coverage testing or nondiscrimination rules
Permitted when participants are owner and spouse or two partners
44
Stock bonus/ESOP
Up to 25% employer deduction of all participants’ eligible compensation
ESOP cannot be integrated with Social Security or cross tested
Flexible contributions
100% of contribution can be invested in company stock
Any business established as a corporation can offer (S corps can offer these, partnerships cannot offer these)
Employer contributions are made in cash which then purchases company stock
45
Definition of net unrealized appreciation
Difference between employer cost basis and market value at lump sum distribution to the employee
46
NUA rules at distribution
Basis is taxed at ordinary income
NUA is not taxed
10% penalty if less than age 55 out of a qualified plan
47
NUA rules at sale
NUA amount is taxed as long term capital gain regardless of holding period
Any appreciation subsequent to the distribution is taxed as long term or short term capital gain depending on holding period after lump sum distribution
48
Section 72(t) provision
Special recapture provision
10% penalty on all annual payments plus interest on payments received before age 59.5
Payments need to continue for the longer of 5 years or until age 59.5 before being modified
49
Keogh/HR-10 plan
for sole proprietorships and partnerships (business organizations that aren’t incorporated)
Contribution or benefit is based on net earnings (NOT salary)
* Net earnings is net income after all business deductions and employee only retirement contribution
For 15% contribution, Schedule C income x 12.12%
For 25% contribution, Schedule C income x 18.59%
50
SIMPLE
Unlike a 401k plan, there is no nondiscrimination testing
Easy to administer
Salary deferrals are subject to FICA and FUTA
Mandatory employer contributions
Employee deferrals allowed
Employer match allowed but not required
Employer may not have more than 100 employees
Plan must cover any employee who earned $5,000 in either of the previous years
25% penalty for distributions or rollovers within first two years of participation and then 10% EWP applies thereafter
Immediate vesting
Roth option available
Rollovers allowed but account must be open for two years prior to receiving funding
Cannot maintain any other qualified plan, 403b, or SEP at the same time
Not integrated with Social Security
51
SIMPLE 401k
Exempt from ADP and ACP testing as well as top heavy requirements
Exempt from creditors as an ERISA plan
Employer match not allowed
52
SEP IRA
Permits employer contributions only, NO MATCHING, FICA AND FUTA DON’T APPLY
No requirement to contribute
Contributions limited to 25% of compensation ($350,000 maximum) or $70,000
Treat like Keogh contribution for self-employed owner (those limits apply)
Easy to adopt and inexpensive to install relative to a qualified plan
Contribution limits similar to Keogh plans for self-employed individuals
Immediate vesting
Must cover all employees who are at least 21 years of age, have worked for the employer three out of the last five preceding calendar years, and paid at least $750 (NOT GOOD FOR EMPLOYERS WITH SEASONAL EMPLOYEES)
Can be integrated with Social Security
Roth option available
Can’t establish plan until it files its prior year return
53
SARSEP
Employers can no longer establish unless adopted before 1/1/1997
Only available to employers with 25 or less employees
Immediate vesting
Distributions are taxable because contributions are made with pretax dollars
Deferrals are subject to FICA and FUTA
Early withdrawal doesn’t require hardship
54
TDA plan/TSA plan/403b
Adopted by private universities, 501c3 organizations, churches, and public schools
Employees with 15 years of service can defer an additional $3,000
Funding limited to annuities or mutual funds
Immediate vesting
Salary reductions are subject to FICA and FUTA
Subject to ERISA only if employer contributes
55
Attributes of retirement plans that differ from qualified plans
No top heavy rules
No vesting schedule
No coverage testing
No cross testing
Integration with Social Security only applies to SEP IRAs
56
Age and service rules for qualified plans
21 and one rule – anyone 21 years of age and has one year of service can participate
21 and two rule – anyone 21 years of age and has two years of service can participate and is fully vested
Year of service – 1,000 hours during the initial 12 month period or 500 hours for at least 3 consecutive years
57
Ratio percentage test (discrimination)
plan must cover a percentage of NHCEs that is at least 70% of the percentage of HCEs who are covered
58
Average benefits test (discrimination)
average benefits for NHCEs is at least 70% of the benefits for HCEs
59
Definition of key employee
any of greater than 5% owner, officer with compensation greater than $230,000, or greater than 1% owner and compensation greater than $160,000
60
Top heavy plan
more than 60% of its benefits, account balances, or compensation are allocated to key employees
61
Highly compensated employee
any of greater than 5% owner or earns more than $160,000 in previous year
* Spouse, parent, child, or grandparent of a greater than 5% owner are deemed to be a greater than 5% owner (NOT SIBLINGS)
62
Minimum benefits to non-key employees of DB and DC plans
DB plan: benefit to non-key employees must be at least 2% of compensation x number of service years (10 years max)
B IS THE SECOND LETTER OF THE ALPHABET
DC plan: benefit to non-key employees must be at least 3% of compensation x number of service years
C IS THE THIRD LETTER OF THE ALPHABET
63
ADP and ACP testing (limits on deferral percentages for HCEs)
0-2% for non HCEs is times 2, 2% to 8% is plus 2
64
Which plans cannot be integrated with Social Security?
ESOPs, SIMPLE IRAs, and SIMPLE 401ks
65
Cross tested/new comparability plan
* Age weighted so benefits older and higher wage workers
* Different contribution percentages for different categories of workers
o Provides maximum benefits to highly compensated employees
66
Aggregate deferrals under multiple plans
elective deferrals to multiple plans are always aggregated
67
Annual additions rules with multiple plans
* Related employers – limit applies over all plans
* Unrelated employers – limit applies separately to each account
68
Unrelated business taxable income
taxable income generated by a tax exempt entity by means of certain passive activities (LIMITED PARTNERSHIP)
69
Who are eligible for 457 plans and who aren't?
For governmental units (ex: State of New Jersey), government agencies, and organizations exempt from federal income tax
* Churches not eligible
70
Governmental 457 plans
Catch up contribution allowed
Can be rolled into IRAs
Not aggregated with types of elective deferral plans
71
Nongovernmental 457 plans
Can be rolled into another plan
Salary deferrals are not aggregated with other plans
Subject to creditors
72
60 day rollover rule
IRA owner can withdraw all or part of the balance and reinvest in another IRA within 60 days
Can occur once per year out of an IRA
Qualified distribution then IRA distribution is okay
73
Direct transfer/direct rollover/trustee to trustee transfer
Check is made out to the plan
74
Direct distribution
When participant receives check payable to the participant
20% withholding even upon death or divorce UNLESS for substantially equal payments or for RMD requirement
75
Exceptions to EWP for qualified plans and 403bs
Death
Disability
Substantially equal periodic payments following separation of service
Distribution following separation of service at age 55 or later
QDRO
Medical expenses in excess of 7.5% of AGI
$5,000 distribution for qualified birth/adoption
Federally declared disaster
76
Penalty for RMD shortfall
25% tax on RMD amount not taken or 10% tax if RMD is taken by end of second year in which it’s due
77
RMD rules for IRAs and 5% owners with qualified plans
RBD is April 1st following year in which turning age 73
78
RMD rules for non business owners of qualified plans
RBD is April 1st following year of retirement if still working
79
RMD rules around spouse who is more than 10 years younger
Use joint life expectancy table
80
Qualified charitable distribution (QCD)
o Ages 70.5 and older can distribute up to $108,000 to charity
o That amount is excludible from taxable income and therefore no charitable deduction
81
Loan rules from qualified plans
Cannot exceed lesser of 50% of vested balance or $50,000
Up to $10,000 can be borrowed without the percentage limitation
82
QJSA
Postretirement death benefit to surviving spouse
To opt out, employee must waive benefit and spouse must sign off
83
Compensation for IRA contribution purposes
Compensation includes wage earnings, salaries, tips, professional fees, board of director fees, bonuses, alimony from pre 2019 divorces, and separate maintenance payments
84
IRA deductibility rules when both spouses are inactive participants
contributions are deductible
85
IRA deductibility rules when both spouses are active participants
Subject to AGI phaseouts
86
IRA deductibility rules when one spouse is active and the other is inactive
Inactive spouse can deduct
Active spouse can deduct if AGI is below threshold
87
Spousal IRA
Married person who doesn't have compensation can still contribute to an IRA as long as couple's AGI exceeds the combined IRA contribution amounts and AGI is less than the spousal IRA threshold
Applies to traditional and Roth IRAs
88
EWP exceptions from an IRA
* Death
* Permanent disability
* Qualified education expenses
* Distribution used to pay medical insurance premium after separation from employment
* Substantially equal payments
* First home acquisition cost up to $10,000
* Medical expense greater than 7.5% of AGI
* $5,000 for qualified birth/adoption
* Federally declared disaster
89
Taxability of distributions of contributions to Roth IRAs
Nontaxable
90
Taxability of distributions of conversions to Roth IRAs
Nontaxable because it was already taxed
If funds are held for 5 YEARS OR less than age 59.5, EWP applies
91
Taxability of distributions of earnings to Roth IRAs
If 5 year holding period is met and age 59.5, no income tax and no EWP
92
Roth 401k
For after tax elective deferrals
Employers may offer a match
Deferrals are subject to FICA
Contributions are included in gross income
No income limits associated with contributions
For a tax free distribution, five year rule applies and after age 59.5, death, or disability
Employers are not obligated to offer Roth 401k plans
Participant can roll over into another plan with a Roth option only
No RMD requirements
93
Funded deferred compensation plans
Benefits promised by an employer are secured by rights to specific property (not a naked promise to pay)
94
Unfunded deferred compensation plans
Mere promise by employer to pay benefits (no legal promise)
95
Rabbi trust
Informally funded plan
o Assets are available for company’s creditors
o Used during mergers, acquisitions, and changes in ownership
96
Secular trust
Funded plan
o Creditor protection
o Taxation of the compensation in the year its transferred to the trust
97
What's the primary difference between ISOs and NSOs?
Taxation at the date of exercise (ISOs are not subject to regular tax but NSOs are)
98
ISOs
Only first $100,000 per year is granted preferential treatment
* Options granted that exceed this amount are NSOs
Vesting is one year
Nontransferable
* Bargain element (spread between market price on exercise date and exercise price) is AMT add back item
* Basis is exercise price
Not subject to FICA, FUTA, nor withholding given it’s not compensation
99
Holding period requirement for ISOs
Must sell more than 1 year from exercise and 2 years from grant (EGG)
* If fail either test, ISO becomes NSO (disqualifying disposition)
100
Gifting ISOs
Not advantageous to gift because it becomes a NSO and taxed to person who made the gift as ordinary income
* FMV of stock on date of gift – strike price = value of the gift
101
ISO taxation upon grant
None
102
ISO taxation upon exercise
None
103
ISO taxation upon sale
FMV at time of sale - exercise price
104
NSO taxation upon grant
None
105
NSO taxation upon exercise
Ordinary income taxation on bargain element
106
Bargain element
Difference between FMV at exercise date and exercise price
107
Does a corporation receive a tax deduction for granting an ISO?
No but corporation would get a deduction when it becomes an NSO
108
Are 457 plans subject to FICA?
No, because it's deferred comp
