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Flashcards in Retirement Deck (31):

When solving for retirement problem, "they want to know if $XX,XXX will be sufficient, what are the steps to solve it?

Discount the PMT they would like by the inflation adjusted return over their expected retirement years. Solve for PV, and this is how much they expect to use. Determine if it is more or less than what they have saved and answer.


What should a company do if they can't afford a defined benefit plan anymore?

Freeze the defined benefit plan.


In a money purchase plan, what would happen if a key employee is replaced by a clerical employee?

Decreases company contributions. Since overall payroll went down, the contributions also go down.


In a money purchase plan, what would happen if the plan investment returns increase?

No effect. Return doesn't affect payroll. Money purchase plan contributions scale with payroll. Payroll goes up, contributions go up. It goes down, contributions go down.


In a money purchase plan, what would happen if forfeitures are not reallocated to remaining participants?

Decreases company contributions. If a forfeiture is not allocated to remaining participants, then they must be used to reduce company contributions.


In a money purchase plan, what would happen if the salary level of all employees increased?

Increases the company contributions. Contributions scale with the level of employee income.


Which types of retirement plans do forfeitures increase account balances of plan participants (which ones allocate forfeitures to the remaining participants)?

Profit Sharing Plans and Money Purchase Plans.


If a company has a top heavy profit sharing plan because employees are terminated often or laid off, what vesting schedule is best for the company?

3-year cliff. Eligibility after 1 year and no vesting until the 3rd year. Forfeitures benefit the HCEs for retention. If it had said it wants to retain the rank and file employees, then a graded schedule is better to entice them to stay.


If a plan has a base contribution of 25%, what is the permitted disparity?

Just 25%. The maximum limit is 26.25% for maximum disparity on a Defined Benefit Plan, but it is the lesser of 26.25 or the base. In this case, the base is less than 26.25, so you have to use 25%.


Remember for ADP/ACP testing: HCE can only contribute +2% of what NHCE can contribute. Pay attention to the AGE of the client for catch-ups as well.

If a guy is 55 and makes $120,000, and NHCE are contributing 4%, how much can he contribute?

6% (4 + 2), which is $7,200. He's also 55, so he can include a $6,000 catch up, making it $13,200 total.


When is the interest deductible on a 401(k) loan to purchase a home?

The participant must be a rank and file employee, and they have to secure the loan ONLY with the primary residence purchased with the loan funds.


Can a retired 71-year old man make a contribution to a Roth IRA?

No, he can't. To contribute to a Roth IRA, you need to have EARNED income. It says he is retired. If he had earned income, like alimony or a job, then the answer would be yes.


If a couple makes $200,000 AGI MFJ, and their companies don't offer benefit plans, can they contribute to a Roth IRA and a Traditional IRA?

Only a traditional. Since they don't have plans at work, there's no phase limits on a traditional IRA. There are phase limits on a Roth no matter what, which their $200,000 is in excess of.


When can a Roth IRA be closed with no tax consequences?

The Roth must be established for at least 5-years and the owner party must be over 59.5.


If a person under retirement age withdraws their entire SIMPLE balance when they quit the company, what are the tax consequences?

The entire balance withdrawn is ordinary income, and there is a 25% early withdrawal penalty on SIMPLE plans.


If an employer has a SIMPLE plan, can they also have another plan in place to maximize contributions?

No. If the employer has a SIMPLE plan, it can be the only plan.


Which plan has both a maximum allowable contribution as well as a mandatory contribution?

A money purchase plan.


What does this describe:
1) 415 limits apply (lesser of 54,000 or 25% of comp.)
2) New employees can be added to the plan up to 25 total
3) Maximum deferral is 18,000 not including catch up
4) All contributions are 100% vested immediately

A SARSEP plan (SAlary Reduction SEP)


Which plan has contributions that are NOT subject to FICA and FUTA?

SEP plans are not subject to FICA or FUTA.


Do profit sharing plans and SEPs offer catch-ups?

No, they don't. This can make them unfavorable when choosing between plans that offer maximum contributions.


If an employee in a defined benefit plan has incidental life insurance using the 100 to 1 test, and then dies, his wife receives 2 checks. One for $200,000 death benefit, and one for the $20,000 cash value. How much is not taxable this year?

The $200,000 death benefit. The cash value will be taxable. The 100 to 1 test doesn't make a difference in the taxation. It just means if the monthly benefit is $4,000, then the life insurance death benefits can be UP TO $400,000 (100 times 4000).


What plans are subject to PBGC?

Defined benefit plans and cash balance plans ONLY.


Can real property rents, gain from sale of capital assets, annuities and whole life insurance generate UBTI?

No. None of these are UBTI.

Equipment leasing programs can generate UBTI as they are generally under an LP.


If a company has no cash but wants to reward its employees, and expects profits the following year, what should it do?

High expected profits = profit sharing plan. If they are confident that it will be high profits, then they should borrow the funds from the bank to fund it right away and pay it back later.


Which is exempt from the 10% early withdrawal penalty of a qualified plan?
Hardship withdrawal
Distribution from legal divorce
Distribution for purchase of PRINCIPAL resident
Distribution from separate of service at 55

Only the separation from service at 55 is exempt. The rest are subject to the 10% penalty. Principal resident does NOT mean "first" home.


Can a mother name her son a beneficiary in her Money Purchase Plan?

No. Only a spouse can be named beneficiary.


Do QDRO rules apply to IRAs?

No, they only apply to governmental 457 plans, 403(b) plans and qualified plans.


If a spouse is awarded a direct $500,000 check from the other spouse's qualified plan in a divorce, what is the penalty paid?



If a client just retired and withdrew 100% of her retirement plan and her employer did not take the 20% mandatory withholding, was her plan a qualified plan or a non-qualified plan?

Non-qualified, like a SIMPLE IRA. A SIMPLE 401(k) would have needed the 20%, but the IRA wouldn't because it is a non-qualified plan.


When does someone have to take their RMD from a pension plan while they are still working at the company?

When they are greater than a 5% owner in stock. If the question doesn't mention this, then they can take their RMD the year after they retire.


If your client gets a $40,000 contribution of employer stock in their ESOP plan, then takes a distribution of the plan in lump sum to his IRA at $100,000, then sells it two years later for $150,000, what are the tax consequences?

$40,000 is ordinary income (employer basis), and then the $60,000 is long term gain for the first lump sum distribution. The extra $50,000 was accrued over 2-years, so the full $110,000 would be LTCG.