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Flashcards in Retirement Deck (40)
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 Basic Concepts of Social Security

Coverage: Nearly every worker is covered under OASDI.

Employment categories not covered by Social Security include:

  • Federal employees who have been continuously employed since before 1984.
  • Some Americans working abroad
  • Student nurses and students working for a college or college club
  • Railroad Employees
  • A child, under age 18, who is employed by a parent in an unincorporated business
  • Ministers, members of religious orders and Christian Science practitioners if they claim an exemption
  • Members of Tribal Councils


Social Security

(Reduction of Benefits)

Age 62 - FRA (Full Retirement Age): Benefits reduced $1 for every $2 earned over $17,640 (2019 threshhold)


Social Security


  • Must include Muni Bond Income to calculate MAGI
  • If income (MAGI) plus ½ of Social Security Benefits is:
    • Above $25K for a single taxpayer, then 50% of the total Social Security is included in Income.
    • Above $44k for MFJ, then 85% of the total Social Security is included in Income.


Types of Qualified Plans / ERISA

(Vesting /Admin Costs / Exempt from Creditors / Integrate with Social Security)

  • Defined Benefit
  • Cash Balance
  • Money Purchase
  • Target Benefit
  • Profit Sharing
  • Profit Sharing 401(k)
  • Stock Bonus ESOP (NOT integrated with Social Security or cross-tested)


Types of Retirement Plans 

(No Vesting / Limited Admin Costs)

  • SEP
  • Thrift or Savings Plans
  • 403(b)


Defined Benefit - Qualified Plan

  • Favors older employee/owner (50+)
  • Certain retirement benefit; Max $225k (2019)
  • Meet a specific retirement objective ​
  • Company must have very stable cash flow
  • Past service credits allowed
  • Forfeitures MUST be applied to reduce employer contributions
  • PBGC Insured (along with Cash Balance Plan)


Money Purchase - Qualified Plan

  • Up to 25% Employer Deduction
  • Fixed Contributions
  • Need stable cash flow
  • Maximum Annual Contribution lesser of 100% or salary of $56k (2019)


Target Benefit - Qualified Plan

  • Up to 25% Employer Deduction
  • Fixed Contributions
  • Need stable cash flow
  • Maximum annual contribution less of 100% of salary or $56K (2019)
  • Favors older workers


Profit Sharing - Qualified Plan

  • Up to 25% Employer Deduction
  • Flexible contributions (must be recurring and substantial)
  • Maximum Annual Contribution lesser of 100% of salary or $56K (2019)
  • Can have 401(k) provisions
  • SIMPLE 401(k) exempt from creditors


Section 401(k) Plan

Qualified profit sharing or stock bonus plan that allows plan participants to defer salary into the plan.

  • Max $19,000 (2019) deferral for participants under 50 (subject to FICA)
  • Additional $6,000 catch-up for age 50 and over (2019)


Section 415 Annual Additions Limit

  • Lesser of 100% of compensation or $56,000 (2019)
  • Includes employer contributions, employee salary reductions and plan forfeitures


Safe Harbor Non-Discrimination

A Safe Harbor 401(k) plan automatically satisfies the non-discrimination tests involving highly compensated employees (HCEs) with either an employer matching contribution or a non-elective contribution.


Safe Harbor Match / Vesting

The statutory contribution using a match is $1/$1 on the first 3% employee deferral and $0.50/$1 on the next 2% employee deferral.

  • If the employer chooses to use the non-elective deferral method, the employer must contribute 3% of all eligible employees' compensation regardless of whether the employee is deferring or not. 
  • Employer contributions must be immediately vested. 


Stock Bonus / ESOP - Qualified Plan

  • Up to 25% employer deduction
  • Flexible contributions
  • Maximum Annual Contribution lesser of 100% of salary or $56K (2019)
  • 100% of contribution can be invested in company stock ESOP cannot be integrated with Social Security or cross-tested


Net Unrealized Appreciation (NUA)

NUA Example:

Stock is contributed to the retirement plan with a basis of $20k. The stock is distributed at retirement with a market value of $200k. The NUA, $180k, is not taxable until the employee sells the stock, but the $20k is taxable now as ordinary income.

The $180k is always LTCG. If the client sells the stock for $230k, the $30k of extra gain is either STCG or LTCG depending on the holding period after distributed at retirement.


Keogh Contribution

  • Only for sole proprietor and partnerships
  • Self-Employment Tax must be computed and a deduction of one-half of the Self-Employment Tax must be taken before determining the Keogh deduction.

Shortcut below takes into account Self-Employment Taxes:

  • If contribution 15%: multiply by 12.12% of net earnings
  • If contribution 25%: multiply by 18.59% of net earnings



  • Fewer than 100 employees
  • Employer cannot maintain any other plan
  • Participants fully vested
  • Easy to administer and funded by employee salary reductions and an employer match


SEP (Simplified Employee Pension)

  • NO Salary Deferrals - Employer contributions only
  • Up to 25% contribution for owner (W-2) / treated like Keogh contributions for self-employed
  • Maximum of $56K (2019)
  • Account immediately vested
  • Can be integrated with social security
  • Special Eligibility: 21+ years old, paid at least $600 (2019) and worked 3 of the 5 prior years


Tax-Deferred Annuity (TDA)

Tax Sheltered Annuity (TSA)


  • For 501(c)(3) organizations and public schools
  • Subject to ERISA only if employer contributes
  • Salary reduction limit up to $19,000 (2019) plus $6,000 catch-up if 50 or over


Age and Service Rules - Qualified Plans

  • Max age and service are age 21 and one year of service (21-and-one-rule)
  • Special provision allows up to 2-year service requirement, BUT then employee is immediately vested (2-year/100%)
  • Year of service is 1,000 hours (includes vacations, holidays and illness time)


Highly Compensated Employee (HCE)

  • A greater than 5% owner, OR
  • An employee earning in excess of $125,000 during the preceding year (2018)


Key Employee

An individual is a Key Employee if at any time during the current year he/she has been one of the following:

  • A greater than 5% owner, or
  • An officer and compensation > $180,000 (2019), or
  • Greater than 1% ownership and compensation > $150,000 (2019)


Vesting - Fast / Slow


  • DB Top-heavy Plans / All DC Plans
  • 3-year cliff or 2-6 year graded or 100% vested after 2 years


  • Non-top-heavy DB Plans only
  • 5-year cliff or 3-7 year graded or 100% vested after 2 years


Defined Contribution Plans

(Integration with Social Security)

Base % + Permitted Disparity = Excess %

Base % - DC plan contribution for compensation below integration level

Permitted Disparity - Lesser of base % or 5.7%

Excess % - DC plan contribution for compensation above integration level


Defined Benefit Plans

(Integration with Social Security)

Base % + Permitted Disparity = Excess %

Base % - DB plan contribution for compensation below integration level  

Permitted Disparity - Lesser of base % or 26.25%  

Excess % - DB plan contribution for compensation above integration level


Multiple Plans 2019

Elective Deferrals

Elective Deferrals: More than one employer (2019)

  • Elective Deferrals to multiple plans are always aggregated (2019)


  • $19,000 plus catch up $6,000

SIMPLE and other SIMPLE          

  • $13,000 plus catch up $3,000

457 Plans are NOT part of aggregated amounts.


Life Insurance as a Funding Vehicle

According to the Treasury Regulations, life insurance benefits must be merely "incidental" to the primary purpose of the plan. If the amount of insurance meets either of the following tests, it is considered incidental:

  • The aggregate premiums paid for a participant's insured death benefit are all times less than the following percentages of the plan cost for that participant:
    • Ordinary life insurance 50%; Term Insurance 25%; Universal Life 25%
  • The participant's insured death benefit must be no more than 100 times the expected monthly benefit. Defined benefit plans typically use the "100 times" limit.


Rollovers NOT Permitted

  • Transfers to another 457 plan remain the only option for non-governmental tax exempt organizations
  • Hardship distributions can not be rolled into any other qualified plan
  • Required minimum distributions


Qualified PlanEarly (age 59½) - 10% Tax Penalty Exceptions

  • Death
  • Disability
  • Substantially equal periodic payments following separation from service
  • Distribution following separation from service after age 55
  • Distribution in accordance with QDRO (to any alternative payee)
  • Medical expenses in excess of 10% of AGI or health insurance costs while unemployed
  • Distribution used to pay insurance premium after separation from employment (must file for unemployment)


Required Beginning Date (RBD) for


The required beginning date is April 1st of the year following the year in which the covered individual attained 70½.

Subsequent distributions must be made by December 31st of each year thereafter.


Required Beginning Date (RBD) for

Qualified Plans / 403(b) / 457 plans

The required beginning date, with the exception of 5% owners, is the later of April 1st following the year in which the individual attained 70½ or retired.

Subsequent distributions must be made by December 31st of each year thereafter. 

5% owner RBD is the same as IRA/SEP RBD.


IRA Deductibility Keys

  • If neither spouse (or single person) is an active participant in an employer plan, the IRA is deductible.
  • Employer plans that affect participant status include almost all plans EXCEPT for 457 plans.
  • If one spouse is an active participant, the other spouse (not active) can do a deductible IRA if combined AGI is less than  $193K-$203K (2019)
  • If both spouses are active, AGI limits apply: $64K-$74K (single) and $103K-$123K (Married) (2019)

NOTE: Activity that results in active status: annual additions to a DC account or benefits accrued to a DB plan.


IRA Exceptions to 10% Penalty for Early Distributions before age 59½

  • Death
  • Substantially equal payments
  • Disability
  • First home expense up to $10,000
  • Qualified education expense
  • Medical expense greater than 10%
  • Distribution used to pay insurance premium after separation from employment (must have received unemployment compensation for 12 weeks)


Roth IRA

Ordering Rules for Distribution

  • Any contributions (not conversions) are withdrawn first
  • Conversions are withdrawn second
  • Earnings are withdrawn last


Roth IRA

Required Minimum Distributions

  • Distributed within 5 years of owner's death, or
  • Distributed over the life expectancy of the designated beneficiary with distributions commencing prior to the end of the calendar year following death (stretch)
  • Where the sole beneficiary is the owner's surviving spouse, the spouse may delay distributions until the Roth owner would have reached 70½, or may treat the Roth as his or her own (roll it to her/her Roth)


Non-Qualified Deferred Compensation Plans

  • Salary Reduction Plan: Uses some portion of the employee's current compensation to fund the ultimate compensation benefit (also called Pure Deferred)
  • Salary Continuation Plan: Uses employer contributions to fund ultimate benefit


Rabbi Trust

  • Key Words: Merger, Acquisition, or Change of Ownership
  • Assets in Rabbi Trust available for company's creditors
  • Fear that ownership / management may change before deferred compensation is paid


Incentive Stock Option (ISO)

Holding Period

Holding Period:

  • 1 year from Exercise Date and 2 years from Grant before selling ISOs
  • Violating either rule results in a Disqualifying Disposition


Section 457

Deferred Compensation Plan

  • Non-Qualified Deferred Compensation Plans of governmental agencies and non-church controlled tax exempt organizations
  • Deferral limited to $19,000 or 100% of compensation (2019)
  • Catch-up of $6,000 allowed for those 50 and over ONLY for governmental plans (2019)
  • Salary deferrals NOT aggregated with other plans (401k, etc.)
  • Non-governmental plans can ONLY be rolled into another 457 plan


IRA Keys


  • No Loans
  • No Life Insurance
  • Immediate Vesting
  • May not be creditor protected (state specific)
  • 59½ not 55 for no 10% penalty
  • Must take RMDs at 70½ (even if not owner)