Retirement Planning Flashcards
(150 cards)
1
Q
Methods of rollover from IRA and ER Retirement Plans
A
Two methods:
Traditional (way of) Rollover
Direct Transfer Rollover
2
Q
Traditional Rollover
A
Only one traditional rollover is allowed in a year.
- Plan administrator transfers vested account balance or portion to the participant.
- Within 60 days the participant deposits the funds into an IRA or different employer plan.
Traditional rollover from a qualified plan requires mandatory 20% federal income tax withholding by the employer (not required for IRA-to-IRA traditional rollover).
If withheld amount is not replaced and deposited with the rollover, the withholding amount is considered distributed and subject to income tax and possible 10% penalty.
3
Q
Direct Transfer Rollover
A
No annual limit on the number of direct transfers in a year.
Plan trustee transfers rollover directly to IRA or another employer plan.
Participant does not take possession of the funds.
No mandatory tax withholding applies.
4
Q
Distro Reqs For inherited traditional IRAs - Spouse Bene
A
Has choice of being treated as the IRA owner or as the beneficiary of an inherited IRA;
If spouse beneficiary chooses to be treated as the owner, they may defer RMDs until they attain age 73;
The spouse beneficiary may combine the inherited IRA with their own IRA.
5
Q
Distro Reqs For inherited traditional IRAs - Non-Spouse Bene (10 year rule)
A
10-year rule - Non-eligible designated beneficiaries must take RMDs from inherited IRAs within 10 years
Note - if the account was in RMD status at the time of death the beneficiary must make annual RMDs in years 1-9 and have the account drained by the end of year 10
6
Q
Inherited Roth IRA Distro Reqs
A
No RMD during life of owner.
Spouse beneficiary can become owner and forego RMDs for life.
Non-spouse beneficiary subject to RMDs.
7
Q
Inherited IRA / ER Retirement Plans - Eligible designated beneficiary
A
These beneficiaries can take distributions from inherited IRAs over their lifetime, except for minors
Spouse,
chronically ill beneficiary, disabled beneficiary,
minor children of decedent under age 21, or
Other Benes/individuals NOT more than 10 years younger than the Decedent
8
Q
Early Withdrawal Penalties - What does it apply to and how much
A
Applies to Traditional IRAs, IRA-Funded Employer Plans, & Qualified Plans
Withdrawals taken from an IRA or qualified plan prior to age 59 ½ are subject to a 10% penalty on the taxable portion of the distribution unless an exception applies.
9
Q
Early Withdrawal Penalties - SIMPLE IRA
A
Withdrawals taken from an IRA or qualified plan prior to age 59 ½ are subject to a 10% penalty on the taxable portion of the distribution unless an exception applies.
Distributions from a SIMPLE IRA in the first two years are subject to a 25% penalty.
10
Q
Roth IRA Distributions - Regular Contributions
A
Contributions can come out tax-free; No income tax; no penalty
but there are requirements for distribution of earnings to be tax-free
The 5-year holding is absolute; it must be satisfied for a qualified distribution, but death, disability, or first-time home purchase can occur at much younger ages.
Attainment of age 59 ½ is not an absolute requirement for a tax-free qualified distribution to occur.
11
Q
Roth IRA Distributions - Qualified Distributions
A
Distribution must be made 5 yr after the first taxable year for which roth contributions was made
AND
distribution must occur in relation to one of the following events:
1. AC owner’s death
2. AC owner being disabled
3. First-time home purchase (life time limit of 10K max)
4. Made on or after the individual turns 59 1/2.
12
Q
Roth IRA Distributions - Roth Conversion Contributions (non-qualified)
A
No regular income tax
distribution within 5 yr of conversion may be subject to 10% penalty
13
Q
Roth IRA Distributions - 5 year holding period
A
5-yr holding period for regular contributions begins January 1 of the year FOR WHICH the contribution IS MADE/DESIGNATED
14
Q
Roth IRA Distributions - Non-qualified - regular contributions
A
No regular income tax; no penalty
15
Q
Early Withdrawal Penalty Exception for Separation from Services
A
No penalty for withdrawing form qualified plan for separation from service during or after the year the employee reaches age 55
(Penalty applicable for IRA withdrawals for this reason)
16
Q
What types of withdrawals from qualified plans cause a penalty ?
A
Penalties apply, If you take withdrawals from qualified plans for
Higher education expenses
health insurance premiums paid while unemployed
1st time home buyer ($10K lifetime max),
17
Q
What is 72t
A
72T - series of substantially equal payments
(Exceptions to penalty for early withdrawals)
18
Q
Inherited IRA RMD - 10-year rule for non-eligible designated beneficiary
A
19
Q
Rules for determining required minimum distributions for IRA Beneficiaries
A
Rules depend on the following:
The beneficiary is the surviving spouse.
The beneficiary is an individual (other than the surviving spouse).
The beneficiary isn’t an individual (for example, the beneficiary is the owner’s estate).
The IRA owner died before the required beginning date or died on or after the required beginning date.
20
Q
Inherited IRA - Options for Spouses
A
Surviving spouse beneficiary can treat the inherited IRA as their own and not required to take RMDs in 10 year
21
Q
Inherited IRA - Non-designated benes - 5yr rule
A
Non-designated beneficiaries such as estate, charities, trust not qualifying as designated beneficiary
will have to drain the IRA within 5 yr
22
Q
Self-employment (SE)
A
a tax consisting of Social Security and Medicare taxes primarily for individuals who are classified as self-employed.
The SE tax is calculated on Schedule SE of Form 1040.
The self-employment tax rate is 15.3%. (12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance))
23
Q
SE Tax When NE > 168,600 (SS Taxable Wages)
A
25795.80 (168600 x 0.153)
Adjusted NE = NE x 0.9253
Amount taxable at Medicare = Adjusted NE - 168,600
SE Tax = Add 25795.80 + Medicare Taxed Amount
15.3% applies up to the Social Security taxable wage base of $168,600. (2024)
Earnings above $168,600 (2024) are subject only to the Medicare tax of 2.90%.
24
Q
SE Tax Adjustment for AGI
A
Half of the SE tax is an adjustment to income deduction on IRS Schedule 1 in calculating “for AGI”.
One-half of the SE is subtracted from net earnings from self-employment in the calculation of the maximum contribution to a retirement plan for a self-employed person.
25
SE tax when NE <= $168,600
NE X .1413 (14.13%)
26
Profit-sharing plan contributions for SE
Adjusted NE = Subtract 50% of SE Tax from NE
Determine contribution rate for SE = Plan Contra Rate / (1+plan contra rate)
Multiply Adjusted NE x Contra rate for SE
27
% of tax ER plays for SS and Medicare
7.65%
Take the wages below 168,600 x 0.0765 for ER portion of the tax E
28
FICA Taxes ( i.e Payroll Taxes)
include both Social Security and Medicare taxes.
ER and EE each pay 6.2% for Social Security and 1.45% for Medicare = Total of 7.65% per party
Upto 168,600 = pay 7.65 (Both SS and Medicare); After 168,600, only pay 2.9% (total)
Total 12.4% (6.2 x 2) for social security (old-age, survivors, and disability insurance) and
Total 2.9% (1.45% x 2) for Medicare (hospital insurance).
IF SE = total 15.3% (7.65 x 2) or (12.4 + 2.9)
29
FICA - SS %
6.2 % per party (ER & EE) = Total 12.4% up to 168,600
30
FICA - Medicare %
1.45% per party (ER & EE) = total 2.9%
31
FICA for SE
IF SE = total 15.3% (7.65 x 2) or (12.4 + 2.9)
32
What are the benefits of rabbi trust for executives?
Funds in the rabbi trust are not available to the corporation for other purposes.
Funds are safeguarded in the event of a merger or acquisition.
A rabbi trust does not trigger immediate recognition of compensation to the executive because the substantial risk of forfeiture is considered to exist due to the funds in the rabbi trust being accessible by corporate creditors in the event of insolvency of the company.
33
What's a rabbi trust ?
A rabbi trust provides some security to the executive in safeguarding the payment of the promised deferred compensation benefits.
34
What is Nonqualified deferred compensation plan?
A plan used by businesses to provide additional retirement benefits to top executives that exceed limits available through qualified plans.
AKA top-hat plans, excess benefits plans, or supplemental executive retirement plans (SERP)
35
Excess benefits plans characristics
typically mirrors a qualified plan benefit formula but is not subject to funding or benefit amount limits, covered compensation limits, or an annual additions limit.
36
excess benefits / SERP
supplemental executive retirement plans (SERP)
typically promises to pay an executive additional compensation of a specified amount for a specified period contingent on the executive remaining with the company for a specified period and/or attaining specific goals, typically related to production or sales growth.
37
Eligibility for Non-qualified deffered compensation plan
Employers can select which executives are included in the plan and benefits do not need to be uniform among participants.
38
Taxation and funding of non-qualified deffered comp plans
The goal is to avoid constructive receipt and current taxation; there must be a substantial risk of forfeiture. Plans typically have a vesting schedule.
The executive does not recognize income and the employer does not receive a deduction until there is no longer a substantial risk of forfeiture.
Occasionally “informally funded” using cash value life insurance.
39
Secular Trust
A “secular” trust is not subject to the company’s creditors and results in immediate compensation recognition.
40
Rabbi trust - taxation and funding
A rabbi trust does not trigger immediate recognition of compensation to the executive because the substantial risk of forfeiture is considered to exist because the funds in the rabbi trust are accessible by corporate creditors in the event of insolvency of the company.
41
Advantages of NQDC
One of the advantages of nonqualified deferred compensation plans is that plans are not subject to all the rules and regulations under ERISA or the funding limits for qualified plans under IRC Section 415, including the annual additions limit.
42
When do benefits become taxable for NQDC
NQDC benefits become taxable to the executive when there is no longer a substantial risk of forfeiture.
43
List of Qualified Plans
Pension
Profit-sharing (401(k))
44
List of Tax-advantaged plans
SEP
SIMPLE IRA
45
List of non-qualified plans
NQDC
SERP
Top Hat
Sec 162 Bonus Plan
46
Qualified Plans & Tax-Advantage plans - Suitability
Deductible ER plan contributions
Benefits not currently taxable to EE/Participant
47
Section 162 Bonus Plan Suitability
Deductible ER plan contributions
Employer can limit participation to select individuals (pick and choose)
48
Non-qualified Deferred Comp Plan
Benefits not currently taxable to the employee/participant
Employer can limit participation to select individuals (pick and choose)
49
Which type of requirement plans allow for exclusion of employees who do not work 1000 hrs per yr
Qualified Plans - Pensions, Profit-sharing - 401(k)
50
What's an NQSO or ISO?
An option allows the purchase of a share of employer stock at a set price.
51
Non-Qualified Stock Options (NQSOs)
Usually subject to vesting.
Can be transferred or “gifted” to family members, trust, or charitable organizations.
Corporation receives a deduction when employee pays tax at exercise.
EXERCISE: Exercise of the option, triggers W2 income (bargain element = exercise price - FMV at the time of exercise)
SALE: Cap gains or losses on difference from the strike price + W2 income recognized at the exercise
52
Incentive Stock Options (ISOs)
Corporation may not ever receive a deduction.
May create AMT.
No more than $100,000 per year may be granted.
EXERCISE: bargain element is not subject to W2; preference for AMT
SALE:
53
when are traditional IRA contributions non-deductible?
The traditional contributions are non-deductible if you are an active participant (you are covered by a retirement plan at work)
If you are covered by a retirement plan t work, than you will need to use MAGI to determine the amount of deduction.
54
LE: when are traditional IRA contributions fully deductible?
If you are NOT an active participant in an employer-sponsored, you can fully deduct all of traditional IRA contributions.
55
Who is an active participant in a retirement plan - DC Plans?
Defined Contribution Plan: anyone who received any annual additions:
Employer Contributions,
Employee Contributions (deferrals)
Forfeitures reallocated to remaining participants
Account earnings ARE NOT included in application of the annual additions limit.
56
Who is an active participant in a retirement plan - DB plan
Anyone who eligible for the plan is accruing a benefit.
57
For Which retirement plans, participants ARE considered active participants for traditional IRA purposes ?
SEP, SIMPLE, Section 403(b) (TSA)
58
For which retirement plan, participants are NOT considered active for traditional IRA purposes?
457 (not considered active participants for IRA purposes = you can contribute to 457 and to your traditional IRA and can still deduct your traditional IRA contributions
59
Excess Benefits & Constructive Receipt
Goal is to avoid constrictive receipt and current taxation; there must be a substantial risk of forfeiture to avoid constructive receipt.
The executive does not recognize income and the employer does not receive a deduction until there is no longer a substantial risk of forfeiture.
Plans typically have a vesting schedule
60
Section 162
Executive benefits
Large cash value life insurance policy
executive owns the policy and names the beneficiaries
The employer pays the premiums; the executive pays taxes on the premiums paid as bonus comp
death benefits are tax-free
executive has access to the cash value
61
OASDI and Benefits provided
Social Security: Old Age, Survivor, Disability Insurance
Provides benefits for:
- Retirement
Survivors of a deceased worker
Disability
62
OASDI Funding
Funded through payroll taxes assessed on earned income:
7.65% from EE and 7.65% from ER on earned income up to $168,600 (2024).
1.45% from the EE and ER is paid on unlimited earned income.
63
OASDI Earned Credits
$1730 of earned income = 1 quarter/earned credit of coverage
MAX eared credit = 4 quarters per year (regardless of when the income during that year was earned)
retirement income benefits require fully insured status at 40 earned credits (i.e. 40 quarters)
64
OASDI Retirement Benefits Eligibility
attain age 62 AND have 40 earned credits
Max 4 credits allowed each year when income is above $6920 ($1730 x 4)
65
OASDI Disability Benefits Eligibility
Adult 18 or older who are unable to work due to physical or mental disability that is expected to last AT LEAST 12 MONTHS or result in DEATH
66
OASDI Survivor Benefits Eligibility
Family Members of deceased workers who qualified for social security
67
AIME
Average Indexed Monthly Earnings (AIME)
Used to calculate PIA
Best 35 years of earnings are used to calculate AIME
68
PIA
Primary Insurance Amount (PIA)
PIA is the monthly retirement benefit at Full Retirement Age (FRA).
Breaks average earnings down based on “bend points”.
In 2024, the bend points are $1,174 and $7,078.
Benefit Formula
90% of first $1,174
+ 32% of the next $5,904 ($7,078 - $1,174)
+ 15% of excess above $7,078
69
Early Retirement Social Security Benefits Formula
Reduced Benefits (if taken before 62; benefits do not increase after 62)
From FRA working backwards - first 36 months from FRA - 5/9% for each of first 36 months worker is claiming benefits prior to FRA (20% reduction), PLUS
5/12% for next 24 months (each month over 36 months worker is claiming benefits prior to FRA up to an additional 24 months) (10% Reduction)
The current maximum reduction is 30% for a worker whose FRA is age 67 and claims benefits at age 62 (60 months prior to FRA)
70
Early Retirement Social Security Benefits
Reduced Benefits (if taken before before FRA; benefits do not increase after FRA)
COLA is still applied
71
Delayed Retirement Social Security Benefits
2/3% for each month that passes following FRA, up to age 70.
Delayed created it 8% annually to 70 ( total 24% increase by delaying from 67 to 70)
72
What happens when you are receiving Social Security Benefits BEFORE FRA and have earned income
a portion or all of one’s Social Security benefits may be withheld temporarily.
Earned Income Limits are in TAX TABLEs
73
How much benefits is withheld if you are claiming benefits while having earned income before or after attaining FRA
From age 62 to FRA is attained - $1 of Social Security benefits is withheld for every $2 earned in excess of $22,320 (2024)
in the year in which full retirement age (FRA) is attained:
$1 of Social Security benefits is withheld for every $3 earned in excess of $59,520 (2024)
74
Special “first-year” for Social Security Benefits
Any income earned PRIOR to claiming Social Security Benefits IS NOT considered for withholding.
Withholding begins If you have EARNED INCOME AND ARE ALREADY CLAIMING Social Security Benefits.
Ex: Turned 62 on 4/1 and claimed SS Benefits on 5/1. Earned Income started on 8/1 - withholding starts on 8/1
Benefits can be paid in any month in which the earned income is less than 1/12th of the applicable yearly limit (1/12th of $22,320 (2024) or 1/12th of $59,520 (2024) in the year of FRA)
75
Earned income limit after attainment of FRA
There is no earned income limit after FRA
76
Provisional Income
PROVISIONAL INCOME = 50% of Social Security benefits + tax-exempt income + AGI (without Social Security)
77
3 elements in analyzing Social Security benefits
claiming benefits prior to or after FRA,
the impact of earned income when claiming benefits prior to FRA, and
the taxation of benefits
78
What is the max tax % for Social Security Benefits
85% (i.e. 15% of social security benefits will always be tax-free)
79
Spousal Social Security Benefit Amount
50% of worker's PIA
80
Spousal Social Security Benefit - Eligibility
Full benefit at FRA
Can start as early as 62 (reduced by 8.33% a year for first 3 years + 5%/year beyond 3 years)
No Delayed Retirement Credits after FRA
81
Spousal Social Security Benefit - Divorced Entitlement
You are entitled to spousal social security benefits from your divorced spouse IF:
- WORKER must be AT LEAST AGE 62
- DIVORCED for AT LEAST 2 YEARS
- must have been MARRIED for AT LEAST 10 YEARS
- CURRENTLY unmarried
82
Spousal Social Security Benefit - Reqs for Current Spouse
- must have been MARRIED FOR AT LEAST 1 YEAR
- spouse must be age 62 or older (or any age if caring for unmarried child of the worker under age 16)
- worker must have filled for his/her own benefits
83
Spousal Social Security Benefits for Current Spouse
Max Benefit at Current's spouse's FRA = 50% of worker's PIA;
Reduced benefits prior to FRA
84
Are Social Security Benefits paid to former spouse counted in the max family benefit?
NO
85
Spousal Social Security Benefits Amounts
Bsed on the worker's spouse's PIA
MAX 50% at spousal claimant FRA
If under FRA = Benefits reduced (i.e. max 50% is reduced)
86
Medicare
Medicare is a federal healthcare program funded by payroll tax (1.45% EE/ER on unlimited income; additional 0.9% above $200,000/$250,000 MFJ).
87
Medicare Part A
Hospital
Most participants pay no premium
Must be age 65 or older and paid into Medicare for at least 10 years
Flat per hospitalization deductible for days 1-60; Co-pay for days 61-90; over 90 days uses lifetime reserve days up to 60 additional days and requires even higher co-pay
Costs beyond 150 days are paid by individual
88
Medicare Part B
Medical (non-hospital)
Optional but highly recommended;
Requires premium – Most individuals pay a standard premium; higher-income individuals pay a higher premium.
89
Medicare Part C
Medicare Advantage
Alternative to A & B.
Typical vastly lower premiums than Medicare A and B combined with a Medicare Supplement (Medigap) insurance policy.
Some plans have zero premiums. Uses “gatekeeper” concept; must use network providers
90
Medicare Part D
Prescription drugs; (remember “D” for drugs)
Coverage is optional but recommended;
requires premium;
Medicare Advantage plan may include prescription drug coverage
Deductibles and co-pays can be paid by Medicare Supplement (Medigap) policy
91
Medicare Payroll Tax %
1.45 EE/ER on unlimited income
additional 0.9% above $200K / $250K MJF
92
IRMAA
Income Related Monthly Adjustment Amount (for high earners)
2-year lookback period
Higher-income Medicare beneficiaries covered under part B and/or Part D may pay an additional premium if Medicare-specific MAGI exceeds thresholds
Medicare-specific MAGI = AGI + Tax-Exempt Income
93
Medicare - Benefit Period
Benefit Period = Event; you can have multiple events in a year
94
Which Medicare plan uses "gate keeper:
Part C
95
Medicare - Parts/Premiums
Part A = most participants pay No premiums
Part B = optional; requires premiums (higher for high income earners / IRMMA)
Part C = Alternative to A and B (lower premiums with Medigap policy)
Part D = Requires Premiums (higher for high income earners / IRMMA)
96
Medigap Policy
Medicare Supplement (Medigap) insurance policy
Part C premiums can be drastically LOW when combined with a Medigap policy
Part D deductibles and co-pays can be paid by Medigap policy
97
Medicare Part B deductible and coverage
Annual deductible - after the deductible Medicare pays 80%, and the individual pays 20%
98
Ways to reduce IRMMA
Reduce M/AGI - apply exclusion or deductions to lower AGI
99
Social Security Benefits Reqs for Child
- Under age 18 or
- Under age 19 if in high school or
- Adult but disabled before age 22
- Worker must be receiving benefits
100
Social Security Benefits for Child
Max Benefit is 50% of worker's PIA
101
Who qualifies to receive social security RETIREMENT benefits ONLY when worker is receiving benefits
Current Spouse
Dependent Child
102
What benefits can dependent parents receive from socical security?
Dependent parents may be eligible for Survivor benefits.
Dependent parents are not eligible to receive requirement benefits based on worker's PIA
103
Traditional Profit-sharing plan
Flexible year-to-year ER contributions;
no requirements for contribution every year;
contribution must be "substantial and recurring" - 3 of last 5 years;
100% employer funded
typically allows in-service hardship withdrawals and loans to participants
May invest 100% in employer stock
Not subject to QJSA
"age-weighted" traditional profit-sharing plan can skew higher plan contributions to older participants
104
Which retirement plan is NOT subject to minimum coverage rules?
SERP (Supplement Executive Retirement Plan)
105
RMDs - Penalty Tax
25% of the shortfall / undistributed amount
106
Deadline for first RMD for Traditional IRA
4/1 following the year of turning 73, even if still employed
RMDs are NOT REQUIRED during the life of a Roth IRA
107
Deadline for first RMD for 401(K)
Later of (1) 4/1 following the year of turning 73 OR
(2) the actual year of retirement
RMDs are NOT REQUIRED during the life of a Roth 401(k) owner.
Deferral to actual retirement year ONLY applies to current employer's plan
108
Deadline for RMD after 1st year
12/31 of current year (Both for Trad IRA and 401K
109
Calculating RMD - Trad IRA
FMV of combined accounts as of 12/31 of previous year / age factor
May distribute combined amount from one or more Trad IRA accounts
More than the RMD can be distributed in any year
110
Calculating RMD - 401(K)
FMV of combined accounts as of 12/31 of previous year / age factor
Each account RMD calculated and distributed separately
More than the RMD can be distributed in any year
111
RMD Withdrawals
More than the RMD can be distributed in any year
Multiple withdrawals are allowed to meet RMD by deadline
112
QCD
is a nontaxable distribution from a traditional IRA directly to an eligible charitable organization.
113
QCD Age Req
taxpayer who makes QCD must be at least 70½ years old on the day of the distribution.
114
QCD Transfer Req
may only be executed using a direct transfer rollover to the eligible charity or charities
Direct transfer are NOT included in AGI
115
QCD - Max Annual Limit per person
maximum annual exclusion for QCDs is $105,000 (2024) per person
116
QCD - Tax Forms
The full QCD is reported on Form 1040 as an IRA distribution.
The taxable amount of the distribution is reported as zero with “QCD” next to the line.
The QCD can be made only from funds in the IRA that would otherwise be taxable.
117
QDROs
Qualified Domestic Relations Orders
118
What is QDRO ?
is a judgment, decree, or order for a qualified retirement plan to pay child support, alimony, or marital property rights to an alternate payee (spouse, former spouse, child or other dependent of a participant).
119
QDRO Distribution - Tax treatment for Payor
QDRO payor is not subject to income tax or penalty on the distribution.
Read the question carefully to determine which party a tax question pertains.
120
QDRO - Required Info
Must contain specific info:
the participant and each alternate payee’s name and last known mailing address, and
the amount or percentage of the participant's benefits to be paid to each alternate payee.
121
QDRO - What benefits are awarded?
A QDRO may not award an amount or form of benefit that is not available under the plan
122
QDRO - Benefit Reporting
A spouse or former spouse who receives QDRO benefits from a retirement plan reports the payments received as if he or she were a plan participant.
123
What can Spouse/Former Spouse do with QDRO awarded benefits?
A spouse or former spouse receiving QDRO payments may roll the payout over to an IRA or another qualified plan.
If the payout is not rolled over it is subject to income tax.
The QDRO payor is not subject to income tax.
Distribution under QDRO are not subject to penalty for distribution prior to attainment of age 59 ½.
A QDRO distribution that is paid to a child or other dependent is taxed to the plan participant.
124
What can you do if you want to make charitable contribution but you want to reduce your AGI
Use QCD as RMD for the given year
125
NUA Application
Applies only to employer stock held in qualified plan.
Must be executed as part of qualified lump-sum distribution.
Qualified lump-sum distribution must be 100% of employee’s account within one year.
126
QNUA
Qualified Plan Net Unrealized Appreciation (NUA)
Special tax-advantaged treatment is available in a qualifying lump-sum distribution, referred to as Net Unrealized Appreciation (NUA) tax treatment WHEN a qualified plan participant holds employer securities in their account
127
NUA at time of plan lump-sum distribution
is tax-deferred.
Taxed as LTCG when subsequently sold without regard to holding period.
Subsequent Appreciation is STCG/LTCG based on holding period after lump-sum distribution.
No step-up in basis at death for NUA portion remaining.
128
NUA Calculation
NUA is the difference at the time of the lump-sum distribution
NUA = FMV of the employer stock - the employer basis in the contributed stock at the time of the contribution.
129
NUA - ER Contribution Basis
Is taxed as ORDINARY INCOME in year of distribution.
130
Qualified Plan Nondiscrimination Testing
Non-highly compensated employees are not discriminated against
Qualified plan must meet ONE of the following 3 Tests:
Safe Harbor Test
Ration % Test
Avg. Benefits test
131
Qualified Plan Nondiscrimination Testing - Safe Harbor Test
plan must cover at least 70% of the non-highly compensated employees
132
Qualified Plan Nondiscrimination Testing - Ration % Test
plan must cover a % of non-highly compensated employees = at least 70% of the percentage of highly compensated employees covered
133
Qualified Plan Nondiscrimination Testing - Average Benefits Test
the % of benefits received by non-highly compensated employees must = at least 70% of the percentage of benefits received by highly compensated employees
134
Qal Plan Social Security Integration - Excess Integration
Rate contribution rate for wages up to $168,600 (Soc Sec Wage Base) + Excess Rate is applied to wages above Soc Sec Wage Base
Max permitted disparity/Excess Rate is LESSER Of
(1) Base Rate X 2 OR
(2) Base Rate + 5.7%
135
MAX increase in benefits produced by the integration formula used cannot exceed
26.25% (3/4th of 1% x 35 years)
136
Key Employee Test
Key employees are officers or owners of your business who:
(1) Officers with earnings of more than $220,000 (2024)
(2) Owners of more than 5% of the business, or
(3) Owners earning over $150,000 (not adjusted for inflation) and holding more than 1%.
137
When is Qualified Plan considered Top-Heavy?
When the plan provides more than 60% of the aggregate accrued benefits (defined benefit plan) or
60% of the aggregate account balances (defined contribution plan) to key employees.
138
What is accelerated vesting schedule?
2-6 r graded OR
3-yr cliff
139
Other names for Solo 401(k) Plan
Solo 401(k)
Solo-k
Uni-k
One-participant k
140
Who is covered under Solo 401(k)
Traditional 401(k) plan covering a business owner with no employees, or that person and their spouse
same rules and requirements as any other 401(k) plan
141
Retirement funding Cap Preservation Calculation
N = # of yrs in retirement
I/R = Nominal Rate
PV = ?
PMT = 0;
FV = CUPVAD
FV + CUPVAD
142
Retirement funding Purchasing Power Preservation Calculation
N = # of yrs in retirement
I/R = Inflation Adjusted Rate
PV = ?
PMT = 0;
FV = CUPVAD
FV + CUPVAD
143
SIMPLE 401(k)
If you establish a SIMPLE 401(k) plan, you:
(1) Must have 100 or fewer employees.
(2) Cannot have any other retirement plans.
(3) Need to annually file a Form 5500.
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SIMPLE 401(k) - Loans and Withdrawals
Loans are permitted.
In-service withdrawals are permitted, but subject to possible 10% penalty if under age 59-1/2.
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SIMPLE 401(K) - Who can contribute and how much?
Employee salary deferrals and Employer contributions.
Contribution limits:
Employee - On TAX Table including catch up contributions over 50
Employer - A dollar-for-dollar match up to 3% of pay or a 2% non-elective contribution for each eligible employee.
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SIMPLE 401(k) - Advantages
Employees are fully vested in all contributions.
Straightforward benefit formula allows for easy administration.
Optional participant loans and hardship withdrawals add flexibility for employees.
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SIMPLE 401(k) - Disadvantages
Plan is not subject to the non-discrimination rules that apply to everyday 401(k) plans.
No other retirement plans can be maintained.
Withdrawal and loan flexibility adds administrative burden for the employer.
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DC Plan Features
1. Sponsor defines the contribution formula
2. Mandatory employer contributions required for DC pension plans
3. Annual contributions are not required for DC profitsharing plans
4. No guarented final benefit
5. Participant-directed accounts
6. Participant bears investment risk
6. Favor younger participants with more years to accumulate higher account balances
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DC Plan Vesting
Vesting must be at least as generous as 3-yr cliff or 2-6 year graded
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DC Plan
* Max Combined EE/ER Contributions
* Max EE Deferrals
* Max Comp Considered
* Max deductible ER Contributions
* Max EE/ER Contribution upto annual additions limit of $70K **(this is for each participant)**
* Max EE Elective deferral of $23,500
* Max Comp considered in benefit formula - $350K
* Max deductible employer contribution is 25% of covered payroll **(this is for the whole payroll/all participants)**
