Retirement Planning

Question 1

Basic Concepts of Social Security

Answer 1

Coverage - Nearly every worker is covered under OASDI. Employment categories not covered by social security include:
A Federal employees who have been continously employed since before 1984
B Some Americans working abroad
C Student nurses and students working for a college or college club
D Railroad employees
E A child, under age 18, who is employed by a parent in an unincorporated business
F Ministers, members of religious orders and Christian Science practiitioners if they claim an exemption
G Members of tribal councils

Question 2

Social Security

reduction of benefits

Answer 2

• Age 62-FRA (full retirementage):benefits reduced $1 for

every $2 earned over $15,480(2014 threshold)

Question 3

Social Security

taxation

Answer 3

• Must include muni bond income to calculate MAGI
• If income (MAGI) plus 1/2 of social security benefits is:
1. Above 25K for a single taxpayer, then 50% of the total
social security is included in income
2. Above 44K for married filing jointly, then 85% of the
total social security is included in income

Question 4

Types of Qualified Plans/ERISA

vesting/admin costs/exempt from creditors/integrate with Social Security

Answer 4

• 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)

Question 5

Types of Retirement Plans

no vesting/limited admin costs

Answer 5

• SEP
• SIMPLE
• SAR-SEP
• Thrift or saving plans
• 403(b)

Question 6

Defined Benefit - qualified plan

Answer 6

• Favors older employee/owner (50+)
• Certain retirement benefit; Max $210K (2014)
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)

Question 7

Money Purchase - qualified plan

Answer 7

• Up to 25% employer deduction
• Fixed contributions-need stable cash flow
• Maximum annual contribution lesser of 100% of salary or $52K (2014)

Question 8

Target Benefit - qualified plan

Answer 8

• Up to 25% employer deduction
• Fixed contributions-need stable cash flow
• Maximum annual contribution lesser of 100% of salary or $52K (2014)
• Favors older workers

Question 9

Profit Sharing - qualified plan

Answer 9

• Up to 25% employer deduction
• Flexible contributions (must be recurring and substantial)
• Maximum annual contribution lesser of 100% of salary or $52K (2014)
• Can have 401(k) provisions
• SIMPLE 401(k) exempt from creditors

Question 10

Section 401(k) Plan

Answer 10

• Qualified profit sharing or stock bonus plan that allows plan participants to defer salary into the plan
• Max $17,500 (2014) deferral for participants under 50
(subject to FICA)
• Additional $5,500 catch-up for age 50 and over(2014)

Question 11

Section 415 annual additions limit

Answer 11

. Lesser of 100% of compensation or $52K (2014)
. Includes employer contributions, employee salary
reductions, and plan forfeitures

Question 12

Safe Harbor

Nondiscrimination

Answer 12

A safe harbor 401(k) plan automatically satisfies the nondiscrimination tests involving highly compensated employees [HCEs] with either an employer matching contribution or a nonelective contribution.

Question 13

Safe Harbor

Match/Vesting

Answer 13

The statutory contribution using a match is $ 1/$1 on the first 3% employee deferral and $.50/$1 on the next 2% employee deferral. If the employer chooses to use the nonelective 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.

Question 14

Stock Bonus/ESOP - qualified plan

Answer 14

• Up to 25% employer deduction
• Flexible contributions
• Maximum annual contribution lesser of 100% of salary or $52K (2014)
• 100% of contribution can be invested in company stock
• ESOP cannot be integrated with Social Security or cross- tested

Question 15

Net Unrealized Appreciation

NUA

Answer 15

NUA Example
Stock is contributed to the retirement plan with a basis of $20,000. Stock is distributed at retirement with a market value of $200,000. The NUA, $180,000 is not taxable until the employee sells the stock, but the $20,000 (the basis) is taxable now as ordinary
income.

The $180,000 is always LTCG. If the client sells the stock for $230,000, the $30,000 of extra gain is either STCG or LTCG depending on the holding period after distributed at retirement.

Question 16

Keogh Contribution

Answer 16

• 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

Question 17

Simple Plan

Answer 17

• 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

Question 18

SEP

Simplified employee pension

Answer 18

• NO salary deferrals - employer contributions only
• Up to 25% contribution for owner (W-2)/treated like Keogh contributions for self-employed
• Maximum of $52K (2014)
• Account immediately vested
• Can be integrated with social security
• Special eligibility:21+ years old, paid at least $550 (2014), and worked 3 of the 5 prior years

Question 19

Tax-deferred annuity (TDA)/Tax sheltered

annuity (TSA) /403(b)

Answer 19

• For 501(c)(3) organizations and public schools
• Subject to ERISA only if employer contributes
• Salary reduction limit up to $17,500 (2014) (plus $5,500
catch-up if 50 or over)

Question 20

Age and service rules -

qualified plans

Answer 20

• 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)

Question 21

Highly Compensated (HC) 
Employee

Answer 21

• A greater than 5% - owner, or
• An employee earning in excess of $115,000 during
the preceding year (2013)

Question 22

Key Employee

Answer 22

An individual is a key employee if at any time during the current year he/she
has been one the following:
• A greater-than-5% owner, or
• An officer and compensation > $170,000 (2014), or
• Greater than a 1% ownership and compensation > $150,000 (2014)

Question 23

Vesting - Fast / Slow

Answer 23

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

Slow: Non-top-heavy DB plans only
. 5-year cliff or 3-7 year graded or 100% vested after 2 years

Question 24

Defined Contribution Plans

Integration with social security

Answer 24

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

Question 25

Defined Benefit Plans | Integration with social security

Answer 25

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

Question 26

Multiple Plans 2014 | Elective Deferrals

Answer 26

Elective deferrals - more than one employer (2014) Elective deferrals to multiple plans are always aggregated. 2014 401(k)/403 (b)/SIMPLE/SARSEP $17,500 plus catch up ($5,500) SIMPLE and other SIMPLE $12,000 plus catch up ($2,500) 457 plans are NOT part of aggregated amounts.

Question 27

Life Insurance as a Funding Vehicle

Answer 27

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. 1. 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% 2. 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.

Question 28

Rollovers NOT Permitted

Answer 28

* 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

Question 29

Qualified Plan Early (age 59 1/2)-10% Tax Penalty Exceptions

Answer 29

* Death * Disability * Substantially equal periodic payments following separation from service * Distribution following from service at 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)

Question 30

Required Beginning Date (RBD) for | IRAs / SEPs / SARSEPs / SIMPLEs

Answer 30

The required beginning date is April 1st of the year following the year in which the covered individual attained age 70 1/2. Subsequent distributions must be made by December 31st of each year thereafter.

Question 31

Required Beginning Date (RBD) for | Qualified plans/403(b) plans/457 plans

Answer 31

The required beginning date, with the exception of 5% owners, is the later of April 1st following the year in which the individual attained 70 1/2 or retired. Subsequent distributions must be made by December 31st of each year thereafter. 5% owner RBD is the same as IRA/SEP RBD.

Question 32

IRA Deductibility Keys

Answer 32

• If neither spouse (or single person) is an active participant in an employee 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 $181K-$191K (2014) • If both spouses are active, AGI limits apply-$60K-$70K(single) and $96K- $116K (married) (2014) NOTE: Activity that results in active status: annual additions to a DC account or benefits accrued to a DB plan

Question 33

IRA Exceptions to 10% Penalty for Early Distributions before Age 59 1/2

Answer 33

* 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)

Question 34

Roth IRA | Ordering rules for distribution

Answer 34

1. Any contributions (not conversions) are withdrawn first 2. Conversions are withdrawn second 3. Earnings are withdrawn last

Question 35

Roth IRA | Required Minimum Distributions

Answer 35

• Distributed within five 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 sole beneficiary is owner's surviving spouse, the spouse may delay distributions until the Roth owner would have reached age 70 1/2, or may treat the Roth as his or her own (roll it to his/her Roth)

Question 36

Non-qualified Deferred | Compensation Plans

Answer 36

* Salary reduction plan - uses some portion of employee's current compensation to fund the ultimate compensation benefit (also called pure deferred) * Salary continuation plan - uses employer contributions to fund ultimate benefit

Question 37

Rabbi Trust

Answer 37

* 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

Question 38

Incentive Stock Option (ISO) | Holding Period

Answer 38

Holding Period: 1 year from exercise date and 2 years from grant before selling ISOs Violating either rule results in a disqualifying disposition

Question 39

Section 457 Deferred | Compensation Plan

Answer 39

• Nonqualified deferred compensation plans of governmental agencies and non-church controlled tax exempt organizations • Deferral limited to $17,500 or 100% of compensation(2014) • Catch-up of $5,500 allowed for those aged 50 and over ONLY for governmental plans (2014) • Salary deferrals NOT aggregated with other plans (401k, etc.) • Non-governmental plans can ONLY be rolled into another 457 plan