Retirement Planning - Other Tax Advantaged Plans Flashcards

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1
Q

Qualified plans vs other tax-exempt plans

A
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2
Q

What are the key features of Traditional IRA’s?

A
  • contributions limited to the lesser of $6,000 or earned income, catch up of $1,000 over age 50
  • Spousal IRA can be contributed to if a someone has no income but their spouse has earned income. Spouse would need to make at least $12,000 for both to be eligible to max out IRA’s for the year.
  • contributions must be made to both Traditional and Roth IRA accounts by due date of tax return without extensions. and must be made in cash.
  • Required Minimum Distributions must begin by April 1st of the year following age 72.
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3
Q

Earned income vs not earned income for IRA contributions.

A
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4
Q

What is the penalty for Excess Contributions to IRA’s?

A

-Excess Contributions are subject to an excise tax of 6%, this penalty is charged each year the excess contribution remains in the account.

This can be avoided by withdrawing the excess contribution and any related earnings from the account by April 15th of the next year.

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5
Q

Is your IRA contribution deductible?

A

The deduction limit will be reduced based on a proportion equal to the amount by which the individuals AGI exceeds the lower limit of the phaseout range divided by $10,000 or $20,000 in the case of a joint return

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6
Q

IRA Deduction examples

A
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7
Q

What is considered Active Participation?

A

-An active participant is someone who benefited under one of the following plans from contribution or an accrued benefit:

Qualified plan 
Annuity plan 
Tax sheltered annuity 403(b) plan 
Certain government plans
Simplified employee pensions (SEPs)’
Simple retirement accounts (SIMPLEs)
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8
Q

How are Non-Deductible IRA contributions Treated?

A
  • Non Deductible IRA contributions create an adjusted basis in the IRA.
  • withdrawals from an IRA will consist partially of account earnings that have not been subject to income tax and partially adjusted basis for which income tax has been paid.
  • Distributions from IRA’s with Non deductible contributions and Rollovers from qualified plans with After tax contributions (thrift plans) are a combination of return of basis and ordinary income.
  • Ratio of Adjusted basis = AB Before Withdrawal/FMV of account at Withdrawal
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9
Q

What are the rules regarding 10% early withdrawals from IRAs?

A
  • Traditional IRA and Roth IRA distributions taken before age 59 1/2 will be subject to the 10% penalty unless a specific exception applies.
  • see the following chart for exceptions to the 10 percent withdrawal penalty for IRA’s and Qualified plans.
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10
Q

What are the key features of IRA annuities?

A
  • Cannot be pledged as collateral or loans be taken from the contract.
  • Annual premiums cannot exceed $6,000 for 2022
  • Distributions are the same For IRA’s/
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11
Q

Roth IRAs vs IRA chart

A
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12
Q

What are the key features of IRA’s?

A
  • Roth IRA’s can be funded at any age with Earned income,
  • not subject to RMD’s
  • Can only contribute if you fall within the limits, regardless if you are an active participant or not.
  • Qualified Distributions are not subject to 10 percent penalty and not included in owners income.
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13
Q

What are Qualified Distributions from Roth IRA’s?

A
  1. Distribution must be made after a five year period which begins on January 1st of the taxable year for which the first regular contribution is made to any Roth IRA of the individual or when first conversion contribution is made.
  2. The distribution must satisfy one of the four following requirements:
  • after age 59 1/2
  • made to beneficiary as a result of death.
  • for Disability.
  • First time home purchase (cap of $10,000)

-If a beneficiary receives the account the five year clock does not reset.

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14
Q

How are Non Qualified Distributions from Roth IRA’s treated?

A

-Non Qualified Distributions treated on a FIFO Basis:

  1. Regular Contributions
  2. Conversion Contributions
  3. Earnings
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15
Q

Roth IRA Distribution Flow Chart

A
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16
Q

What types of Investments are not allowed in IRA’s?

A

Life Insurance
Collectibles (Work of art, antiques, metal, stamps, coins, wines)

An Exception is US Minted Coins and Bullion, Gold, Silver, Platinum, these are permitted.

17
Q

What is the limit on income that can be excluded for QCD’s in a year?

A

$100,000

18
Q

What are the Prohibited Transactions for IRA’s?

EXAM TIP - NEED TO MEMORIZE

A

If an individual partakes in these transactions the account will cease to be an IRA as of the first day of the current taxable year

If distribution is prohibited, the entire balance in the IRA is treated as being distributed, in this case the taxpayer will be subject to ordinary income on entire balance and subject to 10% early withdrawal penalty.

Prohibited transactions:

  • Selling, exchanging, or leasing of any property to an IRA
  • Lending Money to an IRA
  • Receiving unreasonable compensation for managing an IRA
  • Pledging an IRA as security for a loan
  • borrowing money from an IRA
  • buying property for personal use
19
Q

What are the key features of a Simplified employee pension IRA?

A
  • Used by small businesses and sole proprietors
  • Easier to establish than qualified plans and have no filing requirements.
  • contributions limited to lesser of 25% of compensation or $61,000
  • can be established and funded by due date of tax return including extensions.
  • tax deferred growth of contributions
  • Same withdrawal rules as IRAs, 10% penalty exceptions are the same
20
Q

Who are employers required to cover for SEP IRA’s?

A
  • Attainment of 21 or older
  • performed services for 3 of the last 5 years
  • received compensation of at least $650 during the year.
21
Q

What are the contribution rules for SEP IRA’s?

A
  • Employer contributions are discretionary,
  • Contributions are 100% vested.
  • no employee contributions.
  • If contribution is made it must be made for all eligible employees during the year. Even if employee died or left the company
  • can be integrated with social security, permitted disparity allowed.
  • for self employed, 20% covered compensation limit.
22
Q

What are the key features of SARSEP plans?

A
  • not permitted to be established after 1996, some are still in operation.
  • Allows for employee elective deferral like a 401k but it was easy to establish and had minimal reporting/testing like a 401k.
  • To Establish:
    The employer had to have less than 25 employees

at least 50 percent of employees eligible had to choose to defer their salary

The elective deferrals of highly compensated individuals had to meet the SARSEP ADP TEST

-combined employee and employer elective deferalls cannot exceed the lesser of 25% of employees compensation or $61,000 for 2022.

-

23
Q

Simple IRA and Simple 401(k) Chart

A
24
Q

What are the key features of 403 (b) plans or Tax Sheltered Annuities (TSA’s)?

A
  • retirement plan for certain employees of public schools, certain ministers, and employees of tax exempt organizations.
  • NOT a qualified plan
  • Two Types:
  1. Salary reduction - only accepts employee deferrals
  2. Employer-funded plan, accepts employee and employer contributions
  • Common for 403 (b) plans to be part of an overall pension or retirement plan and therefore subject to ERISA requirements.
  • If plan only provides salary reduction then plan is not subject to ERISA Requirements.
  • plan with immediate vesting MAY require a maximum waiting period of two years and the attainment of age 21 OR, one year and the attainment of age 26 (only for schools)
  • If no immediate vesting, the waiting period is no longer than one year and the attainment of age 21.
  • Maximum Employee deferral is $20,500
  • Offers two separate catch up contribution:
    1. Age 50 Catch -Up Contributions

$6,500

  1. 15 Year Rule Exception

For employees that have worked the same employer 15 years (not required to be consecutive.)

organization has to be health, education, or religious organization (HER)

$3,000 catch up contribution, up to $15,000 and have to have unused deferral

  • Total Contributions (EE+ER) are limited to the lesser of $61,000 or 100% of employees covered compensation.
  • Loans are allowed subject to same limitations as Qualified Plans.
  • Subject to the same required minimum distribution rules as IRA’s , age 72 april 1st.
25
Q

What can 403(b)’s Invest in?

A

Can only invest in either insurance annuity contracts or mutual funds.

26
Q

When can distributions be made from a 403(b) account?

A
  • employee turns 59 1/2
  • separation from service
  • death
  • employee becomes disables
  • birth or legal adoption
  • salary reduction contributions, employee endures a hardship
27
Q

Summary chart - 403(b) plans

A
28
Q

What are the key features of a 457 Plan?

A
  • See chart for different types of 457 plans.
  • Allows employees of state and local governments and employees of tax exempt nongovernmental entities to save tax-deferred compensation for retirement.
  • Employee contributions do not count against contributions into 401k’s or 403bs because it is a deferred compensation plan not a retirement plan.
  • They are not QUALIFIED Plans and are not subject to eligibility requirements, non discrimination testing, minimum participation, funding and vesting standards.
29
Q

What entities can establish 457 plans?

A
  • State, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state.
  • Tax Exempt Organizations: Trade Associations, religious organizations, private hospitals, rural electric cooperatives, farmers cooperatives, private schools and foundations, labor unions, and charitable organizations.
30
Q

What are the three types of 457 plans?

A
  • Three Types of 457 plans:
    1. eligible governmental plans - Public Plans

funded via a trust holding all assets and income for the benefit of plan participants.

  1. eligible tax -exempt plans - Private Plans

ERISA limits participation to a select group of highly compensated employees or management. Funds not placed in a trust and are vulnerable to employers creditors.

  1. ineligible plans - allow for greater deferral
31
Q

What are the rules surrounding contributions for 457 plans?

A
  • Employee contributions are limited to lesser of $20,500 or 100% of includable compensation.
  • 457 plans have two catch-up provisions:

Age 50 Catch Up Contribution - only available to governmental Public 457 plans.

Final 3 Year Catch Up Provision - Applies to both public and private 457 plans. (see other slide for details)

  • Employer can make matching contributions or non-elective deferrals. into the 457 plan.
  • for 457(b) not 457 (f) plans the limit of $20,5000 applies to both employee and employer contributions. Matching contributions are very rare due to this.

*****VERY IMPORTANT - Employee can contribute the maximum amount to a 401k, 403b, SARSEP, or SIMPLE and still contribute to a 457 plan

32
Q

What is the 457 Final 3 year catch up provision?

A
  • Applies to both public and private 457 plans.
  • in the final three years before the plans normal retirement age an employee can contribute an additional amount equal to the employee contribution limit, so they could contribute an additional $20,500 for a total of $41,000
  • Employee must have prior unused deferral contributions to make this contribution.
  • Employers are not required to offer the final 3 year provision
  • it cannot be used simultaneously with the age 50 catch up contribution.
33
Q

What are the distribution rules for 457 plans?

A
  • Distributions treated as ordinary income.
  • advantage of 457 plans is that the age 59 1/2 withdrawal rule does not apply at separation of service.
  • no 10% early withdrawal rule.
  • Loans are permitted for 457(b)’s
  • Subject to Required minimum distribution rules.
  • Rollovers from tax exempt private 457(b)’s an only be rolled over into another private 457(b) plan.
34
Q

What is a section 457(f) ineligible plans?

A
  • these are “top hat” plans, only HC employees or top management can participate.
  • these are plans that under section 457 fail to meet one or more requirements of the “eligible plan”
  • amounts contributed are subject to “substantial risk of forfeiture”
  • taxation of funds in an ineligible plan occurs when there is no risk of forfeiture. amounts may therefore be taxable prior to the actual payment or distribution to the participant.
  • Disadvantages:

if participant terminates before payment period, they may forfeit all of the 457(f) funds.

funds may be taxed without distribution once the funds vest or are no longer subject to substantial risk of forfeiture.

35
Q

457 plan summary

A
36
Q

Chart - 457 plan type comparison

A