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CFP Exam Prep (July 2023) > Retirement Savings and Income Planning > Flashcards

Retirement Savings and Income Planning Flashcards

1
Q

Capital Preservation Approach

A

Additional capital needed on day 1 of retirement to leave same account balance at death as capital utilization approach requires:
N - Years of expected retirement
I/Y- Nominal rate of Return
PMT - 0
FV - Capital utilization amount
Solve for PV

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2
Q

Defined Contributions Plans

A

A qualified plan which the sponsor defines the contribtuition formula rather than a guarunteed final benefit

Can be either a profit sharing plan or a DC pension plan

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3
Q

Defined Contribution plans (name them)

A

Profit sharing plans:
Traditional profit sharing plan
Section 401(k) plans
Stock bonus plans
employee stock ownership plans

DC Pension Plans:
Money purchase pension plan
Target Benefit pension plans

Pension plans can be either DC or DB depending on the plan

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4
Q

Defined Contribution annual limits include…

A

Employer Contributions
Employee Contributions
Reallocated forfeitures (only if allocated to individuals accounts, not if used to pay management fees

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5
Q

Features common to ALL defined contribution plans

A

Participant Directed accounts
combined EE/ER contributions up to $66k
Maximum compensation in benefits formula $330k
Participant bears investment risk
No guaranteed final benefit amount
Vesting must be at least 3 year cliff or 2-6 year graded or better
Maximum deductible employer contribution is 25%
Tends to favor younger employees
Easy for participants to understand
NO PBGC insurance

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6
Q

Additional features of Traditional Profit Sharing Plans

A

Flexible year to year employer contributions
No Required yearly contributions, must contribute 3 of last 5 years and they must be” substantial and recurring”
100% employer funded
May invest 100% in employer stock
Not subject to QJSA
Contributions can be made from retained earnings and cash flow, not just profits
Typically allow hardship withdrawals and loans
Age-weighted traditional plan can skew to older participants

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7
Q

Additional Features of Section 401(k) plan

A

Elective deferral lesser of 100% of compensation or $22,500 (+$7,500 catch up for and 50 and above)
Not required to make annual contributions but usually have some type of matching program
offer loans and hardship withdrawals
can have employer contributions be 100% employer stock
participants must be given a minimum of 3 diversification alternatives for elective deferrals
Maximum contribution is aggregated from all jobs
Employee contributions subject to ADP testing
Employer contributions subject to ACP testing

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8
Q

Additional features of Money Purchase Pension Plan

A

Mandatory annual employer contributions
100% employer funded
Defines the employer’s contribution usually as a % of employee’s compensation
May invest no more than 10% in employer stock
typically no in-service withdrawals until age 62
Subject to QJSA

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9
Q

Additional features of Target Benefit Pension plan

A

Requires mandatory annual employer contributions
100% employer funded
Actuary determines contribution based on age and target benefits
Skews contributions in favor of older participants
Actuary only used for initial year
benefits are not guaranteed
No more then 10% in employer stock

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10
Q

Types of Defined Benefit Plans

A

Traditional DB Plan- guarantees the final monthly pension amount

Cash balance Pension Plans- Guarantees a specific cash balance at the plans stated normal retirement age

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11
Q

Features of ALL Defined Benefit Plans

A

Guarantees final benefit
Maximum annual pension is $265,000
Maximum compensation considered in formula is $330,000
5 Year cliff of 3-7 years graded vesting or better
Must have joint ad survivor payout unless waived
No Participant directed accounts- sponsor bears investment risks
No predetermined maximum deductible employer contribution
Annual actuarial work required
Must Satisfy 50/40 rule

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12
Q

Additional Features of a traditional defined benefit pension plan

A

Guarantees a monthly pension
older, higher-earners can have substantial funding on their behalf
Common formula is percentage of pay times number of years of service
No Individual accounts
Accruing a benefit of any amount is “active participant” status for IRA deduction purposes

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13
Q

Additional Features of a cash balance plan

A

Hypothetical participant accounts for record keeping but not participant directed account
Each year participant accruses a plan contribution on a “pay credit” plus an “interest rate credit”
Provideds uniform benefit accrual for all employees
can convert cash balance to a lifetime pension
Considered the easier of DB plans for people to understand

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14
Q

403(b) plans

A

Used by tax exempt organization and public schools
pretax contributions and tax deferred growth
limited investment choices, mutual funds and annuities
2 catch up provisions both at age 50+:
1) additional $7,500
2) if 15+ years of service with the sponsoring organization, an additional $3,000 catch up contribution can also be made
Totaling the annual contribution limit to $33,000

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15
Q

457(b) plans

A

Used by government and certain non-profits
pretax contributions and deferred tax growth
no 10% withdrawal penalty before 59 1/2
not considered an active participant for IRA deduction purposes
contributions not aggregated with other retirement savings programs
age 50+ catch up- $7,500
During last 3 years of service special catch up: recapture unused deferral from past years to twice normal annual limit ($45,000)
Both catch ups can not be used at the same time

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16
Q

Self Employment Tax

A

Consists of social Security and Medicare taxes
Goes on schedule SE of form 1040
15.3% total
12.4% for social security, up to $160,200
2.9% for medicare on all earnings

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17
Q

IRS Schedule 1 and SE tax

A

1/2 of SE tax is an adjustment to income deduction on IRS schedule 1 in calculating AGI
1/2 of SE is subtracted from net earnings in calculation of maximum contributions to retirement plan

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18
Q

Calculating SE Tax

A

Net Earnings*.9235= SE earnings
SE earnings *.153 (if SE is less then 160,200)
(SE earnings * .0290)+(160,200 * .124) = if SE earnings are over 160,200

Shortcut- if net earnings are below 160,200 do:
Net Earnings * .1413

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19
Q

Maximum Retirement contributions for Self Employed

A

1) Subtract 1/2 SE tax from net earnings
2) Employer contribution % / (1+employer contribution %)
Multiply the answer from step1 b the answer in step 2

Shortcut if employer %= 25%
take net earnings * .1859

This calculation does not apply to other employees, only the self employed owner

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20
Q

Employer Sponsored Retirement plans: Simplified Employee Pension (SEP)

A

Easy to set up
1 or more employee
No annual required contribution from employer
up to 25% of covered compensation up to $66,000
Contributions on a year to year basis
100% vested contribution immediately
Must offer to all employees 21 and over that have been there for 3 out of the last 5 years and earned $750 this year
Withdrawals permitted, taxes and early withdrawals penalties apply
No Loans

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21
Q

Employer sponsored retirement plans: Simple IRA

A

Salary Reduction plan with little administrative paperwork
100 employee or less (and no other plans being offered)
Employee salary reduction and Employer contributions
Employee may contribute $15,500 (and $3,500 catch up)
Employer must either match 100% for the first 3% (can go as low as 1% for 2 of the past 5 years) of compensation or 2% of eligible compensation
Must be offered to all employees earning $5,000 in the last 2 years
Normal taxes plus a 25% penalty if taken out in the first 2 years
all contributions are 100% vested immediately

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22
Q

IRA Contribution Deduction Rules

A

Single- Active member 83,000 and up not deductible
73,000 and down fully deductible
Not active- fully deductible
MFJ- Neither member active- fully deductible
Client is active- 136,000 and up not deductible
116,000 and down fully deductible
Not active but spouse is- 228,000 and up not deductible
218,000 and down fully deductible

457 plans are not active plans
SEP, Simple, 403(b) and TSA are all active plans

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23
Q

IRA and Employer sponsored plans: Traditional Rollover

A

Only 1 traditional rollover is allowed per year
plan administrator transfers vested account balance or portion of it to the participant.
within 60 days the participant must deposit the funds in an IRA or new employer plan
20% of balance is withheld for federal income tax. If that 20% is not replaced in new account then with-holdings is taxed and subject to 10% penalty

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24
Q

IRA and Employer Sponsored Retirement Rollovers: Direct Transfer Rollovers

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

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25
Q

Traditional 401(k) rollover to Roth IRA

A

Must first transfer to a traditional IRA then from that to a Roth IRA
Can not DIRECTLY transfer from a Traditional 401(k) to a Roth IRA

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26
Q

Inherited Retirement Accounts:
Spouse

A

Has choice of being treated as the IRA owner or as the beneficiary
If chooses to be the owner they defer RMDs until age 73
May combine their own IRA and inherited IRA

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27
Q

Inherited Retirement Account: NonSpouse Beneficiaries

A

10-Year rule applies
If account was already in RMD status at the time of death, the beneficiary must make annual RMDs in years 1-9 and have drained the account by the end of year 10

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28
Q

Inherited Retirement Accounts: Eligible Designated Beneficiaries

A

Spouse
Chronically ill beneficiaries
Minor Child (under 21)
Beneficiaries NOT more than 10 years younger (but must be younger) than the IRA owner

29
Q

Inherited Retirement Accounts: Roth IRA

A

No RMDs during the life of the owner
If the spouse is the beneficiary and becomes owner then they forego RMDs for their lifetime as well
Non-spouse beneficiaries are subject to RMDs

30
Q

Exceptions for Early Withdrawal Penalty: Qualified plans (NOT IRAs or IRA funded employer plans)

A

Yes- Medical Expenses, after the death of the owner, total or permanent disability, a series of substantially equal payments (72(t)), and separation from service in the year you turn 55 or after
NO- qualified higher education expenses, health insurance premium paid while unemployed, qualified first time home buyer, up to $10,000 lifetime

31
Q

Exceptions for Early Withdrawal Penalty: Traditional IRA and IRA funded Employer Plans

A

Yes- Medical Expenses, after the death of the owner, total or permanent disability, a series of substantially equal payments (72(t)), qualified higher education expenses, health insurance premium paid while unemployed, qualified first time home buyer, and up to $10,000 lifetime
NO- Separation from service in the year you turn 55 or after

32
Q

Roth IRA qualified distribution Requirements

A

Must be after the 5 year period beginning with the first taxable year for which an individual made a Roth IRA contribution

AND 1 OF THE FOLLOWING
-the account owners death
-the account owner being disabled
-First time home purchase $10,000 max
-Made after the individual attains 59 1/2

33
Q

Roth IRA: Non-qualified Distributions taxes and penalties

A

Accounts earners are subject to regular income tax and 10% penalty
Roth conversion contributions- No regular income tax, distribution within 5 years of conversion maybe subjected to 10% penalty
Regular contributions- no regular income tax and no penalties

34
Q

Nonqualified Deferred Compensation

A

Also called top hat plans, excess benefit plans and supplemental executive retirement plans (SERPs)

35
Q

Rabbi Trust

A

Funds are not available to corporations for purposes other than non-qualified deferred compensation
Funds are safe guarded in event of merger/acquisitions
Is accessible to corporate creditors in the event of company insolvency (this makes it so it is not recognized compensation)

36
Q

Qualified Plans: Tax advantaged plans

A

Currently deductible employer plan contributions and benefits not currently taxable to the employee/participant

37
Q

Non-Qualified Section 162 Bonus plans

A

Currently Deductible employer plan contributions
and
Employer can limit participation to select individuals (pick and choose)

38
Q

Non-Qualified Deferred Compensation Plans

A

Benefits not currently taxable to employee/participant
and
Employer can limit participation to select individuals (pick and choose)

39
Q

Non-Qualified Stock options (NQSOs) Tax Consequences

A

The right to purchase stock at a set price
grant- awarding the option to purchase stock (No taxes)
Exercise- buying the stock (the difference between FMV and strike price is taxed as ordinary income)
Sale- selling the stock (Difference between FMV at exercise and sale is taxed as capital gain

40
Q

Incentive Stock Options

A

Grant- Set option to buy and the strike price
Exercise- Stock is purchased at strike price
FMV Sale- Selling the stock at a future date for FMV
Sale must be 2 years after grant and 1 year after exercise to have qualifying disposition
If QD you pay long term capital gains on difference from strike price to FMV sale
AMT may apply at exercise step

41
Q

Incentive stock options taxation of Disqualified disposition

A

Difference between strike price and FMV (bargain element) is not taxed as capital gains
if bought and sold in the same year; bargain element is taxed as ordinary income ad FICA taxes apply. Employer will receive a deduction on their taxes
If bought and sold in 1 year but no the same year; bargain element is taxed as ordinary income; no FICA tax, employer does not receive a deduction

42
Q

Social Security: Earning Credits and Fully Insured

A

You earn 1 credit $1,640 earned in a tax year with a maximum of 4 credits earned per year ($6,560)
40 credits means you are fully insured

43
Q

Social Security Funding

A

7.65% from ER and EE (15.3%) on earned income up to $160,200 (Social Security and Medicare)
1.45% on unlimited earnings (just medicare)
6.2% from ER and EE are social security tax (up to the $160,200 limit)

44
Q

Social Security Disability Benefits

A

Adults 18 or older who are unable to work due to a physical or mental disability expected to last at least 12 months or result in death

45
Q

Average Index Monthly Earnings

A

Based on 35 best years of social security earnings
Adjusted (indexed) each years earnings to present day dollars
Calculates average monthly earning in current dollars

46
Q

Primary Insurance Amount (PIA)

A

The Monthly retirement benefit at full retirement age (FRA)

47
Q

PIA Benefit Formula

A

90% of the first $1,115
32% of the next $5,606
15% for everything in excess of $6,721 (1,115+5,606)

48
Q

Social Security: Important ages

A

62 Earliest retirement age
67 full retirement age
70 Maximum benefits

49
Q

Social Security: Early/Delayed Benefit calculation

A

67=FRA
Between 64-67 5/9% reduction for each month early (total 20%)
Between 62-64- 5/12% reduction for each month early (total 10%)
Between 67-70- 2/3% increase for each month delayed (total 24%)

50
Q

Social Security, Claiming early and income limits

A

62 until the year in which you turn 67- $1 of benefit is withheld for every $2 you make over $21,240
In the year you reach FRA $1 of benefit is withheld for every $3 you earn over $56,520
In the year you begin claiming it is 1/12 the income limit for each month claiming and working

51
Q

Taxation of Social Security Benefits

A

1/2 SS Benefits + tax exempt income + AGI = Provisional income

MFJ- 0 taxable under 32k
50% taxable between 32-44k
85% taxable over 44k

Single- 0 taxable under 25k
50% taxable between 25-34k
85% taxable over 34k

MFS- Always taxed at 85%

52
Q

Spousal Social Security Benefits

A

Current spouse- worker must already be receiving benefits
must have been married for at least 1 year
Must still be Married

Former Spouse- Worker must be at least 62
Must have been married for at least 10 years
Must have been divorced for at least 2 years

53
Q

Spousal Social Security Benefits and Maximum Family Benefit Rules

A

Current Spouse benefits are included in maximum family benefit rules
former spouse’s benefits are not included in maximum family benefit rules

54
Q

Spousal Social Security Benefits and early/Delayed claims

A

Claiming before full retirement age has a reduction of 8.33% per year for the first 3 years and 5% per year for the 2 before that
No delayed retirement benefit credits past FRA

55
Q

Spousal Social Security Maximum Benefits

A

Maximum at 50% of the workers benefits at FRA

56
Q

Overview of Medicare part

A

Part A- Hospital
Part B- Medical (non-hospital)
Part C- Medicare Advantage
Part D- Prescription Drug Coverage

57
Q

Medicare Tax

A

1.45% from both ER and EE and all earnings
additional 0.9% above:
250,000 MFJ
125,000 MFS
200,000 all other filers

58
Q

Income Related Monthly Adjustment Amount (IRMAA)

A

Higher income beneficiaries under Part B and D may pay additional premium if medicare specific MAGI exceeds threshold

AGI + Tax exempt income = Medicare specific MAGI

59
Q

Medicare Part A

A

Generally no premium
Qualify if you are 65 or older and have paid into it for at least 10 years
Hospitalization- 1-60 days- flat deduction
61-90- must pay a daily co-pay
over 90 days uses the lifetime reserve days up to 90 additional days (pays a higher co-pay)
Beyond 180 days is paid entirely by the individual

60
Q

Calculating RMDs

A

FMV of combined accounts as of December 31 the previous year divided by the age factor

61
Q

RMD Penalty

A

25% penalty on the undistributed amount

62
Q

RMDs from Multiple Accounts

A

IRAs- May distribute total RMD amount from 1 account

401(k)s- Each accounts RMD must be calculated and distributed seperatly

63
Q

Deadline for First RMD

A

IRA- April 1st following the year of attainment of age 73, even if still employed

401 (k)- the later of April 1st following the year of attainment of age 73 or the year of actual retirement age
(working exemption does not apply if you are 5% or more owner in the company you work for)
Working deferral only applies to the current employers plan

64
Q

Qualified Charitable Distributions (QCD)

A

A non-taxable distribution from an IRA directly to an eligible charitable organization

65
Q

Qualifications for a Qualifies Charitable Distribution

A

Tax payer is at least 70 1/2 on the day of distribution
transfer must be through a direct transfer rollover
annual maximum $100,000 to one of more charities per person

66
Q

Advantages of Qualified Charitable Distributions

A

Satisfies RMD requirements if needed
Is not included in AGI effecting Medicare premiums, surtaxes, sate tax etc.

67
Q

Net Unrealized Appreciation (NUA)

A

Applies only to employer stock in a qualified plan
typically entire amount employer contributed and earned would be taxed as ordinary income
Instead employer basis is taxed as ordinary income and appreciation is taxed at capital gains tax rate

68
Q

Qualified Domestic Relations Order (QDRO)

A

A judgement decree or order for a qualified retirement plan to pay child support, alimony or marital property rights to an alternative person

69
Q

Individual Receiving QDRO payments

A

Can roll it into another IRA or Qualified Plan
If not put in a qualified plan you pay tax on it
Not subject to early withdrawal penalty
If distributed to a minor then the plan participant pays the tax

CFP Exam Prep (July 2023) (6 decks)

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