Unit 24

A pension plan administrator hires an investment adviser to oversee the investment decisions of the plan. The adviser's primary responsibility is to which of the following? A) The plan B) The plan sponsor C) The pension plan administrator D) The adviser

A. The adviser's primary fiduciary responsibility is to the plan itself. By maintaining proper fiduciary responsibility to the plan, the interests of the participants of the plan are protected. U24LO5

Coverdell ESA

After tax contribution - no tax deduction -Grows tax deferred Anyone can contribute up to annual max of $2000 Contributions up to 18th birthday Earnings limitations for those making contributions Distributions before 18 and after 30 -Income taxes and 10% penalty Earnings portion of qualified distributions are tax free

Which of the following is a benefit to an employee of a business offering a safe harbor 401(k) using a non-elective formula? A) It guarantees that highly compensated employees do not get more of an employer match than non-highly compensated employees. B) The employer is required to contribute on the employee's behalf even if the employee does not contribute to the plan. C) The employees are guaranteed the ability to consult an investment adviser D) The plan is free from the top-heavy testing requirements.

B. A safe harbor 401(k) with a non-elective formula is one in which the employer must contribute a minimum of 3% of each employee's earnings, whether or not the employee participates in the plan. Furthermore, those contributions are immediately vested. As a result, these plans offer a safe harbor from being tested for being top heavy, but this is a benefit for the employer, not the employee. U24LO5

Safe Harbor Section 404c

Fiduciary duty Not responsible for investment performance as long as they provide Investment selection Independent control Communication In order to qualify the portfolio selections must include at least 3 different asset classes

ERISA prohibited transactions

Involving "parties of interest" -Borrowing money from the plan Fiduciary self dealing -Acting on both sides of a transaction involving the plan

Section 404A

Recommended but not required Investment objectives and policies Investment selection criteria Monitoring procedures and performance Determination for meeting future cash flow needs

401K plan (DC)

Reduces income tax for employees who contribute but not FICA and FUTA Top-heavy testing for key employees (not highly compensated employees) -Deductions for contributions cannot exceed 25% of total payroll Safe harbor -Avoids testing if contributing with immediate vesting, whether non-elective or matching Participants may borrow -If employee is terminated, balance must be paid back with interest or it is considered a distribution

Keogh (HR- 10)

Self employed Non-incorporated Only earned income from self employed business (not based off the employees total income)

457 Plan (DC)

State/city/county employees Certain non-profits (not churches) Can't rollover, but no 10% penalty Can max contributions plus max to 403b or 401k A governmental Section 457 plan must hold plan assets in trusts or custodial accounts

Rule 72T

Substantially Equal Periodic Payments contributions, asset transfers, or rollovers are not permitted while receiving payments.

Ineligible investments in an IRA

Tangibles Insurance Municipal bonds What is allowed: -US gold and silver coins -Investment real estate is allowed

SIMPLE Plans

100 employees or fewer employees earned $5,000 or more during the preceding calendar year. up to $13,000 with a $3,000 catch-up provision 2% nonelective employer contribution or dollar-for-dollar match up to 3% of compensation

SEP vesting

All contributions are immediately fully vested

UGMA

Assets registered to individual at age of majority

Simplified employee pension plans (SEPs) Eligibility

At least 21 years old Worked at least 3/5 past years Earned at least $600 in compensation in the current year All employees must that meet this criteria must be eligible

403(b) plans (Tax sheltered annuities)

Available for employees of 403(b) organizations (ie. public schools) and 501c3 organizations (ie. qualified nonprofits - churches/hospitals) Funded through pretax salary reductions Employer may make contributions

SEP Taxability

Contributions are tax deductible to employer

In many cases, the exceptions from the early distribution tax penalty of 10% are the same for both IRAs and qualified plans. However, a specific exception granted to those with qualified plans that is not available to IRA owners is distributions A) used for higher education expenses B) for certain medical expenses C) for a first-time home purchase D) under a QDRO

D. Only in the case of a qualified (employer sponsored) plan are distributions from a qualified domestic relations order (QDRO) exempt from the 10% early distribution penalty. The home purchase and higher education exception applies only to IRAs, and certain medical expenses qualify for the exemption under both. U24LO4

Summary Plan Description

Required by Department of Labor

Guaranteed Investment Contracts (GICs)

Alternative option to 403b's offer a guaranteed return of principal at a certain date in the future and come with a fixed rate of return not federally insured -Slightly higher investment risk

Money Purchase Pension Plan (DC)

Annual employer contribution is fixed

Qualified vs. Non-Qualified plans

Annuities are generally not part of qualified plans The corporation cannot deduct nonqualified plan contributions made on behalf of participants until paid to the participant.

Martha passed away in November 2020 at the age of 87. Among the assets in her estate was an IRA with a value of $150,000. Martha's son, Jerome, a successful 52-year-old surgeon and a client of yours, was named as the beneficiary of the IRA. From a tax standpoint, which of the following options would you recommend to Jerome? A) Jerome should use the 5-year cash-out option. B) Jerome should take the cash now and use a Section 1035 exchange into an annuity. C) Jerome should take the cash now and use the money to fund a new IRA. D) Jerome should use the 10-year cash-out option.

D. When an IRA is inherited by a nonspouse individual, there are several options available. Unless something in the question told us that Jerome is disabled, at his age, the only practical choice is to withdraw the funds over a 10-year period. After the SECURE ACT of 2019, there is no longer a 5-year option. The Section 1035 exchange right does not apply when moving funds from an IRA, and inherited money is not considered earned income for purposes of funding an IAR. ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback U24LO1

IRA premature distribution exceptions

Death Disability Qualified education expenses Medical expenses (over a limit) FIrst time purchase of primary residence ($10K) Health insurance for unemployed Equal payments for life expectancy - Rule 72(t) -5 years of 59.5 whichever is later

UTMA

Designate age for the transfer of assets Maximum of 25 years old Offer greater investment choices -Real estate

SEP IRA Funding

Employer can contribute up to 25% of employees salary per year Contributions are determined by employer and must be the same percentage for each employee as well as the employer No catch up provision

Profit sharing plan (DC)

Employer contribution may be decreased or skipped on the basis of corporate profits offer employers the greatest amount of contribution flexibility

IRA Tax Penalties

Excess contribution: 6% per year until excess is withdrawn Premature distribution: 10% Insufficient distribution: 50% -Distributions must begin April a of the year after turning 72

Requirements for Roth IRA earnings distribution

MUST be established for 5 years and one of the following -Age 59.5 -Death/disability -First time home purchase

IRA RMD

Must be taken by April 1st of the year following you turn 72

Roth IRA advantages

No RMD Contributions after 72 Minors may be named as beneficiary

UGMA/UTMA

One child - beneficial owner One custodian -Adult -Not necessarily the donor -Fiduciary Irrevocable -No limit to gift size -Withdrawn only for benefit of minor but not for basic necessities No management fee allowed when donor is custodian Names on account -Custodian -Minor's name -State where account is held Taxation -Minor's SSN

Defined Benefit Plans

Pension plans Retirement benefit is predetermined in plan based on the following: -Age -Years of service -Earnings Sponsor (employer) bears investment risk

Defined contribution plan

Plan defines how much employer contributes to account Employees bear investment risk

College Savings Plans

States set maximum contribution limits

403b Eligibility

must be made available to each full-time employee who has both reached age 21 and completed one year of service if the plan only offers employee deferrals, -then any employee, even one who started today, is eligible to participate.

Economic Growth and Tax Relief Reconciliation Act of 2001

responsible for the catch-up contribution provisions.

529 Plans

After tax contributions No age limit for contributions or withdrawals tax free distribution on earnings when used for qualified education expenses Max of $10K distributions annually No earnings limitations Non-qualified distributions subject to income taxes and 10% penalty MUCH higher contribution limits

Adjusted Gross Income

Gross income plus other income such as interest and dividends, capital gains, alimony received, and profits from a business you may own. Less: trad ira contributions, alimony, self employment taxes, and penalties paid on early withdrawal from savings account

Which of these is an advantage of using a Coverdell ESA rather than a 529 plan to fund a child's future education? A) Contributions to the Coverdell are eligible for the annual gift tax exclusion. B) The Coverdell has greater tax advantages. C) The Coverdell offers greater investment flexibility. D) The Coverdell allows for transfer of beneficiary.

C. A Coverdell ESA works similar to a self-directed IRA where stocks, bond, mutual funds, ETFs, and other investment vehicles are options. With a 529 plan, the donor is limited to whatever is available in the state plan chosen. Tax advantages might be better for the 529 plan because many states allow a portion of the contribution to be taken as a deduction or credit against state income taxes. Both allow for transfer to a new beneficiary as long as that individual is a member of the original beneficiary's family. In both cases, whatever is contributed to the program is treated as a completed gift and is eligible for the annual gift tax exclusion. U24LO6

Keogh Eligibility

Full time -employees who receive compensation for at least 1,000 hours of work per year Tenured -completed one or more years of continuous employment Adult -21 years of age and older and, just as with traditional IRAs, not in excess of 701⁄2.