Employee Benefits Test 1

Class Notes: WRR is 80% for most people, but 75% for the wealthy because they have more disposible income to save. What does this formula look like?

(Gross income- savings) X 0.75

Book Notes: Retirement Needs Analysis: Capital Preservation Method (LOOK UP CALCULATIONS)

Annuity Methods Assumes exhausting all assets at the point of life expectancy, presuming that all assumtions occur as expected. Due to the nature of the assumtions of this model, a person who lives beyond their assumed life expectantcy will be in trouble. Capital Needs Preservation Method provides a cushion in the event that someone lives beyond their life expectancy by using assuming that at the client's life expectancy they client has exactly the same account balance as they did at beginning of retirement.

Book Notes: Savings and Investment Issues

- 3 Factors that the amount of personal savings depend on: savings amount and rate, timing of the savings and the period over which the savings grows, and investment returns earned on the savings. 1. Savings Rate: Identifies the average savings amount in the US. Savings rate is thought of as being a % of disposible income. Since the 70's, its declined signficantly. Concerning becuase a savings rate of 10-13% is required over a long time peirod to be adaquete. 2. Timing of savings: The number of years over which savings can earn investment returns and grow. More compouding savings to grow results in less total savings needed over the WLE (thats why its not good to not start saving when you're young; you're missing out on compouding periods and will actually have to keep on taking out part of your income to save for longer; compouding savings could potentially save you some of this burden). 3. Investment returns:

Book Notes/class: Reduction of deduction to a traditional IRA because of phase-out: - Fred K is single, age 38 and an active participant in his employer's qualified retirment plan. His AGI is 65,000 and he makes the maxium contrbtionn to his tradional IRA. Whats his deduction gonna be reduced by? - Fred is over the age of 50. - Robbie E, age 32, and his wife Mandy Rose are married and are active participants in qualified plans. They file a joint return and have AGI of 107,000. They both make maximum contiribtion to their respeive trational IRAS - Kanye and Kim are married and file jointly. Kim is a film star who earns 130,000 per year and is an active participant in her company's qualified plan. She also has portfolio income of 15,000 per year. Kanye is unemployed and drinks all day. Can Kanye make a contirbution to a tradtional IRA?

- 6,000 X 65,000-64,000/10,000=$600. Therefore, his max deduction is $5,400. - 7,000 X 65,000-64,000/10,000=700. Can only deduct 6,300 - 6,000 X 107,000-103,000/20,000= 1,200. Thus each can deduct only 4,800 - Yes, because together they have suffient earned income, and its deductible for him because their joint AGI is less than 193,000. (remeber if one spouse in married filing joint is qualifed and other isnt, the one that is not has the 193-203 limit) Therefore, he can make the maximum contribtuion to his IRA. Kim can make a conribtion but not deduct it (since she's the spouse that is active, she has to use the 103-123 limit...and their AGI is higher than this).

Active participant examples

- Bob'a employer sponsors a money purchase pension plan with a contribution level of 7% of compensation. Bob meets the elidbiligty requirements. Therefore, he is an active particiapnt - Joe is a participant of his company's profit sharing plan. However, the company had a bad year and did not make a contirbution to the profit sharing plan, and no employees termainated employment with non-vested benefits during the current year. Joe is not an active participant in the plan because he did not recieve any employer contribution or forfiture allocation. - Dana is employed with King Co where she is elidgible to defer up to 80% of her salary into 401K. She does not defer anyhting to it, nor does she recieve a forfiture allocation. However, she does recieve a small contribtion from the employer in the form of a qualified nonelective contribtuion. She is an active partitipant. - Aaron and Stacey are married and file jointly. Their joint AGI in 2019 is 165,000. She is a dentist who earns 120,000 per year and defers the maximum to her 401K. Aaron is a personal trainer earning 45,000 per year. He files a schedule C with his federal income tax return. She is an active participant, but he is not. Because their joint AGI is less than193,00 he could make a fully deductible contribiton. Stacey could make a non-deducible IRA contribtion or contribtion to a ROTH.

Class Notes: Factors Affecting Where They Choose to Relocate to (6)

- Climate - Cost of living - Acess to medical care - Medicare - Activites there - Employment options

Class notes: Planning their retirement income

- Look at their retirement account and their tax bracket (ex. account with 1 million at 30% rate will in effect only have 700,000) - Most will need around 85% of their present income in their reitrement (and make sure that the 85% covers ALL expenses, debt, long-term care and so forth included). -

Examples of qualified distributions from ROTH

- On July 5th 2019, Justin Hall established a Roth for 2019 with a 1,200 contribtuion. Since this was his frist contribution, his 5 year period begins on January 1st 2019. - On Feb 16 2020 Fred Kruger made an intial contribution of 900 to a Roth. She made the contribtuion for the 2019 tax year (Because remeber you can make contribtuion for a year until April 1st of following year). Her five year period begins on Jan 1st 2019 because the contribtuion was for the 2019 tax year. - Collin Ray decides that he wants a sailboat as a present for his 60th birthday. He decides to liquidate his Roth to make the purchase. His first contribution was in 2001. Since he established the IRA more than 5 years before distribution and he is over the age of 59.5, its a qualified distribution and not subject to income tax or penealty. - Mitchell first contributed to a Roth 3 years ago. He converted a tradtional IRA to his Roth He was killed by a garbage truck. His son inherits his Roth. Despite the 2nd requirement being met, his son needs to wait another 2 years.

Book Notes: Sources of Retirement Income

- SS: Most middle and high wage earners do not heavily depend on SS. - Employer-sponsored plans: May be defined contribution or defined benefit plan. For these plans, employees save part of their compensation on a pre-tax basis over many years. - Personal Assets and Savings: A little more difficult because taxes may not be deferred like with an employer-spponsored plan, and even plans that are (like Roths) have a limit to how much can go in them.

Book notes: What is the main role that retirement planning and employee benefits has on professionals and institutions?

- There are professionals who provide advice about retirement planning and benefit plans, and there are also insitutions who manage investments in such plans, administer plans, and comunicate plan info to partipants. Within these insitutions, financial planners and advisors assist individauls and small business owners, as well as other roles. Examples of these instituions include banks, insurance companines, and mutal fund companines.

Book/Class Notes: Phase-out on contribution amounts (LOOK UP IN BOOK)

- Tradtional: Does not apply - Roth - Single: 122-137,000 MFJ: 193,000-203,000 MFS: 0-10,000

Book notes: How has the funding of retirement benefits changed over the last 30 years?

Years ago, employers typically provide a pension plan that would continue for the life of the retiree. These were almost entirely funded by employers. Now, plans are usally funded by the employee and they take on more of the investment risk instead of the employer. - The employer must communicate to the employee about the opporunity to participate in, the employee must play an acctive role in choosing and evaluating these plans.

Book Notes: INCOMPLETE Retirement needs analysis: Annuity, Four Step Method Example: Chucky, age 42 earns 70,000 per year. His wage replacement ratio is 80%. He expects that inflaiton will average 3% for his entire life expectantcy. He expects to earn 9.5% on hisinvestmetns and retire at age 62, possibly living to 90. His SS in today's dollars will be 15,000. - Calaculate his capital needed at 62 and the amount he must save at the end of each year, assuming he has no current savings accumulated.

1. Determine the funding amount in today's dollars: 70,000 X WRR (80%)= 56,000 - SS in today's dollars (15,000)=41,000 needed per year in today's dollars. 2. Inflate the needs from step 1 to the begining of retirment: N=20 years; I=3%; PV=41,000 (reirement needs in today's dollars); PMT=0; FV=74,050.56 first year needs for retirment. 3. Determine funding needs at retriement age: N=28 (90-62 retirement life expectnacy); i=3; pv=41,000; pmt=0; fv=74,050,56;

Book Notes: 4 main types of qualified assets?

1. Pension plans 2. Profit sharing plans - Can be further divided into defined benefit or defined contribtuion.

Book Notes: What 3 things mean that a person is sufficiently prepared for retirement?

1. sufficient assets accumulated 2. An appropriate investment plan 3. A plan for taking distributions from savings

Class Notes: Rule of 72 and inflation? How long until your money has half the purchasing power it once had if inflaiton is at 3%?

72/3= 24. 24 years till your money has half the purchasing power it does today , in any given amount.

Class Notes: Estate Plan....should you nail it down?

Yes. You can always change it later.

Book Notes/class notes: Defining an "active participant;" What type of plans (6)

An employee who has benefited under one of the following plans through a contirbution or an accrued benefit: - Qualified plan (defined benefit and defined contirbution): for defined benefit, an individual who is not excluded under elidbility provisions is considerd to be an active participant, regardless of whether such individual has elected to decline in participating, has failed to make mandntory contribution to plan, or has failed to perform the minimum service required to accrue a benefit under the plan. Ex. When an individual completes an addtional year of service in a defined benefit plan that calculates the benefit based on years of service, then the participant has accrued addtional benefits for that year." An individual is an active participant in a money purchase pension plan or target benefit pension plan if their employer is required to make a contribution on behalf of that employee. Since these plans must comply with mandatory funding requirements, most employees who are elidgible for such plans and are coverd will be active paticipants. Becuase contributions to profit sharing plan are discresionary from employer, determination of whether or not active participant is dependent on whether or not recieved contribution for that year (remember contirbution can come from employer, employee, or from plan forfiture allocation**; any of these contributions will cause an individualto be classified as an active participant for the year which the contribution was made; considered active participant even if contributions to the account are completely foretiable (in other words, even if the employee is not vested in any benefit, he will still be considerd an active pariticpant if he recieves a contirbution to his account for the current year). Employee who makes an employee defferral contribution to a plan, such as 401 K, is considers an active participant for the year (but just because they are elidgible to defer a portion of his salary into a 401 K does not make them an active particpant. **plan forfeire=part of employee's plan that was not vested at the time of termination. - annuity plan - tax sheltere annuity (403b plan) - certain government plnas - simplified employee pension plans (SEPs) - simple retirement accounts

IRA Annuity vs regualr IRA

A little different because its an insruance contract. But has to meet similar requirments: cannot be tranferred by owner and the benefits cannot be forfeitable (proceeds must be recived by owner or by a beneficary of the contract; cannot be pledged as collateral and loans cannot result from it), premiums cannot be fixed, still required minimumm distibution of of april 1st of year following attaining age 70.5 and 10% penalty for those taken above 59.5,

Class Notes: Should you make SS the basis of retirement?

Absolutely not! SS's future is uncertain. It should be, at most, thought as somehting like spending money, covering vacations and so forth.

ABLE accounts

Achieving a better life accounts. Designd to help people with disabilites and their families save and pay for disability-related expenses. Contribtions aren't deductible, but distributions, including earnings, are tax-free to the designated beneficary if used to pay qualfied disability expenses (housing, education, transportation, health, etc)

Book Notes: Pension and profit-sharing plans can be further divided unto defined benefit and defined contribution......

All defined benefit plans are pension plans, but defined contribution plans can be pension or profit-sharing. - Defined contirbution: a qualified plan that provides its participants with either a contributory or noncontirbutory retirment account, which benefits from tax growth for contribtuions and earnings in the account. - Defined benefit: A qualified retirment plan that provides its participants with pre-determined calculated benefits at retirement. Any plan which is not a defined contirbution plan.

Book NOTES: Techniques for an advisor to take into account the probablistic nature of variables like earnings, inflaiton, etc. Range Estimates

Allow the advisor the project the outcomes using a range of assumptions (ex. 2.5-3.5% inflaiton) as opposed to a single mean expectation (ex. 3% inflaiton). Range estimate uses produces multiple outcomes that allow us to gain insight into the change of one variable or changes in a set of variables. Range estimates are usally conducted around the mean estimate, a little lower and higer.

What is ERISA? Who is it enforced by? How did it originate? Who does it put the onus of coming up with plans on?

An act in 1974. It gets amended frequently (almost as frequently as income tax). - Enforced by Department of Labor? - It originated because of abuses in the pension system where employers would screw an employee over right before they retired - The employer

Book Notes: Advantage of Qualified Plan; Income Tax Decution and Deferral on contributions

An employer may deduct up to 25% of the total contribution to a qualified plan. The contirbution will not be taxable for the employee unitl its eventually disbursed from the plan, in which case it will be taxed at their oridnary rate. This creates a government incentive for employers to establish and fund reitrement accounts for employees. Defferred taxation encourages society as a whole to accumulate retirement assets. - Ex. Starlabs employs 15 technicans each earning 40,000 per year. That year they contributed 20% of employee compensation to a profit-sharing plan. This ends up being a dedcuible expense of ([15,000 X 40,000] X 20%] for Star Labs. Neither Star labs nor their technicans will have any current taxable income related to this contribution, but they will be subject to income tax at time of distirbution. Neither will ever be subject ot payroll tax. - Note: Deferring taxes might not always be a good things in situtations like now where income taxes are low...not as advantageous to defer in a low tax era.

Book Notes: Excess contribtions

Applies to both traditonal and Roth IRA's: Contributions that exceed the 6,000 limit are subject to an excise tax penealty of 6%. This penealty is charged each year that the excess contributions remain in the IRA. The taxpayer can avoid the excise penealty on excess contributions by withdrawing the excess contribution and the earnings attrbitutable to the excess contribution by the due date of the federal income tax return (April 14th). - Ex. In 2019 Sara contributed 6,500 to her IRA. She made an excess contribtion of 500 that will be subject to a 6% penealty is she does not withdraw it and any related earnings by April 15th 2020 (or October 15th if extended)

Converting traditional to Roth IRA

Both qualified account balances and traditional IRAs can be converted to a Roth IRA. Whenever you convert, its a taxable event, so better have outside funds to pay for it that year (and cant pay with what you're converting)

10% penealty and its expections for early withdraws

By allowing deducitons for traditonal IRA contributions and by allowing balances in IRAs, both tradtional and roth, to grow on tax-deferred basis, the government forfeits current income to enocruage retirement savings. Encoruages to leave funds in until retirment by imposing a 10% penealty on taxable distirituons made prior to 59.5. Therefore, traditonal and IRA distributions before then will genrally be subject to this penalty unless specfic expemption applies. Exc[etions: - Both qualified and IRA's: death, attainment of 59.5, disability, substianoally equal periodic payments, medical epxenses that exceed 10% of AGI, Rollover, IRS levy, certain distirbutions for qualified militart resevist who are recalled to active duty. - Just IRA: higher education expenses(elidgible post secondary insstuions for benefit of taxpayer, spouse, child, grandchild for tution, fees, books, supplies, and room and board if at least half time) first time home purchase (up to 10,000 as a lifetime maximum for a home for taxpayer, spouse, child, grandchild, or ancesor of they or their spouse. First time home buyer is someone (and if marreid their spouse) who has no present ownership interest in a principal residence during teh 2 years ending on the date of aquisiton of residence they're trying to apply exception to), and health insurance premiumsif unemployed.

Roth IRA's

Created by Tax Relief Act of 97. - Contributions are not dedutcible, qualified distributions consist are tax free. - Can be funded after owner reaches 70.5 and are not subject to required minimum distribution during the life of the orginal account owner (but does apply to beneficaries) - Contributions are limited to phase-out limits (see previous slides) - Same contribution limits still apply, and this limit is an aggregte limit that applies to both types of IRAs, as far as lesser of 6,000 or earned income

Investments with IRA

Cash, stock, bond, etc are of course included. Prohibited items include life insruane and collectibles (art, rug or antique, metal or gem, stamp or coin, alhoolic beverage, etc). If life insruance or collectible item is purhcased, value of the purchase is treated as a distribution fro the IRA accountn and is subject to tax and/or penealty. - Exception to collectibles: US minted gold, platinum, and silver coins; gold, silver, and pltirum itslef. NOT foregin coins.

Book/Class Notes: Timing of Contributions to IRA

Contributions can be made up until April 15th of the following year - In a tradtional IRA, once you've reached 70.5, no more contribtuions. Can contiue to make contributions if have a ROTH.

Book Notes: Advantage of Qualified Plan; Government protection of assets from creditors and sponsor/employer

ERISA provides an anti-alienation protection that prohibits any action that may cause the plan to be assigned, garnished, levied, or subject to bankrupcy proceedings while the assets remain in that plan. - Ex. Steve has 1,000,000 in qualifed plan. His Cleaner's fails and he files for bankrupcy. At the time the bankrupcy was filed, he had assets worth 250,000 and debts totalling 650,000. His 250,000 will be gone but the 1,000,000 will be left alone - OJ hasn't paid much to the Brown family because most of his assets are in retirment plan. - Once distributed, distributed assets are no longer protected by ERISA. ALso, qualified retirement plans are not safe from divorice, property settlement, or child support. ALSO ERISA prevents employers from discriminating against employee based on benefits payable under the plan, from substaitonally altering plan document with approritate approval and notice, and from managing the plan in such a way thats not in the best interest of employees.

Book Notes: ERISA

Employee Retirement Income Security Act tightend the qualifications for employer's plans. It gave the government authority to perscribe a uniform meaning for plan rules and legislated minimm standards for participating, investing the accural of benefits, and funding. Provides protection for employee's retriement assets, both from creditors and plan sponsors. It also ensures the right to recieve their dedicated benefits.

Book Notes: What does returement truly mean?

Financial security....achieving financial indepence (can maintain their desired lifestyle without emploment income). Retirement planning and employee benefits both work towards this goal.

Distributions from Traditional IRA

Generally income from traditonal IRA's is taxed as ordinary income; - excpetion is distributions from a combination of tax-deferred earnings and the return of adjusted basis that results from either non-deducitble IRA contributions or rollovers of contributions from qualified plan balances that included after-tax contributions. In such cases, each distribtuion will consist of a combination of adjsuted basis and ordinary income. The ratio of AB is equal to the ratio of the total AB os the account before the withdrawl to the fair market value of total account balance. Ratio of AB= AB before withdrawl/FMV of account at withdrawl. - Ex. And has a traditonal IRA with an account balance of 100,000. Over the years, he made after-tax contributions of 25,000 and the remaining 75,000 is attributable to pretax contirbutons and earnings. Therefore, andy has an adjusted basis of 25,000. When he begins recieivng distributions, the distribution will be partially a return of basis and partially ordinary income. The ratio is calculated by dividing the AB over the fair market value (25,000/100,000=0.25) Thus, if andy took a 10,000 distribution, then 2,500 would be a return of basis and 7,500 would be ordinary income.

Class Notes: Retirement Budgets...why is it important?

Gotta know exactly where your savings are coming from and going. - Gotta conserve your money - Expenses that decrease in retiremnt: work expenses (gas, clothes, parking), reduction in car insurance, might get a chepaer health insurance policy with less coverage, property tax decrease (some states defer property tax until you pass and the property is sold), in some cases income taxes,

Book NOTES: Managing Retirement Distributions (Annuities, 4% approach, money for life approach)

How much retirees can spend in the name of avoiding superannuation is a big concern, espeically since pension plans are practically a thing of the past. Accroding to book, annuites can help relieve some of this worry. The downside is, funds used to purchase annuites cant be used for anyhting else, and if someone doesnt make it to retirment but pays for annuites anyways, this is money they cant leave their heirs. Two others solutions can help avoid superannuation: 1. 4% approach: Limit withdrawls from the capital accumulation to 4% per year 2. Money for life apporach: Divide cpaital into unequal tranches with each tranche representing five years fo retirement. Invest the funds for each tranche in varying asset classes epected to produce inflation injustd returns of about 5-6% per year.

Book Notes/class notes: IRA's; Are they qualified? Three types? Deducitbility of contributions?

IRA's are NOT qualified plans. It does have tax advantages, however. - The amount that someone can contribute to an IRA on a tax deferred basis is 6,000 per person per year. Addtionally, indivdiuals who are age 50 or older before end of current taxable year are also eldigible for make-up contributions of 1,000 (effecitvely making their contribution limit 7,000) - Law requires IRAS to be held be some custodian (bank, brokerage firm, etc) 1. Traditonal: dedutible and nondeductble contrbutions can be made 2. Roth: only nondedutible contrbtions can be made. 3.SEP: employer sponsored IRA. COntribtuion limits much greater than regular IRA?

ERISA vs Bankruptcy Abuse and Consumer protection Act

IRA's not covered by ERISA, but they are covered, perhaps not as strongly though, by Bankrupcy Abuse and COnsumer Protection Act.

Book Notes/class notes: If someone is an active participant of a qualified plan, there is phase out for how much of an IRA contribion to a trational IRA they can deduct based on their status and AGI.

If the taxpayer's AGI is greater than the upper limit of the phaseout, no deduction for tradional IRA contirbutions is permitted. If less than the lwoer limit of the phaseout, then a full deduciton is permitted. If between the limits, the deduciton is phased out. - MArried filing seperately are phased out between an AGI of 0-10,000. - One spouse is an active partiicpantbut the other is not: 193,000-203,000 FOR sSPOUSE WHO IS NOT AN ACTIVE PARTICIPANT - Married filing joint (BOTH ACTIVE PARTICIPANTS): 103,000-123,000. 193,000-203,000 (completely phased out at or above 203,000) - Single: 64,000-74,000 - The phase-out calculaiton: Reduction of deduction= Contriibtion limit X AGI- lower limit/10,0000 (or 20,000 for joint returns)

Book Notes: Pension vs profit-sharing plans.

In the old days of plans that paid till death, we know that the employee did not contribute to, bear any responsibility for the investment, or participate in managing the plan. These were defined benefit pension plans. Today, more plans are profit-sharing, which means participants usally become responsible for the management of the plan's assets (investment decisions) and sometimes responsible for contirbtuions to the plan. Key dieffernces: - Legal promise of the plan: paying pension at retirment vs defferral of compensation and taxation - In-service withdrawls permitted?: No; yes after two years if plan document permits - Subject to mandantory funding standards?: Yes. No - % of plan assets avaliable to be invested in employer securites: 10%; up to 100% - Must the plan provide qualified joint and survivor annuity and a qualified pre-survivor annuity? Yes; No

Rollover to Qualified Plans

In the past, only funds held in a conduit IRA could be rolled back into a qualified plan. However, distirbutions after DEc 31st 2001 are now permitted to be rolled over into a qualified plan, 403 b annuity, r governmental plan. - Lump-sum distributions from qualfied plans may recieve special tax treatment, including pre-74 capital gains treatment and 1- year foward averaging. However, a distribution from a qualified plan is not eldigible for apital gains or averaging treatment if there was a rollver to the plan that would not have been permitted under present law. In effect, the IRS does not permit taxpayers to recieve special tax treatment on funds held in an IRA that owuld never have qualfiied for special tax treatment.

Saver's credit

Intended to encourage lower income taxpayers to save for retirement. credit agaist income taxes. Maximum credit is 12,000 per person each year. Rate used in calculating the credit is reduced as modified adjusted gross income increases until it reaches 0 at a modified adjsuted gross income of 64,000 joint, 48,000 head of household, and 32,000 in all other cases. Avlible to an edligible indivdual (18 or older and not someone else's dependnt) who makes qualified reitrement savings contirbitions up to 2,000 for that tax year. - Amount of credit is determined by multiplying a taxpayer's qualified savings contributions by applicable % in table. - Ex. Kiley contribtued to her Roth IRA for 2019. She had a MAGI of 15,000 for 2019 and used the single filing status. She has never taken a distribution from her retirment plan. Her maximum credit is 1,000 (2,000 X 0.5); 2,000 because up to 2,000 (cant use all 4,000) - Ex. Reese works at retail store, is married, and earned 30,000 in 2019. Her husband was unemployed in 2019 and did not have any earnings. She contributed 1,000 to her IRA in 2019. Her adjsuted gross income is 29,000 She gets a 50% creidt, 500, for her 1,000 contirution

Class Notes: Butler's thoughts on Target Datefunds?

It doesn't take into account client's unique circumstances. Might be good for some clients and not others. Things could happend between that target date that delay it.

Book Notes: What does it take for an employer to have a "qualified plan" ? What happens once its qualified?

It must follow a standard set of rules and requirements. - Once considerd qualified, the participants will benefit from tax deferral, asset protection, and several other advantages.

Class Notes: How much income is needed?

Look at "big ticket items." - Mortage? Is it almost up or did they refinance? If the latter, its basically a reset button. (ex. if 30 years and refinance at age 50, will pay off at 80 years old) -

How can you still contribute to a Roth even if you fall outside contribution limits?

Make nondedtuble contribution to traditional IRA and then convert this to a ROTH. Since its already taxed, this does not count as an after tax event.

Class Notes: Do most people "retire for good today" ?

Maybe for about 6 months and then they find something else to do.

Qualified Distributions for Roths

Not included in gross income and won't face 10% early withdraw penealty if a qualfied distribution. Those that aren't qualified may be subject o income tax and 10% withdraw penealty. Qualified distribution meets the following test: 1. Five year test: must be made after a five year taxable period, beginning January 1st of teh taxable year for which the first regular contribution is made to any Roth IRA of the individual or, if earlier, January 1st of the taxable year in which the first conversion contribution is made to any Roth of the individual 2. Distribution Test: Distribution satisifes one of the follwoing four requirements. - Made on or after the owener attains the age of 59.5 - made to a beneficary or estate of the owner on or after teh owner's death. - Attributable to owners being disabled - for first time home purchase: lifetime cap of 10,000 for first time homebuyers includes taxpayer, spouse, child, or grandchild who has not owned a house in 2 years

Class Notes: What type of stuff will I look at in my "risk review" with my clients?

Of course investment risk review, and also insurance risk (health, life, long-term case, etc). Ex. Buy life insruance when you retire; unlike IRA or 401k, take out loan against policy for income, which isnt taxable but the total amount of loans is added up and held against the pricniple. PRblem is, this type of policy is very expense. '- Also tax risk; taxes can always rise.

Book Notes: Retirement Needs Analysis: Wage Replacement Ratio

Part of RNA is to determine how much money will be spent during retirement on an annual basis. The amount of money needed in retirement as a % of income earned prior to retirement is called the Wage Replacement RAtio (reirement expenses/pre-retirement income). Accroding to book and Butler, its about 80% for most people. - Ex. Tom Morrow earns $100,000 per year and is about to retire. His retirement expenses will be 40,000. So, his Wage Replacement Ratio is 40% (so a little different than the usual 80%. - Ex 2. Ellen Ripley makes about $120,000 per year and is about to retire. She is captin of the Nostromo. As part of her compensation, she recieves the following benefits: she gets to live in a spaceship (so no home or homeonwer's insruance), she gets to eat from Nostromo's buffet, gets acess to a vechicle when she needs it, and he stays at Weylon properites whenever she vacations. When Ellen retires, she will have to replace many of the benefits that she recieved as part of her compensaton, including: Housing ($35,000), Auto expenses ($15,000), Vacation ($10,000), Food ($10,000). Other epxenses will decrease, like: SAvings (20,000), work clothes per year (2,000), and FICA (9,180). Adding up and decreasing all of these, it comes out with retirement epxneses of 138,820. This is 16% higher than his current salary.....good thing he has savings.

Book Notes: Pension vs profit-sharing (continued)

Pension - A plan established and maintained by employer primairly to provide for the payment of definitely determinable benefits to his employees over a period of years, usally for life after retirement. - Benefits usally measured by factors like years of service and compensation recieved by the employees Profit-sharing: - Qualified retirement plan established and maintained by an employer where the employer makes deductible conritbutions on behalf of the employees, the assets grow taxed deferred, and if there is a CODA feature, the emplyoee also makes pretax contributions. - Plan must provde a definite predetermined formula for allocating the contributions made to the plan among the participants and for distributing the funds accumulated after a fixed number of years .

Class Notes: How should you take into account technological changes?

People can get things they previsouly couldn't by ordering online; can order food, clothes, etc

Book/Class Notes: Deducitbility of IRA contributions for Traditional IRA for those who participate in qualified plans ("active participants)

Provided they have sufficient earned income, an individual can contirbute the annual 6,000 limit to their IRA on an annual basis. However, the deductibility of the contirbution on the income tax is dependent on several factors, including coverage or participation in a qualified plan (if you have a defined benefit or pension plan from employer or other retirment plan and the amount of the indivudal's adjusted gross income. - If an individual and spouse are not participants in a qualified plan, they may contribute to a dedutcible IRA the lesser of contribution limit or eanred income.Even if somone or their spouse is an active partiicpants, they may still be able to contirbute to a deduticble IRA if the AGI of that indivudal and spouse (if any) is below certain threshold limits. - An individual who is not an active participant does not have an income limitation for purposes of deducting his IRA contribtuions. So, if someone does have a substational income (ex. 1,000,000) and is not an active participant, then they may fully deduct a contribution to his or her tradional IRA.

Tax-free distributions for charitable purposes

Qualified charitable distributions from a traditional or ROTH may be excluded from gross income. EXclusion may not exceed 100 ,000 per year per taxpayer. Qualified charitable distirbution=any distribution from an IRA directly by the IRA trustee to a chartiable organization. - In regards to, minimum distribtion rules at 70.5 for traditional IRAs, qualified charitable distributions are taken into account to the same extent that the distribution would have been taken into account like a regular distirbtuion. - Without this law, a taxpyaer would take a distribution from his IRA, which would be subject to ordinary income, and then contribute that amount to chairty.

Book Notes: Retirement Needs Analysis requires making assumptions about variables that cannot be known, like like future rates of return and life expectancy. Therefore, there are methods for calcluating retirment needs, like: Annuity Method

Simplest way to determine retirement needs. Assumes an individual saves for a period of time, begins taking distribtions at retirement, and then dies with a zero accumulation balnce on the projected life expectancy date. Problem is, it doesnt provide room to adapt if a person lives beyond their life expectancy date or provide an estate for heirs. Can be calaculated using the 4-step method or the uneven cash flow approach. Four step method: 1. Determine the funding amount in today's dollars: Determine the amount of money, in today's dollars, that they will need when they retire. It first determines the WRR and then reduces that based on the expected SS payments (because SS payments dont needed to be funded through personal savings and they'll get that amount anyways, subtract it). This assumes that SS payments willbe adjusted for inflaiton. 2. Inflate the Needs from Step 1 to the beginning of retirmeent: This step determines the need in future dollars for the first year of retirement. Its determined by inflating the amount from step one at the rate of inflation for the number of years until retirement. the Amount for subquqeutn years is determined by increasing at the rate of inflaiton for one year to the next. 3. Determine the funding needs at reitement age: calculates amount of money that needs to be accumulated at retirement age, which is found by discouting the amount from step 2 fotr the number of years during retirement. Annual needs must be discounted at the earnings rate while also being increased by rate of inflation. To accomplish this, the inflaiton adjusted discount rate is used. The result is the sum the sum that should be accumulated by the time retirement begins. 4. Determine the required annual savings amount: This calculates the amount that needs to be saved each year to accumulate the funds determined in step 3

Book Notes: 3rd factor that savings depend on: Investment returns

Since one has to have an investment plan to be sufficiently prepared for retirement; Retirement is dependent on savings over time, but it also dependnt on earnings and growth of these funds during accumulaiton and throughout retirement. about 80 perent of retirment funds come from investment earnings while 20 percent come from savings (basically principle). - Plan must take into account the risk tolerance of the investor and the time horizon of the goal. Risk tolerance is essneitally the willingness and ability to accept risk for potential returns. Assets with larger returns typically have larger risk or larger varations in returns. Even if they are willing to accept more risk, the time horizon has to be right to reccomend them taking on thsi risk (if a mismatch, the planner needs more info). Long-term goals can take on higher risk with assets that have higher returns but tend to fluctuate more with changing markets. Short-term goals consist of safe, stable assets. Its for that reason that younger investor's portfolio typically consist more of common stock (which fluctuate more) whiel older ivnestors have less stock but still something with growth to take care of inflaiton.

Book Notes: Main role of financial planning and retirment benefits on governement?

Since they are worried that SS contributions may be insufficent to meet promoised benefits, government has a vested interest in promoting employer-sponsored health care plans and retirment plans. It uses tax policy to make such plans atractive to employers.

BOOK NOTES: Alternatives to Compensate for Projected Cash-flow shortfalls

Situations can be challenging when the required annual savings is unrealistically high or the expressed needs of a client greatly exceeds the assets avaliable. In these situations, the plan simply does not work. There are several adjustments that can help with this: annual or monthly retirement needs are reduced, annual or monthly savings amount is increased, epxeced investment earnigns are increased, expected inflaiton is reduced, WLE is increased, RLE is decreased. - Ex. Jake is 45 years old and plans on retiring at 65 and living until 95. He currently earns 100,000 and his WRR is 70% and SS provides 20,000 (in today's dollars) in retirement benefits. He expects inflaiton to be 3% and that he can earn 6% on investments. - Step one determined a funding need of 50,000 (100,000 X 70% -20,000) in today's dollars. AFter inflating until retirment, he will need 90,306 his first year of retirment. This means, after calacuating, that he'll need 1,842,331 in his investment account at retirment, which equates to an annual savings of 50,083......which is 50% of his income. He could work for 3 years to help, get a greator return form his portfolio, or a combinaton of both. - Other things that could potentially help: potential inheritances, part-time work, paying off mortage prior to retirment,

BOOK NOTES: Techniques for an advisor to take into account the probablistic nature of variables like earnings, inflaiton, etc.

Small changes in assumptions regarding earnings, inflation, life expectancy, and retirement funding needs can have a dramatic impact on retirement planning. One of the problems with Retirement Needs Analysis is that advisors use deterministic estimates as opposed to probability estimates. The Advisor can employ various techniques to help begin to understand the effect of the range of probable outcomes for each variable in a plan. These tecniques include range estimates, sensivity analysis, and simulaitons like Monte Carlo analysis.

Book NOTES: Techniques for an advisor to take into account the probablistic nature of variables like earnings, inflaiton, etc for Retirement Needs Analysis: Sensitivity Analysis

Small devotions in one variable can effect the entire plan. This consist of rotating each variable assumption toward the undesriable side of the risk to determine the impact on a small change in that variable on not acheiving the overall plan. - Ex. One additonal year of employment often makes a retirment plan work because theere is one more year of savings, one more year of earnings accumulaiton, and one less year of consumption. The opposite is true with one less year of work OR Small change in the spread between the earnigns and inflation rate can have a signfiicant impact on a plan, both positvely and negatively. A small increase in inflation can have a signficant negative impact on an otherwise acheiveable retirement plan. - Understading the importance of each individaul variable and the risk involved if there is a change from the assumed number to a more conservative number allows the advisor to use sensitivty analysis to build a set of slightly worse case scenarios and then determine the impact of these more conservaive assumptions on the overall plan

IRA Rollovers

Taking $ from qualified plan and moving to IRA (called conduit or rollover IRA). Like if a person moves from one company to another and doesnt want a plan form their new company, they can move funds in previous company's plan to IRA. - Only one rollver from any of of someone's IRAs within a 12 month period. - Not a full rollover if not full amount from previous account - If directly rolled over from tax deferred to tax deferred account, no tax event. Can roll directly from a qualified plan to a Roth, but this will be a tax event. - FOr assets like insurance that are permitted in qualified plans but not IRA's, there may be deemed a distribution that will be subject to taxable income and possibly the 10% premature withdrawl penealty. - 60 day perid: Taxpayers have the ability to take a distribution form an IRA at any tiime. However, distributions from IRAs will generally be taxed as ordinary incomeand may be subject to the 10% early withdraw penealty if the distribution is not rolled back inot another IRA within 60 days from the orginal disribution. This rule permits taxpayers to recieve a distribution, make use of the funds for a period of 60 days, and then redeposit the funds unto an IRA without any tax consqeunces. 60 day rule may be waived or extended by IRS for events beyond someone's contorl.

Non-dedutible IRA contirbitons

Taxpayers can make nondedutible contributions to tradtional IRA if they are active partiiaptns and income exceeds phase-out. These contributions still recieve the benefit of deferral of income tax. \ - If you do make nondedutible contribtions, file a 8606 form to let IRS know. Filed anytime you make a contribution; also filed when recieve distribtions and basis is more than 0, convert from SEP to ROTH, made repayment of qualified disaster assistance that is attributable to presumably nondeducitble contirbtions, recieve distribution from an inherited IRA that was not a qualified distribution, or recieved dsitribtuions form inherited tradtional IRA that has basis, etc.

Book/Class Notes: Limitation of contribtuinos due to earned icnome?

The annual contributions to an IRA are limited to the lesser of an indivdual's earned income or the 6,000 annual limit in effect. Earned income= any type of compensation where the individual has performed some level of services for an employer or is considerd self-employed (whether or not its a sole propeirtorship, partnership, or LLC). Also includes alimony if it was from a divorce agreement before 2019. - Individuals who do not have any earned income may still be elidgible to establish an IRA if their sposue has sufficent earned income. An IRA for a spouse who has no eanred income is usally referred to as a spousal IRA and can be established provided the other spouse has sufficent earned income. The necessary level of eanred income for their spouse is equal to the total amount that is to be contirbuted to both IRA's

Book Notes: Retirement Needs Analysis

The process of determining how much money a person needs to accumulate to be financially indepenednt during retirment. One of the first steps is to determine their expenses when they retire. Most expenses will carry over from there working years, and plus there will be new expenses like vacations and medical care (others decrease like savings). - Likely to decrease (6): SAvings, FICA, mortage, possibly income taxes, automobile cost, work-related expenses, and in some cases cost of insruance. - Likely to increase: vacation (6): medical expenses, costs for 2nd home, hobby cost, cost of supporting adult children, higher inflaiton cost, and gifts to family memebers.

Book Notes: Factors Affecting Retirement Planning: Retirement Life Expectantcy

The total amount of time expected during retirement. - Its rleationship with WLE: Any change in one factor adversely affects the other. Ex. Decreasing WLE and taking a longer RLE means less time to save. Increasing the WLE means decreasing the RLE.

BOOK NOTES: Techniques for advisor took take into account the probablisitc nature of certain varibales in retirement needs analysis: Simulaitons and Monte Carlo Analysis

The uncertainty of certain variables can be analyzed using software like Monte Carlo Analysis. This is basically a mathamatical tool that illustrates the unpredictability of the "real" world and its effects on Retirement needs analysis. Provides insight into the most likely outcome as well as other possible outcomes. Allows for a variety of alternate assumptions, such as changes in investment rate of return, inlfation, life expectancy, etc.

Book notes: What is the main role that retirement planning and employee benefits has on employers? Whats a benefit of employers offering plans? Who knows more about plans, large or small employers? What % of compensation/payroll cost do such plans end up being?

They have to consider and select employer-sponsored plans. - They typically view these plans as overall compensation cost (as do employees). - Offering plans has a positive impact on both attracting and retaining employees. - Larger employers are more likely to be more knowlegable about and thus offer more cost effective plans than small business owners. - 30-40% of payroll cost

Book notes: What is the main role that reitirement planning and employee benefits has on employees?

They're the ones trying to have financial security during retirement. They view these plans as part of their compensation, since the employer paying their part of thre premium is cheaper for them than gviing that same amount in cash and having it taxed. Employee confience regarding ability to retire is high but inconsistent with reality....most dont really know cost of retirment or how to acheive financial securty. 79% say they plan to work during retirment, while only 34 actually do. 10% expect to retire before 60 and 31 % expect to retire at 70 or later, but the average worker retires at 62...48% reired earlier than expcted from facotrs beyond their controlm 35% retired before 60, and only 7% actually waited until 70 or later to retire - 64% have saved for retirment, 45% have less than 25,000 in savings, 26% have less than 1,00, and 38% have have completed a retirment needs calculation.

Book Notes: Method 1 of deterring WRR: Top-Down Approach; method two: bottom up

This method begins with 100% of preretirement income and adjust the % up or down when expenses are added up. Not as accurate as bottom up, so usally better for people who are young and can afford to plan without great precison. - Ex. Sheldon is 55 years old and makes 100 K per year. He saves 12,350 per year and pays FICA epxnes of 7,650. He'd like to assume that any other expense reductions will be offset by increased retirment expenditures, such as health care and vacations. Based on this, her WRR is 80%. 100,000 (100% of salary)-12,350-7,650-80,000 (80 % of salary) - Bottom up approach is also referred to as budgeting approach becuase it determine total expenses in same manner that is used to build a budget. More precise than top-dwon becuase it involves examining each catergory of expense and detemring whether or not it will increase or decrease or remain the same during retirment. Thats why its often used by people who are very near retirment and have the ability to make such estimates. - Ex. Ana and Cenk have the same amount of income and the same expenses and both are about to retire. They both want to know their WRR. Her house and car will be paid off before retirement, while Cenk will have to continue both. Every other expense stays the same for both. WRR ends up at 64% for her and 84% for him.

Book Notes: Purchasing Power Preservation Model (LOOK UP CALCULATONS)

This model also deals with the possibility of superannuation. A Retirment Needs Analyis that assumes at the client's life expectancy the client will have a capital balance with purchasing power equal to the purchasing power at beginning of retirment. (outlying life expectancy and running out of funds). Its even more conservative than Capital Preservation method. It has the greatest required balance and annual savings.

BOOK NOTES: Retirement needs analysis: Serial Payment Approach (look up calaculation)

Three methods are very similar expect for the amount of money that remains at life expectancy. Each assumes a level amount of annual savings over the remaining WLE. Becuase each assumes level funding, the savings amount should be a smaller % of annual income, as most people's income increases during their later working years. However, Serial Payment Approach assumes increasing the savings amount each year, which often correlates with salary increases over time. This increase from one year to another can be equal to inflaiton. - Ex. Amount in previous exmaples for Chucky to accumulate for retirment was 1,022.625.85. That this not change with serial payment approac.

Required Minimum Distirbutions:

Tradional IRA distributions can be taken at anytime, but the required minimum distirbutions must (expect for Roth IRA's) begin by April 1st of the year following the year in which the ownern attains 70.5/

Book Notes: T or F, WRR for beginning of retirement will likely be more than what it needed towards end of retirment?

True. People spend less as they get older. There are, of course, some expcetions, like healthcare.

Book Notes: Advantages of Qualified Plans

US government offers several income tax advantages to both employers and employees who elect to maintain and participate in a qualified plan. Like income tax referrals, payroll tax savings, and federally provided creditor asset protection.

BOOK Notes: Sensitivity Analysis Example. If the information for Chucky was 20 years to retirement, 3% inflaiton, 41,000 curent needs, and 74,000 future needs....

Via sensitivity analysis, 19 years to retirement, 3.5% inflation, and 42,000 needs. These are more conservative asuumptions. Sensitivity analysis can be used to recacluate using more conservaitve assumptions and thus test roboustness or the sensitivty of the previsouly calculated solution.

Book Notes: Factors Affecting Retirement Planning: Work Life Expectancy

WLE is the period of time a person is expected to be in the workforce. It may be 30-40 years, and during this time one saves for retirement. Increasing or decreasing the work life expectantcy - WLE has declined in the US because of education taking away from retirment and - Normal retirement has traditionally been at 65 because of SS (although you can take at a reduced rate at 62). Until recently the trend was to retire earlier than that, but now its reversing...% of 65-74 as well as those over 75 workers is only expected to grow. Reason is because Boomes are working because they're healither and have a longer life expectancy, ae better educated, and changes to SS and retirement plasn, and the need to save more. ALSO parital retirment where boomers continue to work part time. - AVerage retirment age for men as of recently is 64 and 62 for women. - 24% of men over 65 are employed - Remainding work life expectantcy: how many years more they'll be working before retirmeng.

Book Notes: Advantage of Qualified Plan; No Payroll Taxes on Contributions

When an employer makes a contribution to a qualified retirement plan on behalf of employees, the employer's contirbution is not subject to payroll tax as it normally would be on ordinary compensation. This entices employer's to contirbute to retirement accounts and to view such contirbutons as part of the overall compensation package. The Employee does not have to pay payroll taxes on this contribution either. - Ex. Block Buster paid its two employees $50,000 each in wages and did not contirbute to a qualified profit sharing plan for the year, it would pay 7,650 in total payroll taxes (7.65% X 100,000) that year. The employees themselves also, together, would have paid 7.65%

Class Notes: What is downsizing?

When people choose to sell their old home and buy a newer, smaller one. Can be cheaper and help them the type of lifestyle they wanna live.