Retirement Final Exam

Contribution to Roth IRA

- Limited to lesses of earned income or $5,500 (6,500 if age 50 and over) -Contribution AGI Phaseout limit Single - $120,000-$135,000 MFJ- $189,000-$199,000 MFS- $0-$10,000

Early withdrawal penalty exceptions for Qualified plans and IRAs

-Rollover Distributions from 401(k) plans and IRAs are exempt from the early withdrawal penalty if rolled over into another eligible retirement plan within 60 days. -Distributions Made to Beneficiaries 401(k) and IRA distributions made to beneficiaries of plans inherited after death are generally not subject to the early withdrawal penalty. However, if a spouse beneficiary chooses to treat an IRA as his or her own and is under age 59 ½, distributions will be subject to the 10% penalty. The penalty does not apply if the spouse takes the distribution as the IRA beneficiary, rather than the IRA owner. -Disability Disabled persons can take distributions from both 401(k) plans and IRAs without being subject to the early withdrawal penalty. -Medical Expenses Distributions from both IRAs and 401(k) plans used to pay for medical expenses not reimbursed by health insurance that exceed 10% of your adjusted gross income are not subject to the early withdrawal penalty. -Higher Education Expenses (IRA only) Withdrawals from IRAs for qualified higher education expenses for you, your spouse, child, or grandchild are exempt from the early withdrawal penalty. The distribution can't exceed the qualified higher education expenses incurred during the tax year. -First-Time Home Purchases (IRA only) You may withdraw up to $10,000 from your IRA

Taxation of social security benefit

-Up to 85% of the Social Security benefits may be taxable Modified AGI (MAGI) - AGI + Nontaxable Interest + Foreign Earned Income 1st hurdle- MFJ= $32,000 - Single= $25,000 2nd hurdle- MFJ= $44,000 - Single= $34,000 Second Hurdle > MAGI + ½ of Social Security Benefits > First Hurdle, the taxable amount of the Social Security Retirement benefits is the lesser of: -50% of Social Security Benefits, or -50% [MAGI + 0.50 (Social Security Benefits) less Hurdle 1 Value]

Deductibility of IRA contribution

1) Taxpayer does not have a qualified plan -No AGI Limit 2) Taxpayer os an active participant in a qualified plan Single- AGI phaseout = $63k- $73k MFJ -AGI phaseout = $101k-121k 3) Taxpayer is not active participant but spouse is AGI Pahseout = 189k -199k

Entities that can establish 403b, 457b

403b -Public schools or educational organizations, -Tax-exempt Organizations under IRC §501(c)(3) 457b -Nonqualified Deferred Compensation Plan -Eligible tax-exempt entities =(Private Schools,Religious Organizations (Not CHURCHES)•Private Hospitals) -Eligible governmental entities =(States, Political Subdivisions of a State, State Agencies)

Catch-up contribution rules of 403b and 457b

403b-Participant must have completed 15 years of service with the employer -For 2018, maximum deferral contribution would be $27,500 $18,500 - Employee Deferral -$6,000 - Age 50 and over catch-up -$3,000 - 15-Year Catch-Up 457- 3-Year Catch-Up -three years prior to normal retirement age an employee may defer an additional $18,500 for 2018 -Maximum contribution equals $37,000 for 2018•$18,500 for 2018 deferral contribution + $18,500 for 2018 catch-up contribution

Advantages and disadvantages of IRA

Advantages - you have the freedom to invest in any type of investment you are comfortable with (stocks, mutual funds, ETFs, bonds, CDs, annuities, etc.) -Your money grows TAX-DEFERRED (and contributions are tax-deductible) -allow you to withdraw your money out early (before age 59 ½) at any time BUT there is a 10% penalty for doing so Disadvantages -You have to begin taking Required Minimum Distributions (RMDs) by Apr. 1st of the current year once you pass the age of 70 ½ (you are NOT required to take RMDs from a Roth IRA) -There are certain types of investments you cannot make, such as life insurance contracts, antiques, collectibles, and most precious metal coins

Taxation of social security benefit Example

Assume: Beth & Bill have regular income of $35,000, muni income of $5,000 and receive Social Security benefits of $30,000 •MAGI + ½ SS Benefit: $35k + $5k + $15k = $55k •Taxable portion of Social Security Benefits: A = MAGI + ½ SS Benefit > $32k = $23k; B = MAGI+ ½ SS Benefit > $44k = $11k 1. 50% (A) + 35% (B) = $11.5k + $3.85k = $15.35k 2. 85% SSB = $25.5k 3. 50% SSB + 85% (B) = $15k + $9.35k = $24.35k

Characteristics of NQDC

Contractual arrangement - Employer/Executive •Employer promises to pay executive a predetermined amount sometime in the future •NQDC Plans are NOT Qualified Plans

Characteristics and contribution rules of SEP, SIMPLE, 403, 457

Contributions SEP- smaller of $54,000 or 25% of participants compensation. SIMPLE- Employer Matching Contributions Dollar-for-dollar match up to 3% of compensation. 403b- Limited to $18,500 per year for 2018, plus $6,000 for 2018 for catch-up (50 and over) -Tax deductible -Subject to payroll taxes 457-Annual limit is the same as 401(k) and includes employee and employer contribution

Comparison between DB vs DC plans

DB- most often known as a pension, is a retirement account for which your employer ponies up all the money and promises you a set payout when you retire DC- like a 401(k) or 403(b), requires you to put in your own money.

Medicare coverages

Federal health plan for: -People 65 and older -Disabled individuals -Individuals with permanent kidney failure Consists of: Hospital Insurance - Medicare Part A Medical Insurance - Medicare Part B Prescription Drug - Medicare Part D

Active Participant Example

Nick and Kim are married and file jointly. Kim is an attorney who earns $130,000 per year and is an active participant in the firm's qualified plan. She also has portfolio income of $15,000 per year. Nick is unemployed and goes to the bar every day and plays Gin Rummy. Can Nick make a contribution to a traditional IRA and is it deductible? Yes. Nick can contribute because together Kim and Nick have sufficient earned income and the contribution is deductible because their joint AGI for 2018 is less than $189,000. Therefore, Nick can make the maximum contribution (subject to his age) to the IRA for the current year and fully deduct it.

Beneficiaries of Social Security benefit

Participant Worker •Participant's Spouse •Participant's Children •Dependent Parents •Workers Divorced Spouse (10+ Year Married)

Disqualified disposition

Selling stock acquired from an ISO before two years from grant date or one year from exercise date •Loss of favorable tax treatment•Appreciation over exercise price at exercise date = ordinary income (reported on W-2) •No withholding requirement for ISOs •Appreciation after exercise date = capital gain (short/long based on holding period beginning at exercise date) •Employer has a tax deduction equal to the executive's W-2 income

Qualified distributions from Roth IRA

Qualified Distributions are income tax-free •Qualified Distributions are not subject to 10% early withdrawal penalty •Qualified Distribution: -The distribution is made after a five taxable year period -The distribution is on account of the owner attaining age 59½, the owner's death, disability, or first-time home purchase (maximum $10,000)

Social Security Benefit reduction or increase

Reduction Retirement Earnings Limitations Test -applies to people who take benefits before what's called Full Retirement Age. ... If you earn more than $15,720, your Social Security retirement benefits are reduced by $1 for every $2 your wage income exceeds that limit

403b characteristics

Retirement plan for the following: -Public schools or educational organizations, -Tax-exempt Organizations under IRC §501(c)(3)

Compare Secular trust, Rabbi trust

Secular Trust -Irrevocable Trust -Trust funds are not available to employer or the employer's creditors -Usually no substantial risk of forfeiture for employee. However, trust may require a vesting period•In such a case, the executive would have substantial risk of forfeiture until meeting the vesting period requirements Rabbi Trust -Irrevocable trust -Funds are not available to employer, BUT may be available to the employer's general creditors under bankruptcy -Substantial Risk of Forfeiture exists -not currently taxable to the executive

Characteristics of ROTH and traditional IRA

Traditional IRAs do not allow contributions after the owner is age 70½, unlike Roth IRAs •Roth IRAs are not subject to the lifetime minimum distribution rules, unlike Traditional IRAs

Earned Income rule of IRA

You must have earned income to make an IRA contribution of any type. The amount of earned income you have must equal or exceed the amount of your IRA contribution What is earned income? -W-2 income -Schedule C net income -Income as a general partner -Alimony*

SIMPLE characteristics

d 100 or fewer employees who received at least $5,000 in compensation last year, you can set up a SIMPLE IRA plan. Under a SIMPLE plan, employees can choose to make salary reduction contributions rather than receiving these amounts as part of their regular pay. In addition, you will contribute matching or nonelective contributions.

Penalty for not taking enough RMD

failure to withdraw an RMD by the deadline results in a 50% penalty. If you were supposed to take out a minimum of $4,000 and you did not do so, you have the privilege of writing the IRS a check for $2,000

Active Participant rule of IRA

is someone who receives benefits under an employer sponsored retirement plan or participates in a retirement plan

SEP Characteristics

make contributions directly to a traditional individual retirement account or a traditional individual retirement annuity (SEP-IRA) set up for yourself and each eligible employee