Chapter 4 - Series 66 (Sept 2011) - Retirement Plans

Front 1

What are and aren't deemed compensation for IRA purposes?

Back 1

Compensation incl: wages, salaries &tips, Commissions, & bonuses, Self-employment income, Alimony,
Nontaxable combat pay. The following aren't considered compensation for IRA purposes: Capital gains, Interest & dividend income, Pension or annuity income, Child support, Passive income from DPPs. Contributions ltd to age 70.5

Front 2

Roth IRA's

Back 2

After account holder is 59.5 & the account has been open >5yrs tax-free withdrawals; money withdrawn is used for the 1st-time home buyer (up to $10K);
account holder has died or become disabled; money is used to pay for authorized higher education expenses; or money is used to pay for certain medical expenses or medical insurance premiums. Contributions may be made > age 70.5. No 10% early distribution penalty for death, disability, or first-time home purchase. Minor can be named as beneficiary.

Front 3

Economic Growth and Tax Relief Reconciliation Act of 2001, (EGTRRA)

Back 3

Responsible for installing catch-up contributions of $1K > age 50.

Front 4

Phase-Outs for Roth IRA's

Back 4

For single people - AGI of $107K or less may contribute the full amount to a Roth IRA - phases out at $122K.
Married: AGI limit is $169K with $179K phase-out.

Front 5

SEP IRA's

Back 5

Eligibility - > 21yrs, have performed services for the employer during at ≥3 of last 5 yrs. Employer may contribute up to 25% of employee's pay into SEP up to $49K. Employer determines the level of contributions each yr & must contribute the same % for each employee, as well as the employer. Fully vested immediately. Tax deductible to employer.

Front 6

Withdrawals from Traditional IRA's and Roth IRA's

Back 6

Distributions without penalty may begin after age 59.5 & must begin by Apr 1 > individual turns 70.5. Distributions < RMD < 70.5 may incur penalty tax.

Front 7

Pre-retirement Withdrawals from Traditional IRA's and Roth IRA's

Back 7

Another way to tap IRA $'s age 59.5 without penalty—through the substantially equal periodic (SePP) exception. The substantially equal periodic payment exception under IRS rule 72t states that if you receive IRA payments at least annually based on your life expectancy (or the joint life expectancies of you and your beneficiary), the withdrawals are not subject to the 10% penalty.

Front 8

Latest Distributions from Retirement Accounts

Back 8

For exam purposes, you can postpone beginning distributions until the later of: ■ April 1 of the calendar year after you turn age 70.5, or Apr 1 of the calendar year following your retirement (but only for qualified plans, not an IRA).

Front 9

Nondeductible Capital Withdrawals

Back 9

You can contribute after-tax dollars to an IRA and have it grow tax-deferred but any gains will be taxed at ordinary income rates.

Front 10

Excess Contribution Penalty

Back 10

Contributions exceeding the max are subject to a 6% penalty tax if not removed before Apr 15th.

Front 11

Ineligible Investments in an IRA

Back 11

Collectibles, (incl antiques, gems, rare coins, works of art, and stamps), are not accept- able IRA investments. Life insurance (WL or Term) may not be purchased in an IRA. Tax-free muni bonds, & mun bond funds & UITs are inappropriate given their lower yields

Front 12

Ineligible Investment Practices

Back 12

No short sales of stock, speculative option strategies, or margin account trading is permitted in an IRA or any other retirement plan. Covered call writing is allowed.

Front 13

Direct Real Estate Investments in an IRA

Back 13

Technically allowed but must be strictly as a non-use, passive investment. Any perceived personal use will fall foul of the IRS.

Front 14

IRA Rollovers (where client receives check)

Back 14

Only allowed 1nce per yr. & must be completed <60 days.100% must be rolled. For qualified plan roll-overs, 20% must be retained as a with-holding tax but 100% must be rolled within that 60 day window. Need to then apply for the 20% withheld at next return.

Front 15

IRA Transfers (direct from one custodian to another)

Back 15

# allowed per yr is unlimited. 20% with-holding doesn't apply. Also, no 60 day time limit.

Front 16

Earnings Limitations for Tax Benefits

Back 16

Traditional and certain SEP IRA participants may deduct contributions to their IRAs from their taxable income. The deductibility limits are lowered for individuals who are eligible for other qual plans. Individuals who are ineligible to participate in qual plans may deduct IRA contributions regardless of income level. Limits - Single: $56 - $66K. Married $90 - $110.

Front 17

Inheriting an IRA (as a spouse)

Back 17

Rules depend on; inheritor is deceased's spouse & whether the deceased has already started RMD's. If spouse, can do a 'spousal-rollover' (i.e. inherited IRA is just rolled into spouse's) or continue to own the IRA as a beneficiary. If taken as beneficiary, RMD's commence as they would have at deceased's age 70.5 (but taken over beneficiary's life expectancy).

Front 18

Tricks associated with Inheriting a ROTH IRA

Back 18

If account is Roth IRA & open for < 5 years, any withdrawal of earnings will be subject to income tax but not the 10% penalty.

Front 19

A Nonspousal Beneficiary (ANSB) of an IRA

Back 19

ANSB same as SB in that 10% penalty not applicable to distributions & if open < 5 yrs, earnings will be subject to ordinary income tax but not the 10% penalty. RMD's must commence the yr after death of account owner but based on beneficiary's life expectancy. ANSB may elect to distribute the entire amount over a 5 yr period.

Front 20

Disclaiming an IRA

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Refusal to accept gift or inheritance. To be effective, disclaiming must be done < 9 months of death, it must be in writing, & you cannot have taken any of the money. If disclaimed by named beneficiary, then passes to contingent beneficiary.

Front 21

Keogh (HR-10) Plans

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ERISA qualified plans intended for self-employed indiv & owner-employees of unincorporated biz's or professional practices. Incl in the self-employed category are independent contractors, consultants, freelancers, & anyone else who files and pays self-employment SSec taxes.

Front 22

Contributions to a Keogh

Back 22

<$49K. May also maintain an IRA. Emp's must be covered at the same contribution % to be non-discriminatory. Only earnings from self-employment count towards determining the max that may be contributed (i.e. if one had a PT job in addition to regular job, only PT job income would count for contribution). In addition to tax-deductible contributions - may also make non-tax deductible contributions within $49K limit.

Front 23

Eligibility for Keogh Plan

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- FT emp's are employees who receive comp for min 1K hrs of work p.a.
- Tenured emp's are employees who have completed >1 yrs of continuous emp.
- Adult employees are emp's > 21

Front 24

Comparison of IRA's and Keogh's

Back 24

Tax sheltered growth; distributions taxed as ordinary income, 10% penalty for early withdrawals, Distributions @ 59.5. Payouts maybe either lump-sum or periodic. Upon the planholder’s death, pmt's are made to designated beneficiary(ies).

Front 25

403(b) Plans

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Tax-deferred retirement plans for emp's of public school systems & tax-exempt, nonprofit org's such as churches and charitable institutions, (501(c)(3) emp's). May excl from taxable income if do not exceed certain thresholds. Qualified Annuities offerred under 403(b) plans are called TSA's.

Front 26

Tax Advantages of 403b's

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Contributions (which generally come from salary reduction) are excl from a participant’s gross income. Participant’s earnings accumulate tax free until distribution.

Front 27

403b Allowed Investments and Plan Eligibility

Back 27

Investments Allowed = Annuities, stocks, MF's, bonds, CD's (LI not allowed) but Insurance Co. issued Guaranteed Investment Contracts (GIC's). Only employees of qualified employers are eligible. Must be made available to each FT emp who has both reached age 21 & completed 1 yr of service.

Front 28

403b Plan Requirements

Back 28

Plan must be in writing & must be made through a plan instrument, a Trust agreement, or both. Max contribution is $16.5 with $5.5 catch-up contribution. Employer contributions subject to same max's as all defined contribution plans; < 100% of participant's comp or $49K.

Front 29

Taxation of 403b Distributions

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Subject to ordinary income tax @ age 59.5. Distributions must begin by Apr 1st of the year in which the participant turns 70.5. Once begun, distributions must be paid by Dec 31st of each year.

Front 30

Employee Retirement Income Security (ERISA) Act of 1974
(1 of 2)

Back 30

Eligibility - if plan offerred, must be offerred to all Emp's must be covered if they are >21, have 1 yr of service, & work >1K hrs pa. Funding -funds contributed to the plan must be segregated from other corporate assets. Vesting. employees must be entitled to their entire retirement benefit amounts within a certain time.

Front 31

Employee Retirement Income Security (ERISA) Act of 1974
(2 of 2)

Back 31

Communication. The retirement plan must be in writing, & emp's must be kept informed of plan benefits, availability, account status, and vesting procedure no less frequently than annually. Nondiscrimination. A uniformly applied formula determines employee benefits and con- tributions. Such a method ensures equitable and impartial treatment.

Front 32

Fiduciary Responsibility Under ERISA and the Uniform Prudent Investor Act (UPIA) of 1994.
(1 of 2)

Back 32

UPIA was passed as an attempt to update trust investment laws. MPT was major influencer on UPIA. The UPIA makes 5 fundamental alterations in the former criteria for prudent investing; 1) Standard of prudence applies to total portfolio (& not any single investment); 2) Trade-off in all investments between risk & return is ID'd as the fiduciary’s primary consideration.

Front 33

Fiduciary Responsibility Under ERISA and the Uniform Prudent Investor Act (UPIA) of 1994.
(2 of 2)

Back 33

3) All categorical restrictions on types of investments have been removed. 4) Diversification has been throughly integrated into the defn' of 'prudent investing.' 5) Trustee may now delegate investment responsibilities (subject to safeguards).

Front 34

What provisions do NASAA provide in determining how the UPIA affects your role.
(1 of )

Back 34

A trustee must invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution reqts,& other circumstances of the trust. In satisfying this standard, the trustee must exercise reasonable care, skill, and caution.

Front 35

What provisions do NASAA provide in determining how the UPIA affects your role.
(2 of )

Back 35

A trustee’s inv & mgmt decisions about indiv assets must be evaluated not in isolation but in the context of the total portfolio and as a part of an over- all inv strategy with risk & return objectives that are reasonably suited to the trust.

Front 36

Circumstances a Trustee must consider in investing and managing trust assets
(1 of 2)

Back 36

General economic conditions, inflation, tax consequences, The role that each asset plays within the total portfolio,incl financial assets,tangible & intangible personal property, & real property. Expected total return from income & the appreciation of capital, other resources of the beneficiaries, needs for liquidity, regularity of income & preservation or appreciation of capital.

Front 37

Circumstances a Trustee must consider in investing and managing trust assets
(2 of 2)

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An asset’s special relationship or special value,if any, to the purposes of the trust or to one or more of the beneficiaries.

Front 38

Guiding Principles of Fiduciary Investments
(1 of 4)

Back 38

A trustee must invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee must exercise reasonable care, skill, and caution.

Front 39

Guiding Principles of Fiduciary Investments
(2 of 4)

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A trustee’s inv & mgmt decisions about individual assets must be evaluated not in isolation but in the context of the total portfolio and as a part of an overall investment strategy with risk and return objectives that are reasonably suited to the trust.

Front 40

Guiding Principles of Fiduciary Investments
(3 of 4)

Back 40

A trustee who has special skills or expertise, or who is named trustee in reliance upon the trustee’s representation that the trustee has special skills or expertise, has a duty to use those special skills or expertise. Led to a more stringent standard - prudent expert (i.e. the prof money manager)

Front 41

Guiding Principles of Fiduciary Investments
(4 of 4)

Back 41

For non-experts, the Trustee may delegate Inv & mgmt functions provided reasonable care, skill, and caution in: - selecting the adviser, - est the scope & terms of the delegation, consistent with the purposes & terms of the trust, - periodically reviewing the adviser’s actions, to monitor the adviser’s performance and compliance

Front 42

A number of regulations that apply directly to retirement plan fiduciaries. The details are spelled out in ERISA Section 404.

Back 42

Every person who acts as a fiduciary for an Emp benefit plan must perform his resp in accordance with the plan doct spec's. Under ERISA, trustees cannot delegate fiduciary duties, but they can delegate Inv mgmt responsibilities to a qualified investment manager.

Front 43

Detailed ERISA Section 404 Responsibilities
(1 of 2)

Back 43

Fiduciary resp to the plan are explicit. with respect to the plan, fiduciaries must act: -solely in the interest of plan participants & beneficiaries; - for the excl purpose of providing benefits to participants & their beneficiaries &
defraying reasonable plan expenses; with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent prof would use (aka 'prudent expert rule');

Front 44

Succinct ERISA Section 404 Responsibilities

Back 44

Under ERISA, the Fiduciary must be as prudent as the avg expert, not the avg person. To act with care, skill, prudence, and caution, the fiduciary must also: - Diversify plan assets; -make Inv decisions under the prudent expert standard; - Monitor inv performance; - Control inv expenses; & Not engage in prohibited transactions.

Front 45

Investment Policy Statement

Back 45

To incl; investment objectives for the plan; determination for meeting future cash flow needs; investment philosophy including asset allocation style; investment selection criteria (but not the specific securities themselves); and methods for monitoring procedures and performance.

Front 46

Prohibited Transactions by the Plan Fiduciary

Back 46

Self-dealing, dealing with plan assets in his own interest, or for his own account; - Acting in a transaction involving the plan on behalf of a party with interests adverse to the plan; & - receiving any comp for his personal account from any party dealing with the plan in connection with plan trans.

Front 47

Safe Harbor Provisions of Section 404(c)

Back 47

Under ERISA Sec 404(c), a fiduciary is not liable for losses to the plan resulting from the participant’s selection of inv in his own account, provided the participant exercised control over the investment & plan met reqts of 404(c) regs. 3 basic conditions of this regulation: - Investment selection, Investment control & Comm required info

Front 48

Safe Harbor Provisions of Section 404(c) >> Investment selection—A 404(c) plan participant must be able to:

Back 48

1) Materially affect portfolio return potential and risk level; 2) Choose between at least three investment alternatives; 3) Diversify his investment to minimize the risk of large losses.

Front 49

Safe Harbor Provisions of Section 404(c) >> Investment control—control is defined as:

Back 49

1) Allowing Emp's the opportunity to exercise independent control over the assets in their account by letting them make their own choices among the investment options; 2) Informing Emp's that they can change their investment allocations < qtrly; & 3) Even though the emp's maintain Inv control, the plan fiduciary is not relieved of the responsibility to monitor the performance of the Inv alternatives being offered & replace them when necessary.

Front 50

Safe Harbor Provisions of Section 404(c) >> Communicating required information means:

Back 50

1) Making certain info available upon request, e.g. prospectuses & financial statements or reports relating to the inv options (incl must be info such as annual operating expenses and portfolio composition); 2); A statement that the plan is intended to constitute an ERISA Sec 404(c) plan & that plan fiduciaries may be relieved of liability for inv losses; 3) A description of the risk & return profile of each of the inv alternatives;

Front 51

Summary Plan Document (SPD)

Back 51

Participants are to receive automatically. SPD is a doct that tells participants what the plan provides and how it operates. It provides info on when an emp can begin to participate in the plan, how service and benefits are calculated, when benefits become vested, when and in what form benefits are paid, and how to file a claim for benefits.

Front 52

Taxation of Plan Benefits

Back 52

If all of the funds were contributed by the employer, (known as a noncontributory plan), the employee’s tax basis (cost) is zero. everything above the cost is taxed at the employee’s ordinary income rate at the time of distribution.

Front 53

Profit Sharing Plans

Back 53

Can be paid directly or contributed to an account for future payment.Profit-sharing plans need not have a predetermined contribution formula. To be qualified, a PSP must have substantial and recurring contributions, according to the IRC. PSP are popular because of their flexibility & ease of installation.

Front 54

401(k) Plans

Back 54

Max employer contribution is 15% of total payroll. Despite being deducted from gross pay, FICA (SocSec) taxes are levied against gross salary, not this reduced amount. Loans are permitted - lesser of 50% of vested share or $50K - must have 'reasonable rate of interest' - paid back in 5yrs. Hardship withdrawals permitted - amounts withdrawn are taxable & possibly due a 10% penalty.

Front 55

Roth 401(k) Plans

Back 55

Made with after-tax contributions. Must be older than 5 years to take withdrawals. Like a regular 401(k) plan, it has employer-matching contributions; however, the employer’s match must be deposited into a regular 401(k) plan and be fully taxable upon withdrawal. Thus, the employee must have 2 accts: a regular 401(k) & a Roth 401(k). Roth 401k's have no income limit restriction & also they do require withdrawals at age 70.5

Front 56

Self-Employed 401(k) Plans

Back 56

To contribute to this plan, the businessowner may have no full-time employees other than himself and his spouse. because the covered individual is both the owner and an employee, this plan generally offers the highest possible contribution level of any defined contribution plan.

Front 57

Top-heavy Plans

Back 57

All qualified plans must be nondiscriminatory. The plan must be tested on an annual basis to ensure that it isn't top heavy. On the exam, you may be asked to define a top-heavy plan and will have to choose between key employees and highly compensated employees.

Front 58

Safe Harbor 401(k) Plan

Back 58

A plan does not have to undergo annual top-heavy testing if set up under safe-harbor rules. 2 basic choices; 1) Elective formula (basically 4% on employee contributions) or 2) Non-elective formula - 3% employer contribution regardless.

Front 59

Section 457 Plans
(1 of 2)

Back 59

Deferred comp plan. Eligible employee groups incl; state, political subdivision of a state, and any agency or instrumentality of a state, hospitals, charitable organizations, unions, etc but not churches). In a 457 plan, employees can defer compensation, and the amount deferred is not report- able for tax purposes. Exempt from ERISA, not req'd to follow non-discrimination rules

Front 60

Section 457 Plans
(2 of 2)

Back 60

Plans for tax-exempt orgs are ltd to covering only highly compensated employees (HCE's), while any employee (or even independent contractor) of a Govt entity may participate. Distributions from 457(b) plans of NGO tax-exempt emp's may not be rolled over into an IRA, but there is no 10% penalty for early withdrawal. It is possible to maintain both a 457 and 403(b) and make max contributions to both ($33k in 2011). Loans are never permitted & hardship withdrawals are harder.

Front 61

Savings Incentive match Plans for employees (SIMPLE) Plans

Back 61

<100 Emp's who earnt >$5K in past yr. Employee's may contribute up to $11.5k (with $2.5k catch-up). Two options; 1) 2% nonelective employer contribution, where emp's eligible to participate receive an employer contribution = to 2% of their comp ($245K max) 2) dollar-for-dollar match up to 3% of compensation, where only the participating employees who have elected to make contributions will receive an employer contribution (i.e., the matching contribution).

Front 62

Early Withdrawal Penalties
(1 of 2)

Back 62

Pre-59.5 withdrawals from IRAs for education and 1st-time home purchase escape the early withdrawal penalty, withdrawals from qualified plans for those purposes do not; The 10% tax will not apply < age 59.5, if:

Front 63

Penalty Tax on Failure to Make Required Minimum Distributions

Back 63

As with IRAs, other than a Roth IRA, failure to take your RMD generates a 50% penalty tax on the shortfall in addition to ordinary income taxation.

Front 64

Non-qualified Corporate Retirement Plans - Overview

Back 64

Doesn't allow the employer a current tax deduction for contributions. Instead, the employer receives the tax deduction when the money is actually paid out to the employee. Depending on how the plan is structured, earnings may accumulate on a tax-deferred basis. Needn't comply with non-discrimination rules. NQ plans not subject to the same reporting and disclosure requirements as qual plans however plan must be in writing & comm to plan participants.

Front 65

Non-qualified Corporate Retirement Plans - Types of Plans
(1 of 2)

Back 65

1) Payroll Deduction Plan; involves a deduction from an emp’s paycheck. 2) Deferred Comp plans - is a contractual agreement between a firm and an emp in which the emp agrees to defer receipt of current comp in favor of a payout at retirement. The NQDC agreement typically incl clauses that outline how comp may be forfeited (e.g. by moving to competitor), A statement to the effect that the emp is not entitled to any claim against the employer’s assets until retirement, death, or disability;

Front 66

Funding of NQDC Plans

Back 66

Maybe funded or unfunded. If unfunded, comp paid from the firm’s operating assets. If funded, the advantages of tax deferral are lost. many NQDC plans are informally funded through LI or trust arrangements.

Front 67

Coverdell Education Savings Accounts
(1 of 2)

Back 67

Allows after-tax contributions for student bene's. Contributions must be made in cash and must be made on or before the date on which the beneficiary attains age 18 (unless the bene is a special needs beneficiary). When distributions are made, the earnings portion of the distribution is excl from income when it is used to pay qual education expenses. Withdrawn earnings are taxed and subject to a 10% penalty if not used for qual edu expenses.

Front 68

Coverdell ESA Accounts
(2 of 2)

Back 68

If money not used by a bene's 30th birthday, must be distributed & earnings subject to ordinary income taxes & a 10% penalty. Max annual contribution limit to a Coverdell ESA is $2k per beneficiary. Can also be used for elementary & secondary education expenses & for public, private, or religious schools. Nothing to prevent >1 individual from contributing to a Coverdell; the annual limit applies to each beneficiary.

Front 69

Section 529 Plans aka Qualified Tuition Plans (QTPs) >> Prepaid Tuition plans (PTP) and College Savings Plans (CSP). (1 of 3)

Back 69

State-operated inv plans that give families a way to save money for college with substantial tax benefits (contributions made with after-tax $'s). 2 basic types of 529 plans: PTP & CSP. Pre-paid tuition plans generally allow college savers to prepay for tuition at participating colleges & Uni's, & in some cases, room & board can be prepaid as well. Typical CSP's offers a # of investment options. May be $300K account max (differs on State).

Front 70

Section 529 Plans aka Qualified Tuition Plans (QTPs) >> Prepaid Tuition plans (PTP) and College Savings Plans (CSP). (2 of 3)

Back 70

Earnings in 529 plans are not subject to federal tax &, in most cases, state tax, so long as withdrawals are for eligible college expenses, such as tuition & room & board (even a computer). Withdrawals for ineligible expenses subject to 10% penalty.

Front 71

Impact on Financial Aid Eligibility

Back 71

Both types of plans are treated as parental assets in the calc of the Expected Family Contribution (EFC) toward college costs regardless of whether the owner is the parent or the student. Still better than if they weren't 529 assets of the student because parental assets are assessed at a max 5.64% rate in determining the student’s EFC rather than the 20% rate on non-529 assets owned by the student.

Front 72

Offering Circular

Back 72

529's are considered “municipal fund securities” & as such require under the rules of the MSRB, require delivery of an Oficial Statement, aka "Offering Circular."
There are no income limitations on donors making contributions to a 529 plan.

Front 73

Detailed ERISA Section 404 Responsibilities
(2 of 2)

Back 73

to diversify inv's to min risk of large losses, unless doing so is clearly not prudent under the circumstances; in accordance with the plan docts unless not consistent with ERISA.

Front 74

Safe Harbor Provisions of Section 404(c) >> Communicating required information means:
(2 of 2)

Back 74

4) Explanation of how to give inv instructions; 5) Allowing real-time access to Emp accounts either by phone or the Internet.

Front 75

Early Withdrawal Penalties
(2 of 2)

Back 75

-the distribution is made to a beneficiary on or after the death of the emp; the distribution is made because the employee acquires a qualifying disability; or the distribution is made as a part of a series of substantially equal periodic payments under IRS Rule 72t, beginning after separation from service and made at least annually for the life or life expectancy of the emp.

Front 76

Non-qualified Corporate Retirement Plans - Types of Plans
(2 of 2)

Back 76

A statement to the effect that the emp is not entitled to any claim against the employer’s assets until retirement, death, or disability; A disclaimer that the agreement may be void if the firm suffers a business failure or bankruptcy.

Front 77

Section 529 Plans aka Qualified Tuition Plans (QTPs) >> Prepaid Tuition plans (PTP) and College Savings Plans (CSP). (3 of 3)

Back 77

Donor of the 529 plan assets retains control of most 529 accounts & may take the money back at any time (although a 10% penalty tax may apply). You can rollover any unused funds to a member of the bene's family without incurring any tax liability as long as the rollover is completed < 60 days of the distribution.

Front 78

Non-qualified Corporate Retirement Plans - Types of Plans
(2 of 2)

Back 78

A disclaimer that the agreement may be void if the firm suffers a business failure or bankruptcy

Front 79

Safe Harbor Provisions of Section 404(c) >> Communicating required information means:
(2 of 2)

Back 79

4) Explanation of how to give inv instructions; 5) Allowing real-time access to Emp accounts either by phone or the Internet.