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29 Cards in this Set
- Front
- Back
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ID factors that strengthen the argument for delayed retirment |
- DC plans displacing DB plans; the former favors longer careers -Deductioons are made from SS benefits payable to a worker (and to his or her dependents) that has not attained his or her SS full retirment age---currently age 65 and four months---if the worker has excess earnings. In 2014, a person under the full retirement age loses $1 in SS benefits for every $2 earned above the allowable limit of $15,480 until the first day of the year the worker reaches full retirement age. In that final year, the person loses only $1 in SS benefits for every $3 earned above the allowable limit of $41,400. This reduction ends on the first day of the month the person reaches full retirment age. -The delayed retirment credit for those who owork past their SS full retirement age has been increased dramatically. - The SS full retirement age has been increased to ages ranging form 66-6 for younger groups of American workers |
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The text describes a friendlier labor maket for older workser. Explain how this market has grown friendlier for older workers. |
Several decades ago, labor markets were generally hostile to holder workers. Mandatory retiremtn was forced upon many older workers. There were no statutes against age discrimination. Howeve,r demographic changes have made labor markets tight, despite periodic recessions. Many companies prefer part-time workers. And the skills and work habits of older people ar emore generally appreciated and sought. Advances in technology mean that fewer jobs requrie physical labor. |
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As described in the text, what are the four key questions that clients generally ask in making the retirment decision? |
can i afford it? is it the right time? how will my spouce/family be affected? do i want to retire? |
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What financial resources should be considered when a client asks "can i afford to retire"? |
As they contemplate hte affordability of retiremnt, clients generally look to the following financial resources:
- ss old age benefits - company pensions, iras, and tax-deferred anuitites - other sources of income, such as rental property - personal saving sin the form of cash value life insurance, mf's , cd's etc |
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As described in the text, what two time-related factors make early retirment financially challanging?
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Assuming that the early retiree will enjoy th esame life span as others, he or she will have fewer working years in which to accumulate assets, pension benefits, and SS credits and will have more to fincace more nonworking years |
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Explain how pension benefits are reduced by early retirment |
Early retiremtn reduces the benefits paid by defined benefit pension plans. This is because benefits are a function of final average salary (which is generally lower for the early retiree) and years of service. |
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Explain the Cobra regulation that allows terminated employees to extend their medical coverage |
COBRA requires most employers to provide continued coverage through their group medical plans to employees and their dependents---without proof of insurability--- in the case of certain qualifying events: the employee is terminated (and not for gross misconduct); the employee dies; the employee is divorced or legally separated. In most cases, this continued coverage must be made available for a period of 18 months and may be available for up to 36 months for certain situations. The former EE , however, must pay the full premiums (plus 2% of admin costs) for th egroup policy that COBRA has made accessible. |
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Harold has retired and is plannign on taking a lump-sum distribution from his qualifed retiremnet plan. What will be the tax consequences of this action? Describe hwo these tax consequences can be avoided or reduced. |
Distributions from the qualified plans, such as what Harold envisions, are fully taxable in the year in which they are received. Thus, if Harold received a $300k lump-sum distribution in a single year, the entire amount would be counted as taxable income in that year. Harold should consult hi stax advisor to determine if he is eligible for special forward averaging.
Harold could avoid or minimize the tax. Rolling over the lump sum into an IRA would make the distribution nontaxable. Of course, any amounts withdrawn from th eIRA would be taxable. If he does not affect a direct rollover, Harold could reduce the amount o fhis tax liablility by receiving distributions as annuities over a period of several years. He would then be liable only for the amount received each year. |
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Explain how DBs and defined contirbution plan distributions to employees age 55 and old who are separated from service are treated in terms of premature distributions. |
Normally, qualifed plan distributions, subject to a 10% penalty. However, the tax code provides a special separated from service" exception for EEs age 55+. There is no exemption from the income tax liability created by these distributions, however. |
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Describe the concept of substantially equal periodic payments and explain how this method might benefit certain early retirees. |
The phraise substantially equal periodic payments refers toa method for taking qualifed plan distributions over the participant's remaining lifetime, as determined by IRS tables. This is generally th emost palatable approach to avoiding th e10% penalty on premature plan distributions. The formula for doing so is as follows:
Annual PMT= Amt of dist/ life expecancy
Life expectancy in this formula can be the life expecatncy of the individual plan participant (using the unifor matble ) or th ejoint lif eexpectancy of th eplan participant and his or her spouse.
Health, working aclients who are under 59.5 can maximize IRA distributions withough paying the 10% penalty tax on premature distributions by usin geither th efixed amortization or fixed annuitization methods to caluclate their substantially equal periodic payments. |
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John, 56, has begun taking substaintially equal periodic payments from his IRA. This makes it possible to avoid the 10% penalty on premature distributions. Under what condition, if any, can John change this pattern of distributions?
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Once jon ha sbegun taking periodic IRA payments, he must stick with this distribution method for five years. (the rule is for five years or til 59.5, whciever comes later). Failure to observethis rule will trigger the 10% penalty on all previous payments.
After 5 yaers jon can change his distribution arrangement |
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Explain how SS bens are increased for those who continue working and delay th ereceipt of benfits beyond full retiremnt age |
Thos who delay retirement beyond the full retirement age, as defined by the SS admin, receive delayed retiremnet credits (DRCs). These delayed credits stop at age 70. DCRs increase the elvel of future SS old-age and survivor benefits. The amount of a DRC is governed by a schedule linked to the recipient's year of birth. The late retiree will see benefits increase by a certain percentage for every year an individual works an dpays FICA taxes past his or her SS fullr etirement age (and until age 70) |
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At what age mus tan individual begin taking dists from an IRA |
RMD must be made form an IRA for yea rin which IRA woner turns 70.5. First dist may be delayed unti 4/1 of callander year following callander yea rin which IRA owner turns 70.5. Many advisors merely tell clinets tha they mus tbegin taking IRA dists by 4/1. This is tru, but keep in mind that if the first RMD is delayed until the indigvidual turns 70.5, a second required dist must be taken before 12/31 of same year. |
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What penalty does the SS recipient invoke if he or sh econtinues to earn income? Explain the pnalties for working after attaning SS full retirment age? |
Until a person reaches her SS full retirment age, SS bens ar ereduced if ht erecipient's earning sexceed a certain allowable limit. The allowable limit is raised each year. In applying th eearning stest fo the calendar year, only earning sbefore the month of attainment of full returment age are considered. in 2014, a person under the FRA (66 for born in 43-54) lost $1 in SS bens for every $2 earned above limit of 15,480.
The rules for caluclating th work penalty ar edifftr for th eyear n which an indvid attains fra. $1 in bens will be deducted for each $3 eearns over 41.4k in 2014, but only coaunting earning before the month in which an individual reachers his or her full retirmetn age. For exx, if an indivd earns 51.4k during months he or hse reaches fra, 3333 (33%10k) in SS bens iwll be lost cuz of work penalty.
A person who attains his or her SS full retirmetn age can earn as muc has she wishes withogut a benefit reduction. |
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3. Distributions from a qualified plan that are attributable to employer contributions are fully includible in gross income in the year they are received. tf |
True These types of distributions are includible in gross income. |
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1. Social Security benefits for individuals who elect early retirement are reduced one dollar for every dollar a retiree earns above a certain amount. tf |
False Until a person reaches his or her Social Security full retirement age, Social Security benefits are reduced if the recipient's earnings exceed a certain allowable limit. The allowable limit is increased each year. A person who begins taking early Social Security retirement benefits in the year before he or she attains the full retirement age (age 66 for persons born in 1943-1954) loses $1 in Social Security benefits for every $2 earned above the allowable limit of $15,480 (2014). However, the rules for calculating the work penalty are different for the year in which an individual attains full retirement age; i.e., $1 of benefits is lost for every $3 of earnings that exceed the allowable limit ($41,400 for 2014) during the months that precede the month in which an individual attains his or her Social Security full retirement age. |
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2. Partnerships generally liquidate after the death of a partner. tf |
False Partnerships go through dissolution, not liquidation, at the death of a partner. However, most partnerships have agreements that provide continuity when partners die or leave the partnership. |
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1. Which of the following is not typical of voluntary “open window” retirement plans? a. They usually allow a short period of time in which an EE can accept or reject the plan b. The ER may offer to step up the EEs years of service c. The ER may offer to step up the EEs ages d. They usually add payroll an dbenefit costs to the organization |
d They usually add payroll and benefit costs to the organization. Voluntary retirement plans reduce payroll and benefit costs to the organization because employees voluntarily leave the organization. |
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1. Trends in retirement have changed over the years. Which of the following is a reason for these changes in recent decades? a. jobs in the US have become mroe plenetyful b. The manditory retirement age was increased by legislation c. DB plans largely replaced DC plans d. Workers near normal retirment age (63-67) are less likely to find jobs in periods of high unemployment |
a Jobs in the U.S. have become more plentiful. Despite recent improvements in the employment landscape, unemployment remains high. |
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3. Regarding retiree contentment, it is not true that a. blue-collar retirees are happier than white-collar retirees b. people who retired voluntarily are happier than people who were involuntarily retired c. healthy retirees are happier than retirees in poor health d. retirees with disposible income are happier than reitrees without |
a. blue-collar retirees are happier than white-collar retirees. Professional and white-collar retirees are generally happier than blue-collar retirees. |
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11. Regarding COBRA-mandated continuation of group medical coverage for terminated employees, it is not true that a. proof of insurability is requrired b. continued coverage must be made availible for at least 18 months c. The terminated emplee must pay full premiums |
a proof of insurability is required. COBRA requires employers to provide continued medical coverage without proof of insurability. |
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12. Frank Sutton is 56 years old. At age 54, he began taking substantially equal payments from his IRA using the fixed amortization method. Frank wants to take smaller IRA distributions because the value of his account has declined by 40% during the recent bear market. It is nottrue that a. he will avoid the 10% penalty on premature distributions b. he must continue to take substantially equal payments using a method approved by the IRS for 5 years or until 59- whichever comes later, or he will trigger the 10% penalty on previous payments c. he cannot change his distribution method until he is 61 |
c he cannot change his distribution method until he is 61. As a general rule, an individual must continue payments using the same distribution method for five years or until age 59½, whichever comes later. If an individual is receiving payments under either the fixed amortization or the fixed annuitization method, he or she may change to the required minimum distribution method in a subsequent year. Once such a change is made, it must be followed until the above-described restriction ends. |
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21. Regarding rollovers from a traditional IRA to a Roth IRA, the amount of the rollover must be included in the taxpayer’s adjusted gross income (AGI). tf |
True The amount of the rollover is added to the taxpayer’s AGI. |
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22. Early retirement programs often allow for alteration of vesting requirements in existing pension plans. tf |
True Early retirement plans often cut through existing vesting requirements and may allow for earlier vesting than is normally required. |
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23. All severance plans must abide by ERISA’s participation, funding, and vesting requirements. tf |
False Some severance plans are not subject to ERISA’s requirements. To qualify for this exemption, the present value, amounts, and recipients of the payments must fall within narrow and well-defined parameters. |
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24. A person that has attained his or her Social Security full retirement age will still loose $1.00 of benefit for every $3.00 earned in excess of the annual limit on earned income ($41,400 in 2014). tf |
False The Senior Citizen’s Freedom to Work Act of 2000 repealed the Social Security retirement earnings limit on the amount that a person who has attained his or her Social Security full retirement age may earn without having their Social Security benefits reduced. |
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25. Labor markets are becoming friendlier to older workers. tf |
True Due to demographic changes, labor markets are becoming more favorable to older workers. In certain markets, there are fewer skilled workers, companies prefer part-time employees, and the skills and work habits of older workers are appreciated. |
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26. People in professional occupations are more likely to take early retirement than blue-collar workers. tf |
False Professionals are likely to work longer than blue-collar workers because they are less affected by the limitations imposed by declining physical strength. |
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29. Tin parachutes apply to middle managers.
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True Tin parachutes apply to middle management employees, and golden parachutes apply to upper management executives. |
