Financial Planning Flashcards

A self-employed consultant with no employees wants to contribute as much as possible to retirement. Why is a Solo 401(k) often better than a SEP IRA at moderate income levels?

Answer: It allows both an employee elective deferral and an employer profit-sharing contribution

A Solo 401(k) adds an employee deferral on top of the employer contribution, so more can be saved at lower income levels.

A 58-year-old high-income practice owner wants deductible retirement contributions well above 401(k) limits. Which plan type best fits?

Answer: A cash balance (defined benefit) plan

Cash balance plans allow large age-based deductible contributions, which helps older high earners most.

A sole proprietor's SEP IRA contribution is often described as about 20% instead of 25%. Why?

Answer: The 25% limit applies to net earnings after subtracting the contribution itself and half of SE tax

Because the contribution reduces the compensation it is based on, 25% of compensation works out to about 20% of net SE earnings after the half-SE-tax deduction.

A business owner rents their home to their S corporation for 12 days a year for documented board meetings at fair market rent. How is the rent treated?

Answer: The business deducts it and the owner excludes it from income under §280A(g)

The Augusta Rule excludes rental income for a dwelling rented fewer than 15 days a year, and the business may deduct legitimate, reasonable rent.

A sole proprietor hires their 15-year-old child for real, reasonably paid work. What payroll tax advantage applies?

Answer: The wages are exempt from FICA and FUTA

Wages a sole proprietor (or parent-owned partnership) pays a child under 18 are exempt from FICA, and under 21 from FUTA.

A founder wants their startup stock to qualify for the Section 1202 qualified small business stock exclusion. Which entity requirement must be met?

Answer: The company must be a domestic C corporation

QSBS treatment applies only to stock originally issued by a domestic C corporation that meets the gross-asset and active-business tests.

A high earner has maxed out 401(k) deferrals and wants more Roth savings. What must the plan allow for a 'mega backdoor Roth'?

Answer: After-tax contributions plus in-service withdrawals or in-plan Roth conversions

The strategy relies on after-tax contributions up to the total annual additions limit, which are then quickly converted to Roth.