FREE FPQP Retirement Planning Question and Answers

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-SEP (simplified employee pension) IRA is an IRA established by an employer for each eligible employee
-only the employer makes contributions into the plan for the benefit of the employee (employees CANNOT contribute)
-unlike employer-funded profit sharing plans, SEP accounts must always be fully vested immediately
-employer cannot prohibit an employee from withdrawing funds (but normal income tax and 10% early withdrawal penalty apply)
Eligibility
-age 21
-have worked for employer at least 3 of the immediately preceding 5 years
-have earned at least $600 (so don't work well with firms that have a lot of part-time or seasonal help)
Contributions
-contributions are deductible for the employer and excluded from income for employee
-earning grow tax-deferred
-SEP IRA is most similar to a profit sharing plan but tax reporting for employers is reduced (there is none except for filling out the adoption agreement) and there is no expectation from the IRS that contributions to the SEP be made on a regular basis
-maximum annual contribution to a SEP for an employee is 25%of compensation up to maximum of $56,000

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SEP IRAs provide a straightforward retirement savings option for employers and are suitable for businesses with fluctuating income or seasonal employees, given the flexibility in contribution amounts and timing.

-SIMPLE=savings inventive match plan for employees
-only employers with 100 or less employees and can only adopt if no other plan is in place
Eligibility
-any employee who received compensation of $5,000 (and can expect to make that amount in the current year) or more during two prior years must be covered under the SIMPLE IRA
-no age restrictions
-employees are fully vested immediately (for their contributions and employers)
-employee elective contributions are limited to $13,000 and catchup contributions are limited to $3,000
Contributions
-employers must contribute to each employee's account in one of two ways: 1) match the employee's contributions up to 3% of salary 2)make a flat 2% contribution (nonelective employer contribution) whether the employee makes elective contributions or not. amount is based on employee's compensation and max amount is $5,600
-employer and employee contributions are deductible and excluded from income for the employee (Social Security taxes apply on the employee deferral amounts)....earnings on contributions grow tax deferred
-SIMPLE plans entail less reporting and are less costly and complex than 401k plans for employers
-**in an effort to deter employees from just pulling the money out of their SIMPLE IRAs...the early withdrawal penalty was increased from 10% to 25% for the first 2 years that the SIMPLE IRA is open....so if funds are taken out early within 2 years, they are subject to the 25% penalty and also income tax
-since SIMPLE IRA plans are essentially IRA accounts, the employees have control once funds are deposited

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The SIMPLE IRA plan is designed for small businesses with 100 or fewer employees.
Employers can adopt the SIMPLE IRA if they don't already have another retirement plan in place.

-main advantage of Roth IRAs: tax-free treatment of distributions and account earnings for the owner and beneficiary ....ALL contributions are made with after-tax dollars (so no deductions available)
Roth IRA Eligibility
-only earned income and annual income limitations requirements
-individuals filing individually with a modified adjusted gross income up to $137,000 can contribute
-marries joint filers with modified adjusted gross income up to $203,000 can contribute
-neither active status (to employer sponsored retirement plan) nor age is relevant
Roth IRA Phaseouts:
-single: from $122,000 to $137,000
-married filing jointly: from $193,000 to $203,000
Roth IRA Distributions
-Roth IRAs are not subject to RMD rules unlike traditional IRAs where distributions must start when the individual turns 70 1/2
-individuals can continue to contribute to Roth IRAs after age 70 1/2 if they still have earned income
Roth IRA Qualified Distributions
-qualified distributions = no income tax and no 10% early withdrawal penalty on any earnings
-distributions are qualified if: (1) a five-year holding period has been met (starts January 1 of the year the Roth account was opened)....(2) if the distribution is made after: age 59 1/2, death, disability or if it is made to a first-time home buyer for the purchase of a home (max distribution is $10,000)

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The main advantage of Roth IRAs is the tax-free treatment of distributions and account earnings for the owner and beneficiary.
Contributions to Roth IRAs are made with after-tax dollars, so no deductions are available for contributions.
Eligibility for Roth IRAs is based on earned income and annual income limitations:
Individuals filing individually can contribute with a modified adjusted gross income (MAGI) up to $137,000.
Married joint filers can contribute with a MAGI up to $203,000.
Active employment status (with an employer-sponsored retirement plan) and age are not relevant for Roth IRA eligibility.
Phaseouts for Roth IRA contributions are:
For single filers: MAGI from $122,000 to $137,000.
For married filing jointly: MAGI from $193,000 to $203,000.

-usually there is a 10% early withdrawal penalty prior to the age of 59 1/2.....but
The following are exceptions for ANY plan:
1. Distributions because of death - distributions to any beneficiary will not have the penalty tax
2. Distributions because of disability - if you are permanently and totally disabled then payments to you will not have the penalty tax
3. Distributions made as a series of substantially equal periodic payments
4. Distributions for medical expenses to the extent that they exceed 10% of AGI
5. Distributions that are qualified reservist distributions - individuals who are called to active duty for at least 180 days
Exceptions only to qualified plans (401k plans) and NOT to IRAs:
1. Distributions made after separation from service - if the separation occurred in or after the year you reached age 55
2. Distributions made under a qualified domestic relations order - divorce
3. Distribution of dividends from employee stock ownership plans
Exceptions that ONLY apply to IRA accounts:
1. Distributions to pay for higher education expenses (college) -
2. First time home purchase of up to $10,000 - eligible if you or your spouse did not own a home during the 2 year period leading up to the home purchase

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"Applicable to Any Retirement Plan (Including IRAs):
Distributions Due to Death:
Distributions to any beneficiary due to the account holder's death are exempt from the penalty tax.
Distributions Due to Disability:
Payments to individuals who are permanently and totally disabled are exempt from the penalty tax.
Substantially Equal Periodic Payments:
Distributions made as a series of substantially equal periodic payments are exempt from the penalty tax.
Medical Expenses:
Distributions used to pay medical expenses that exceed 10% of the taxpayer's Adjusted Gross Income (AGI) are exempt from the penalty tax.
Qualified Reservist Distributions: Individuals who are called to active duty for at least 180 days as qualified reservists are exempt from the penalty tax."

-these schedules are only available for defined benefit plans (NOT profit sharing/401k)
1. Five-year ""cliff"" vesting
-provides 100% vesting after the fifth year of ""service"" (usually 1,000 or more per year is what counts)
-no amounts are vested until the fifth year is completed
2. Seven-year graded vesting (aka three-seven vesting)
-if worked less than 3 years get 0%
-get 20% after the third year
-get 40% after the fourth year
-get 60% after the fifth year
-get 80% after the sixth year
-7 or more is 100%

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These vesting schedules determine when employees become entitled to employer-contributed benefits in a defined benefit plan. Vesting schedules are important considerations for employees planning their careers and retirement, as they impact the availability of retirement benefits based on the length of service with a particular employer.

"Spousal IRA"" refers to using the other spouse's earned income in order to make an IRA contribution to their OWN account...it is NOT some joint account
-spouses not working outside the home (or spouses with less than $6,000 of earned income) may contribute up to $6,000 to a spousal IRA based upon their spouse's income. The spouse can also qualify for the age 50 ""catch-up"" contributions.
-to be eligible, the nonworking spouse must file jointly with the working spouse
-the combined compensation of both spouses must be at least equal to IRA contributions

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A Spousal IRA is a valuable retirement savings strategy that allows nonworking or lower-earning spouses to contribute to an IRA based on the earned income of their working spouse, providing additional retirement security for both partners.

Which of the following is a key consideration in retirement planning?

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Diversification helps spread investment risk and can enhance long-term returns in retirement portfolios.

-may be specified as a dollar amount ($1,000/month) or a formula (50% of final average compensation with 25 yrs of service)
-these plans are now being replaced by 401(k) plans but still found with many government jobs
-companies make contributions to the plan based on determines assumptions. There is one big 'pot' for all participants (not separate accounts) ...employee doesn't know how much money is being set aside but will know with great certainty how much of a benefit to expect at retirement on a monthly basis
-employee contributions are usually not allowed (gov't pension plans may require employees to contribute a certain amt)
-all employees are eligible to participate (depending on required age and # of years with employer)

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Defined benefit (DB) pension plans offer retirement security by guaranteeing a specific benefit amount based on a predetermined formula, often tied to years of service and final compensation. Although less common in the private sector, DB plans remain prevalent in government and public-sector employment, providing retirees with stable and predictable retirement income.

-assets owned outside of any employer-funded retirement account
-savings and investments can be in any of the four major asset classes: cash/cash equivalents, stocks, bonds, and real estate
-you want little to no debt while in retirement (become income sources are limited)
-A "traditional" retirement was to work for a company for many years and retire with a pension....home mortgage would be paid and there would be a good amount of cash value in a whole life policy in case of emergencies

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Personal savings and investments are essential components of retirement planning, offering individuals the opportunity to accumulate wealth outside of employer-sponsored retirement plans and secure their financial future in retirement.

-Medicare provides for hospital insurance (HI) and supplemental medical insurance
Medicare consists of four separate programs:
-Part A=Hospital and skilled nurse care
-Part B=Physician and outpatient hospital care
-Part C=Medicare Advantage plus (offered through an insurance company approved by Medicare and contain better coverage than original Medicare)
-Pard D=Outpatient prescription drug plan (financed by premiums that can also be deducted from social security)
-HI portion is funded by the 2.9% compulsory tax
-supplemental medical insurance (SMI) (Part B) finance by premiums paid by participants and gov't funding (lowest possible premium is $135.50 but increases as income rises) ....participation in part B is voluntary and premiums are deducted from monthly Social Security payment. Individual needs to enroll in Part B up to three months before or after turning 65 (penalties for not initially enrolling ...penalty is a permanent increase in payments of 10% for each 12 month period of delay application

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Understanding the different parts of Medicare and their coverage is essential for individuals approaching Medicare eligibility age (65 years) and those planning their healthcare coverage during retirement. Each part of Medicare provides specific benefits and has enrollment requirements, and timely enrollment is crucial to avoid penalties and ensure comprehensive healthcare coverage.

-there is an increase in the number of people over age 65...this growing number of older people will affect the capacity of our society to provide an individual with a worry-free retirement that includes government-furnished health care and government-subsidized financial safety nets ....the net will be there but how substantial that "net" is is the question
-the millennial population is currently passing baby boomers as the largest demographic (baby boomers are decreasing as they are aging b/c they are dying)

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The aging population and changing demographic trends underscore the importance of proactive measures to enhance retirement security and address the evolving needs of older adults in society. Policymakers and stakeholders must collaborate to adapt social welfare systems to meet the challenges posed by demographic shifts and population aging.

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