Retirement Exam 2

contribution limits for 401ks

$24,500 under 50

contribution limits for IRAs

lesser of $7,500 ($8,600 for 50+) or individual’s earned income

catch-up contribution rules

by employees age 50 +

$8,000 catch up

excess IRA contribution procedures

subject to 6% excise tax for each year the the excess contribution remains in the account

avoid excise tax by withdrawing excess; contribution and the attributable earnings before April 15th of the following tax year

not permitted IRA investment options

life insurance, collectibles, other coins

permitted investment options

cash, stocks, bonds, efts, etc

social security beginning

signed into law 1935 by Roosevelt

federal safety net

pays retirees age 65 up

Social security averages

average monthly benefit in 2025 = $1,976

33% income for elderly

projected to become insolvent in 2035 (reduce benefits by 24%)

social security benefits

lifetime income for workers/spouse

regular cost-of-living adjustments

benefits not affected by markets

guaranteed income stream

preferential tax treatment vs other income sources such as IRA income

social security eligibility

at least 40 quarters of work

one quarter = $1,510

social security spousal benefits

50% of covered spouse benefit

social security widow benefits

widow can affect benefits at age 60 ($24,480 limit)

71.5% of full benefit amount if taken at age 60 and based on deceased spouse’s earnings

must be married for at least 9 months

earning limitations may apply if still working

full retirement age by year

1943-1954 = 66

1955 = 66 and 2 months

up every year until 1960

1960 and later = 67

IRA withdrawal rules

distributions prior to 59 ½ may be subject to 10% early withdrawal penalty, unless distribution is on account of an exception

retirement plan withdrawal rules

penalty free withdrawal at age 59 ½

required minimum distributions at 73

10% penalty on early withdrawals

Roth conversions

pre-tax funds in IRA can generally be converted to Roth IRA

pre-tax funds in 401(k), 403(b) or governmental 457(b) plan can generally be converted to Roth account via in-plan Roth rollover

deferred income taxes due must be paid on converted funds

no early withdrawal penalty

pro-rata implications

Roth conversions are taxed proportionally based on pre-tax and after-tax contributions

SEP basics

IRA’s provided by employers

greater funding than traditional IRAs

small business retirement plan

tax-deferred growth of contributions

treated like traditional IRA for tax purposes

SIMPLE IRA basics

provided by employers with employee contributions

more like a 401(k)

saving incentive match plan for employees

retirement plans for small employers (less than 100 employees)

easy to establish and maintain

Medicare basics

began in 1965 under Lyndon B Johnson

federal health plan for people 65+, disabled individuals, individuals with permanent kidney failure

consists of hospital insurance (part A) medical insurance (part B) and prescription drug (part D)

QDRO basics

qualified domestic relations order

order set forth by judge that details right of a third party to receive benefits from another individuals qualified plan (child support, divorce, alimony)

nontaxable distributions as long as assets are deposited into recipients IRA or another qualified plan

required minimum distribution calculation

RMD = account balance on Dec 31 of prior year/distribution period

401k loans

borrow up to 50% of vested account balance ($50k max)

money paid back over a number of years (usually 5)

paid back via salary deferrals

nontaxable or subject to penalties

missed payments will not impact credit scores

traditional IRA

tax deductible

taxable distributions

ordinary income, required minimum distributions

Roth IRA

nondeductible contributions

qualified distributions are income tax-free

share contribution limits with traditional IRA

not subject to required minimum distribution rules during the life of the account owner

Inherited IRA distribution options

transfer funds to your own IRA

open inherited IRA

lump sum distribution

Windfall Elimination Provision

eliminated with 2025 social security fairness act

government employee with pension that does not pay into social security

reduces social security benefit up to half

major exception: 30+ years of substantial earnings under SS, $31,275

Social Security Fairness Act of 2025

repeals WEP and GPO, restores full SS benefits to over 2.8 million affected workers, authorized retroactive payments back to January 2024