12 - Wealth Management and Distribution Planning Flashcards
Comprehensive diversification:
A comprehensive and holistic approach generally should be utilized when conducting __________. Individuals should diversify and look at the entire set of investments along the same investment _______; in addition, asset allocation should use a perspective. Failing to use this comprehensive approach could result in under- or overallocating to specific asset classes. This assumes, however, that all of the assets are being accumulated to support retirement resource needs. This may not be the case. If an individual is earmarking certain assets for college funding, these assets must be accessed within a targeted time period when education expenses become due. Consequently, it would be problematic to use a comprehensive approach since these assets have been segregated with a specific purpose for their use.
asset allocation
time horizon
An individual may opt for some form of periodic payment. A person may select payments for a fixed-dollar amount or for a fixed number of years.
The periodic payment approach would avoid the expenses associated with annuities that compensate an insurer for assumption of _______ risk.
A disadvantage of fixed periodic payments is that an individual can exhaust his or her asset base at a future time. If this asset base is the sole or primary means for funding living expenses and the period of disbursement elapses before death, the individual could become indigent. However, if the return on the asset base exceeds that which originally was projected, the individual will either be able to adjust the payment upward or have excess assets to distribute in his or her estate.
longevity
Strategic _____________: Sometimes the selection of specific assets within certain retirement savings plans can enhance wealth creation. For example, a corporate stock paying a substantial dividend would normally be subject to ordinary income taxation on the dividend. The purchase of this same stock within a self-directed Roth IRA would mean a high tax-free yield if withdrawals in future periods met the stipulations for a qualified distribution.
asset positioning
The distinguishing characteristic of an _________ option is the guarantee of lifetime income by the plan or the insurer. An insurer can guarantee lifetime income because of the law of large numbers and the operational fact that some payments from the contract will be terminated when a plan participant dies. They are attractive as retirement plan distribution arrangements because the individual opting for this form of payment cannot outlive the income source.
annuity payment
Various aspects of retirement plan design allow individuals to manage retirement assets using a wealth management approach. Today’s individual participant is, in most cases, more empowered to strategically manage his or her retirement assets. This trend has been supported both by marketplace forces and governmental policy initiatives.
An individual should make the most of this empowerment. This is true both during the accumulation phase and during the distribution phase. Because individuals have the ability to select ________ and, in some plans, determine whether their contributions occur on a _______ basis, individuals can control both asset allocation and tax status of their accumulating retirement resources. An individual also can determine what type of retirement savings ______ to use to accumulate assets.
investments
pre- or after-tax
vehicle
Tax Reform Act (TRA) ‘86 added an additional 10% tax on any taxable amounts received before age 591⁄2 from a qualified retirement plan. This additional tax on early distributions does not apply in the case of death, disability, or termination of employment after age _____. Exceptions also are granted for:
- Distributions that are part of a __________ made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of the employee and his or her beneficiary
- Distributions used to pay ________ to the extent the expenses exceed 7.5% of adjusted gross income. Also, distributions used to pay health insurance premiums after separation from employment
- Certain ___________ made from an employee stock ownership plan (ESOP)
- Payments to ________ pursuant to a qualified domestic relations order (QDRO)
- Distributions used to pay qualified _______ expenses of the taxpayer or his or her spouse, child or grandchild
- Distributions for the purchase of a ______ (limited to $10,000)
- Certain other distributions, such as those to pay an ________ or a timely corrective distribution from the plan
55
- series of substantially equal periodic payments
- medical expenses
- dividend distributions
- alternate payees
- education
- first home
- IRS tax levy
Financial advisors attempt to target retirement resource needs using various types of models. These models may be helpful but have limitations. Retirement planning software models may be segmented into the following three model types:
- Deterministic models use a set of “______” assumptions. These are determined by the model developer, the model user, or some combination of the two. Purely deterministic models do not possess effective means for measuring _____. They can illustrate risks in two ways: (a) the model can be run multiple times illustrating different scenarios or (b) assumptions can be varied indicating sensitivity to various assumptions (i.e., investment return, mortality, inflation, etc.).
- Stochastic models do not use fixed assumptions, but rather vary assumptions and yield probabilities of success or failure depending on repeated _______ of the model. These models employ _______ techniques to introduce variability into the parameters of the model. Pure stochastic models do not really exist because all of these models need to employ certain ____ assumptions. Although the models allow for the variation of some assumptions, there are some elements that remain fixed, even though these elements of the environment actually can and do undergo change.
- Mixed models use a combination of fixed (deterministic) assumptions and variable assumptions. These models allow a certain set of assumptions to vary; thus, these types of models attempt to gauge probabilities of success or failure. ________ techniques are examples of these mixed models. A simulation is an analytical method meant to imitate a real-life system, especially systems that are too mathematically complex or too difficult to reproduce. The simulation selects variable values randomly, and the model is run multiple times to assess outcomes. For each uncertain variable that can have a range of possible values, the possible values are defined with a probability distribution. The type of distribution selected is based on the conditions that surround this variable.
fixed
risk
iterations
statistical
fixed
Monte Carlo
Developing a retirement income strategy involves several important considerations. First, an individual must assess retirement income needs and have some idea of the ongoing _______ he or she will incur during retirement. Additionally, an individual should assess his or her _____ and the possibility of additional expenses related to the occurrence of these. Costs and tax implications of various approaches should be considered.
expenses
risks
Risk transfer at favorable pricing:
Given the retirement risks, it is sometimes a preferable risk management strategy to transfer some of these risks. For the individual planning for retirement, this is often accomplished through the purchase of _______. Risk transfer can occur by using life insurance, health insurance and long-term care insurance. Retirement income risks and investment risks can be transferred by purchasing an ________ or by opting for a retirement distribution in an annuity form. When these products are priced favorably, they should be considered.
insurance
annuity
It is important to have a clear understanding of the elements that constitute an employee’s cost basis (or investment in contract), if any, since the employee’s cost basis is an important factor in the taxation of distributions under the plan. Briefly, Section 72 of the IRC provides that an employee’s cost basis includes the following:
- The aggregate of any amounts the employee contributed on an _______ basis while employed
- The aggregate of the prior _________ costs the employee has reported as taxable income, but only for distributions made under that policy.
- Other contributions made by the employer that already have been ______ to the employee. An example could be where the employer has maintained a nonqualified plan that later was qualified.
- ______from the qualified retirement plan to the participant that were treated as taxable distributions.
- after-tax
- insurance
- taxed
- Loans
Broadly speaking, distributions from a qualified plan are taxable in accordance with the annuity rules of Section ____ of the Internal Revenue Code (IRC).
Lump-sum distributions made to individuals born before January 1, _____ may qualify for special income-averaging treatment if certain conditions are met.
72
1936
Attainable efficiencies should be sought:
When accumulating resources for retirement, an individual can capture certain efficiencies during the accumulation process. These efficiencies can occur from different sources. For instance, the very nature of retirement savings vehicles confers tax savings through ______. In addition to tax savings, certain retirement savings vehicles offer lower costs to retirement savers. Sometimes these costs are further reduced when individuals achieve a certain ______ within their accounts. When an individual is starting his or her retirement savings program, vigilance for these savings and the effect of compounding on the individual’s savings can appreciably enhance wealth accumulation.
tax deferral
asset size
PPA made some changes in the law affecting plan distributions and rollovers from various retirement plans:
- PPA made changes to the mortality table and ______ that is used to compute the minimum value of a lump-sum distribution paid from a DB plan. The effect of these changes generally is to _______ the value of the lump sum that would be paid under prior law.
- In the past, distributions to plan participants from a qualified plan before severance of employment were ______. This issue caused difficulties in facilitating ______ retirement arrangements for workers nearing retirement. PPA made clear that a qualified plan may provide distributions to an employee who attains the age of ___ even though the employee has not separated from service.
- PPA directed the Secretary of the Treasury to change regulations regarding hardship withdrawals from qualified plans, tax-sheltered annuities, nonqualified deferred compensation plans and deferred compensation plans of state and local governments and tax-exempt organizations. With the adjustment in these regulations, distributions for hardships and unforeseen financial emergencies that were previously allowed for conditions affecting spouses and dependents of plan participants would now be extended to a participant’s ______ under the plan. This provision would be especially helpful in situations involving hardship withdrawals for the payment of medical expenses.
- PPA waived the 10% early withdrawal penalty tax on qualified _______ employees who separate from service at their employers and take distributions from government pension plans after having attained the age of ___.
- PPA allowed rollovers from various types of retirement savings plans to be directly placed into _______ rather than having to first be moved into a traditional IRA as was the case previously.
- PPA permitted the rollover of after-tax contributions through a trustee-to-trustee transfer from a qualified retirement plan to a DB plan or a 403(b) plan. After-tax rollovers, although previously allowable into DC plans and IRAs, had not been permitted into DB plans or 403(b) plans prior to January 1, ______.
- PPA allowed a nonspouse beneficiary to receive a distribution from an eligible retirement plan previously held by a deceased participant or account owner. Such a distribution must occur through a direct trustee-to-trustee transfer into an IRA created to receive the distribution on behalf of the beneficiary. When such a distribution occurs, the transfer is considered an eligible rollover distribution. The IRA that received the distribution is treated as an ________, and the required minimum distribution rules applicable where the participant or account owner dies before the entire interest is distributed apply.
- interest rate / reduce
- problematic / phased / 62
- beneficiary
- public safety/ 50
- Roth IRAs
- 2007
- inherited account
(IRD) = ________. IRD occurs when a deceased person was entitled to items that would have created gross income for federal income tax purposes but that were not includable in the decedent’s _____ for the year of his or her death. IRD items are generally treated as gross income to whoever receives them after the decedent’s death. They do not receive a step-up in basis following the decedent’s death, as do capital assets at present. Accordingly, these assets can be subject to substantial ______. Also, because of the ability of assets within these plans to compound on a tax-deferred basis (or on a tax- free basis for Roth plans), these plans can create substantial wealth.
In respect of a decedent
gross income
taxation
An individual may opt to combine various ________ options as part of a retirement income strategy. If an individual possesses sufficient resources and has charitable giving or estate-planning objectives in addition to retirement income objectives, it is even more likely that a ________ distribution option will fail to meet all of the individual’s needs. Therefore, many individuals evaluate multiple distribution forms as components of their overall retirement income strategy.
In addition to blending multiple income distribution forms, the timing when these distributions commence also can be varied. As such, a ________ approach can produce income enhancements at select prearranged times or when circumstances dictate additional resource needs.
distribution
single
phased
