Chapter 10

Question 1

What is an annuity and how is it treated by the IRS?

Answer 1

Contract between an individual and an insurance company.
tax deferred

Question 2

What are the different types of annuities? What are the differences in terms of asset classes, licenses needed to sell them, accounts used?

Answer 2

Fixed annuity
-insurance product, not security. RR needs insurance license
-RE, mortgages etc.
-Insurance co. keeps in general account

Variable annuity
-stocks, bonds, MIC
-security + insurance product. both licenses needed
-Insurance co. keeps VA in separate account segregated from general funds

Question 3

What size requirements must an insurance company meet?

Answer 3

Insurance co.: >$1M net worth + separate account >$1M

Question 4

What are the different kinds of variable annuities?

Answer 4

Direct investment: individual stocks, bonds. RIA needed to manage AUM. Considered open-ended.

Indirect investment: MIC. Considered UIT.

Question 5

What are the restrictions surrounding annuity applications?

Answer 5

Illustrations/marketing of performance of An: < 12%

Applications approved/denied within 7 biz days

Question 6

What is a 1035 exchange?

Answer 6

no tax to switch An

But there are surrender charges, so 1035s are red flag. Investor must acknowledge.

can’t use if 1035 already used < 36 m

Question 7

What happens to the sales commission if an investor redeems a contract?

Answer 7

Commissions returned if investor redeems < 7 biz days

Question 8

What are the different annuity purchase options?

Answer 8

Single payment deferred
Single payment immediate (< 60 d)
Periodic payment deferred

Question 9

What is being purchased by an investor in a deferred annuity plan?

Answer 9

In deferred plans, the payments are used to purchase accumulation units (proportionate ownership in separate account)
When the accumulation phase ends: accumulation units are traded for annuity units

Question 10

What are the different annuity payout options?

Answer 10

Life only / straight life

Life with period certain (greater of: life or fixed period. if investor dies before period end => estate gets money)

Joint with last survivor

Question 11

What is the assumed interest rate?

Answer 11

bechmark for separate account performance. It’s an earnings target.

Question 12

What is the tax treatment of an annuity?

Answer 12

Contributions to An are made with after tax $. If money withdrawn from An, only growth is taxed.

Question 13

What is the maximum sales charge for an annuity contract?

Answer 13

None

Question 14

What are the two different subsets of retirement plans? What are the key differences between them?

Answer 14

Qualified: contribution pre-tax, IRS approval required, taxed as ordinary income, everyone allowed to participate

Non Qualified: after tax, no required approval, only growth is taxed as OI, corp can choose who is allowed to participate.

Question 15

What is the maximum contribution for a traditional IRA?

Answer 15

Contribution: $6.5k pp. Over 50 y o: $7.5k.

Question 16

In what case does money grow tax deferred? (Trad IRA)

Answer 16

Money can grow tax deferred whether contributions were pre or after tax

Question 17

What are the withdrawal rules for traditional IRAs?

Answer 17

Withdrawal < 59.5 y o: 10% tax.
Exemptions:
higher ed, $10k homebuyer, medical insurance if unemployed, $5k birth

Withdrawals must begin at 70.5 y o (required minimum distributions). otherwise: 50% tax

Question 18

Is a Roth IRA qualified or non-qualified? What are the required withdrawals?

Answer 18

Nonqualified account
Contribution limits are for both Trad & ROTH combined, not separately
No withdrawal requirement

Question 19

What is a Simplified Employee Pension IRA? What are the limits and requirements? Who must open account? How are contributions treated by IRS?

Answer 19

Used by small businesses and self-employed individuals.
Limit is 25% of comp or $66k / y
Employer must open account for employee
Employer contributions are tax deductible by employer
Employee must have worked for employer during three of the last five years.

Question 20

What are the requirements surrounding educational IRAs?

Answer 20

$2k limit for each child
Used by 30 y o or 10% tax

Question 21

What is a 529 plan? What are the different kinds?

Answer 21

529 plans: qualified tuition plans:
-Prepaid tuition plan: saver purchases units or credits at participating colleges and universities (usually public and in-state) for future tuition and mandatory fees at current prices
-College savings plan: savings for the beneficiary’s future qualified higher education expenses – tuition, mandatory fees and room and board.

Question 22

What is the yearly IRA contribution deadline? How are IRA accounts held? What are limitations regarding investment types in IRAs?

Answer 22

IRA contributions deadline: Apr. 15.

Accounts held “in name of” custodian and “for benefit of” account holder

Can’t do margins, shorts etc. Unwise to put munis (interest is already tax free)

Question 23

What are the different ways of moving an IRA from one custodian to another?

Answer 23

Rollover: individual takes possession for max 60 d. Max once per year.

Transfer: direct custodian to custodian transfer. No limit.

Question 24

What is Age for Required Minimum Distributions from IRAs? What is the deadline to withdraw an inherited IRA (+ exemptions)?

Answer 24

Secure Act:

72

Inherited IRA: 10 y to withdraw. (exempt: widows, disabled, ill, minor, individual < 10 y younger than deceased)

Question 25

What is a Keogh plan? Contribution limits? Requirements? Qualified or non-qualified?

Answer 25

qualified retirement plan for self-employed, sole proprietors & unincorporated businesses.

contribution: lesser of 25% or $66k (same as SEP)

employee works full time, > 21 y o, > 1 y worked at employer

Question 26

What are Tax Sheltered Annuities TSA & Tax deferred accounts TDA ? Are they qualified or non-qualified? Contribution limits?

Answer 26

-non profit & public orgs
-qualified
-Private hospitals and private schools are considered non profits (501c3)
-Employee elective deferral max $22.5k. Employer 25% or $66k.

Question 27

What are the different kinds of corporate qualified and nonqualified retirement plans?

Answer 27

Qualified (est. as Trust)
-Defined benefit plans
-Defined contribution plans ($22.5k employer contribution max ; ex: 401k)

Non qualified
-Payroll deductions
-Deferred compensation plans (beneficial bc when retired, employee is in lower tax bracket ; but if co. goes out of business the employee is screwed)

Question 28

What is the maximum profit sharing for employees of a co.?

Answer 28

lesser of 100% of comp or $66k

Question 29

What is the employee retirement income security act? What restrictions does it put in place?

Answer 29

Regulates private pension and employee benefit plans

-Plan participation (>21yo, 1y FT 1000h, 3y PT 500h)
-Vesting (employer can’t be more restrictive than 3-6 y gradual vesting or 3y cliff)
-Annual updates
-Allowance of a beneficiary in case of death

Question 30

What are Dept of Labor prohibited transactions? What is the penalty if a prohibited transaction happens ?

Answer 30

Transaction between a retirement plan and disqualified person.

DP: plan fiduciary, service provider, employer, unions, D&O + 10% stockholder of employer and their families

15% penalty, then 100% if not corrected within tax period