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Life Insurance Notes > Chapter 11 > Flashcards

Chapter 11 Flashcards

1
Q

What are the 2 eligibility requirements for setting up an Individual Retirement Account?

A
  1. The individual must be under 70.5 years of age

2. Must have earned income from salary, wages, commissions, bonuses, tips, or money from a divorce decree

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2
Q

Can passive income from rental properties - interest, dividends, pensions, annuities - be used for eligibility in a IRA?

A

No

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3
Q

Can a non-working spouse make contributions to an IRA based upon earned income of spouse (spousal IRA)

A

Yes

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4
Q

What are annual IRA contributions capped at?

A

THe lesser of:

  1. 100% of earned income
  2. A flat dollar amount - the tax law places limits on IRAs contributions, the amount is adjusted annually for cost-of-living adjustments
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5
Q

Does the flat dollar limit also apply for spousal IRAs?

A

Yes

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6
Q

Do individuals aged 50 and over have a “catch-up provision? What does that mean?

A

Yes - it means that they can contribute more than the amount flat dollar amount defined as the upper limit for IRA contributions

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7
Q

When may individuals deduct IRA contributions from taxable income?

A

When (1) the individual or spouse is not covered by an employer sponsored retirement plan or (2) the adjusted gross income (AGI) is under a certain limit

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8
Q

IRA contributions may be deducted - partially or fully on a federal income tax return and the income limit ranges are adjusted annually - t/f?

A

True - the entire contribution is deductible for incomes below the range

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9
Q

Is any portion of a contribution deductible for incomes above the range?

A

No

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10
Q

A full annual limit contribution is allowed whether it will or will not be deducted from federal income taxes

A

Note

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11
Q

There are some restrictions on the types of products in which IRAs are allowed to be invested in - including what?

A
  1. Life insurance
  2. Collectibles (artwork, antiques, stamps etc.)
  3. Hard Assets (precious gems + metals)
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12
Q

Products that may be used (with IRAs) include what?

A
  1. Flexible premium annuities
  2. Bank accounts
  3. Brokerage accounts
  4. Mutual Funds
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13
Q

Are earnings on IRA contributions tax-deferred?

A

Yes - meaning, income tax is not due until the earnings are withdrawn

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14
Q

An early withdrawal from an IRA account may incur what?

A

A 10% penalty tax in addition to income tax due on the amount withdrawn

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15
Q

When is the 10% penalty on an IRA account waived (for early withdrawal)?

A
  1. Periodic Payments made over the owners life expectancy
  2. Certain Medical Expenses
  3. Payment of Health Insurance Premiums while unemployed
  4. Certain Higher Education Expenses
  5. Down payment for first time home purchase ($10,000 maximum)
  6. Distributions made under a divorce decree to an ex-spouse or dependent child
  7. Correcting an excess contribution
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16
Q

What are the two ways to move IRA accounts from one company to another or from an employer-sponsored plan to an individual IRA?

A
  1. Rollovers: The money from the original IRA or qualified plan is distributed to the owner and the deposit it to the new IRA carrier
  2. Transfers: Called Direct Transfers - the money from the original IRA or qualified plan is distributed directly to the new IRA carrier without coming into the owner’s possession
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17
Q

What are the three rules for rollovers?

A
  1. The money must be deposited within 60 days of the receipt by the owner, or it becomes taxable. And if the owner is under the age of 59.5, it will incur a 10% penalty tax unless an exception applies
  2. If the rollover is coming from an employer sponsored plan it is subject to withholding tax rate of 20%
  3. Limited to One rollover every 12 months
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18
Q

What are “required minimum distribution” of an IRA?

A

Must begin when the owner turns age 70.5. The first may be delayed until April 1st of the following year and each future distribution must happen by December 31

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19
Q

WHat is the amount of an RMD based on?

A

The owner’s life expectancy

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20
Q

Failure to take the RMD results in what?

A

a tax penalty generally equal to 50% of the amount that should have been received by the owner

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21
Q

How long can minimum withdrawals be delayed for? (the first one, then all subsequent ones)

A

The first minimum withdrawal can be delayed until April 1st of the year following the year the owner turns 70.5 - every year thereafter is December 31st

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22
Q

How are deductible IRA contributions and earnings distributed (on a tax basis)?

A

After tax

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23
Q

How are nondeductible IRA contributions and earnings distributed (on a tax basis)?

A

Tax Free

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24
Q

How are IRA treated from the standpoint of the owner’s estate?

A

The entire value of the IRA is includable in the deceased owner’s estate

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25
Q

In the event that the owner of an IRA dies, what happens to the requirements for distribution?

A

They vary depending on the beneficiary

  1. Spouses may choose to treat the IRA as their own - the transfer to the spouse is not taxable
  2. Spouses and non-spouse individual beneficiaries may choose one of the following distribution options
    a. Lump-sum distribution
    b. Distributions for up to 5 years after the owner’s death
    c. Distributions over the beneficiary’s life expectancy (or owner’s life expectancy - whichever is longer)
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26
Q

Is transfer of an IRA to a spouse taxable?

A

No

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27
Q

Are contributions to Roth IRAs ever deductible?

A

No

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28
Q

Qualified distributions from Roth IRAs are tax-free if they meet what two requirements?

A
  1. The Roth has been set up for at least 5 years
  2. Distribution is after age 59.5, or due to death, disability, or being a first-time homebuyer (first time home-buyer is subject to a 10,000 limit)
29
Q

Do Roth IRAs have any minimum distribution requirement at age 70.5 (like traditional IRAs)

A

No - and individual over age 70.5 can even contribute to a Roth IRA

30
Q

May individuals have both a Roth IRA and a traditional IRA?

A

Yes - but the annual contribution to both may not exceed the maximum limit for one IRA

31
Q

Are contributions for Roth IRAs phased out for higher-income taxpayers?

A

Yes

32
Q

All employee sponsored qualified plans have what tax advantages?

A
  1. Employer contributions are tax deductible to the business
  2. Employee contributions are tax-deductible to the employees
  3. Neither employee nor employer contributions are taxable as current income to employees
  4. All (except for Roth 401K feature) earnings grow tax deferred
33
Q

All (except for Roth 401 K feature) distributions from employer-sponsored qualified plans are taxable - t/f?

A

True - because they come from tax deductible sources that grow tax deferred

34
Q

For employer-sponsored qualified plans, how are withdrawals taken before age 59.5 considered?

A

They are considered to be premature, unless there is an exception

35
Q

Premature withdrawals from employer sponsored qualified plans (those taken before the individual turns 59.5 are treated how from (from a penalty perspective)?

A

Premature - unless there is an exception - a 10% penalty tax applies in addition to any ordinary income tax

36
Q

Required minimum distributions for employer sponsored qualified plans occur when?

A

When the individual turns 70.5 - the first withdrawal may be delayed until April 1 of the following year (then December 31st thereafter)

37
Q

All employer sponsored qualified plans must be what?

A

Approved by the IRS to qualify for favorable tax treatment

38
Q

The employee retirement income security act of 1974 (ERISA) established what requirements for retirement plans?

A

For employer-sponsored retirement plans, it established the following:

(1) Participation - must benefit all employee, not just a few
(2) Non-discrimination - may not provide benefits to executives and other highly paid that are different from rank-and-file
(3) Vesting - Employee contributions immediately vest and employer contributions must vest after 6 years
(4) Reporting and Disclosure - Must receive summary plan description and annual report
(5) Fiduciary - anyone with control over the plan or its assets are fiduciaries. They must manage the plan solely in the best interest of its participants using the “prudent person rule.”

39
Q

What is the participation requirement of ERISA? (requirements for employer sponsored qualified plans)

A

Must benefit all employees, not just a few

40
Q

What is the non-discrimination policy of ERISA? (requirements for employer sponsored qualified plans)

A

May not provide benefits to executives and other highly [aid that are different from rank-and-file

41
Q

What is the vesting policy of ERISA? (requirements for employer sponsored qualified plans)

A

Employee contributions must immediately best and employer contributions must vest after 6 years

42
Q

What is the reporting and disclosure policy of ERISA?

A

Must receive summary plan description and annual report

43
Q

What is the fiduciary policy of ERISA?

A

Anyone with control over the plan or its assets are fiduciaries. The must manage the plan solely in the best interest of its participants using the “prudent person rule”

44
Q

Pension plans may be either defined benefit or defined contribution - t/f?

A

True - pension plans require employers to make funding contributions to the plan every year

45
Q

Can employees with a defined benefit plan generally choose between either a “lump sum” or “annuity” payment/

A

Yes

46
Q

Defined contribution pension plans do not specify what an employee will receive at retirement, it only specifies how much money the employee can contributed - t/f?

A

True

47
Q

What is a “profit-sharing” plan?

A

A defined benefit plan that does not require an employer to make a funding contribution every year. Rather,

48
Q

What are Keogh plans?

A

Qualified retirement plans set up by self-employed and non-incorporated businesses such as sole proprietorships (individuals) and partnerships

49
Q

What is another name for Keogh plans?

A

HR - 10 plans

50
Q

Employers may make matching contributions up to a certain dollar amount or percentage of the employee’s contribution. The plan has annual contribution limits that are considerably higher than the limit on annual IRA contributoins

A

Note

51
Q

What are 403(b) plans?

A

AKA Tax Sheltered accounts - work much like 401(k) plans - but they are for employees of non-profit organizations such as public school systems, churches, and hospitals

52
Q

Are employer and employee limits for 403(b) plans generally the same as those for 401(k) plans?

A

Yes

53
Q

Simplified Employee Pensions (SEP) plans have significantly less paperwork and easier administration than qualified retirement plans - t/f?

A

True

54
Q

What are simplified employee pensions (SEP)

A

Employee pensions where the employee sets up an IRA and the employer makes contributions to them on the employee’s behalf. Employer contribution SEP-IRAs are much higher than the usual IRA limits

55
Q

Must employees be immediately vested 100% in employer contributions made under a SEP plan?

A

Yes

56
Q

What are Savings Incentive Match Plans for Employees (SIMPLE)?

A

Simplified Retirement plans for small employers with 100 or fewer employees and no other type of retirement plan

57
Q

May a SIMPLE plan be structured as either a 401(k) or IRA plan?

A

Yes

58
Q

SIMPLE plans allow employees to defer a portion of their compensation into the plan and employers are required to match those contributions dollar for dollar for at least 1% to 3% of each employees compensation

A

Note - at least 1% to 3%

59
Q

With a simple plan, employer match must be ___% to ___% and all employees earnings at least $___/year must be allowed to participate.

A

1% - 3%

$5000

60
Q

Under simple plans, what % are employees vested for employer contributions?

A

100%

61
Q

With a SIMPLE plan, what are the premature distribution penalties?

A

25% for the first 2 years, and 10% penalty thereafter

62
Q

How many employees does a SIMPLE plan work for?

A

100 or fewer

63
Q

ERISA was enacted to protect the interests of participants in employee benefit plans as well as the interests of the participants’ beneficiaries. Much of the law deals with qualified pension plans, but what else does it touch on?

A

Group Insurance plans

64
Q

ERISA requires that certain information concerning any employee welfare plan, including group insurance plans, be made available to plan participants, their beneficiaies, the Department of Labor and the IRS - wha are some examples of this kind of information?

A
  1. Summary plan description to each plan participant and DOL
  2. Summary of material modifications that details changes in any plan description to each plan participant and the DOL
  3. Annual return or report submitted to the IRS
  4. Summary annual report to each plan participant
  5. Any terminal report to the IRS
65
Q

Employers who want to provide a benefit for select employees can use what?

A
  1. Non-qualified plan
  2. Bonus Plan
  3. Deferred Compensation Plan
66
Q

Do employer plans (such as non-qualified plans, bonus plans, and deferred compensation plans) - which d- which provide a benefit for select employees, receive the same tax advantages as qualified plans?

A

No

67
Q

Are non-qualified plans regulated by ERISA?

A

No

68
Q

Can non-qualified plans discriminate in favor of higher paid employees?

A

Yes

69
Q

Are contribtutions to non-qualified plans generally tax-deductible?

A

No

Life Insurance Notes (12 decks)

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