Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

FIN3040 - Risk and Insurance > Chapter 14 - IRAs and Annuities > Flashcards

Chapter 14 - IRAs and Annuities Flashcards

1
Q

Tax Benefits of a Roth vs Traditional IRA:

A

Roth IRA: Tax Free
Traditional IRA: Tax Deferred

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Age requirements of a Roth vs Traditional IRA:

A

Roth IRA: None
Traditional IRA: None

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Income Requirements for a Roth vs Traditional IRA:

A

Roth IRA: Single: <$144,000 , Married: <$244,000
Traditional IRA: None

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Withdrawal Taxes for Roth vs Traditional IRA:

A

Roth: None
Traditional: Yes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Early Withdrawal penalties for Roth vs Traditional IRA:

A

Roth: None on contributions, 10% on earnings
Traditional: Under 59 ½ y/o, 10% penalty + income taxes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Required minimum distribution for Roth vs Traditional IRA:

A

Roth: Yes, beginning at age 72
Traditional: Yes, beginning at age 72

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Max Yearly Contribution to Roth vs Traditional IRA:

A

Roth: $6,000
Traditional: $6,000

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is a spousal IRA?

A
  • For a nonworking spouse, can be Roth or traditional
  • Must be married and file joint income taxes
  • IRAs can not be held jointly
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is an IRA rollover?

A
  • Used for rollovers from previous employer’s 401(k)
  • Must rollover within 60 days of distribution
  • Better to have direct transfer
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is a backdoor Roth IRA and how does it work?

A

A strategy to work around the yearly income limits by the IRS

  • Convert funds from your traditional IRA to a roth IRA
  • Pay taxes when you convert
  • No limit on how much money you can convert
  • Can do the same trustee transfer
  • You are paying taxes on your retirement savings now instead of later
  • You need to wait 5 years to bypass before withdrawing from the now roth IRA
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is the three-legged stool approach to retirement planning?

A

Retirement Income Security
Supported by:
Social Security
Employer Sponsored Plans
Personal Savings

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is the primary reason annuities are purchased for?

A
  • The primary reason that annuities are purchased is to supply retirement income. An annuity is the opposite of life insurance that pays when you die.
  • An annuity pays while you are alive.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

An Annuity is an Appropriate Risk Management Tool For:

A
  • Retiring couple ensure a certain level of income throughout their retirement years
  • Death of a single parent life insurance settlement to support very young children
  • Newly widowed individual needs to withdraw from savings to maintain a certain standard of living
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

3 Elements That Make Up A Payment to an Annuitant (person receiving payments):

A
  1. Interest earnings
  2. Partial liquidation of principal
  3. Survivorship benefit – for contracts
    guaranteeing payments for as long
    as an annuitant lives
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is a fixed annuity?

A
  • Benefit is expressed in terms of a stated dollar amount based on a guaranteed rate of return
  • Benefit may be higher than the minimum amount guaranteed in the contract if interest earnings, expenses and /or mortality experience is better than what is assumed
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is a variable annuity?

A
  • The annuity unit fluctuates with the performance of a specified portfolio of investments
  • May not be best suited for needs of retirees because they need a predictable income flow
17
Q

What is the purpose of a variable annuity?

A

-Purpose is to provide an inflation hedge by maintaining real purchasing power

18
Q

Annuity payments may be:

A
  • Only during the lifetime of the
    annuitant
  • Guarantee a certain number of
    payments
  • Based on 2 or more lives
19
Q

What are the types of annuities?

A
  1. Annuity Certain
  2. Straight Life Annuity
  3. Joint & Survivor Annuity
20
Q

What is an Annuity Certain?

A

Payable for a specified period of time without regard to death or life of the annuitant

21
Q

What is a Straight Life Annuity?

A

Annuity that pays benefits only during the lifetime of the annuitant

22
Q

What type of annuity pays the highest amount of lifetime income for each dollar spent?

A

Straight life annuity
- Suitable for person who needs maximum lifetime income & has no dependents or has provided for them through other means
- The older an annuitant is when benefits begin, the greater
the size of the payments

23
Q

What is a joint & survivor annuity?

A

Based on the lives of 2 or more annuitants
* Annuity payments will continue as long as either annuitant is alive
* Some contracts pay the full amount, some contracts pay ⅔ or ½ of the original amount when the first annuitant dies

24
Q

What is an immediate annuity?

A

Benefits begin as soon as the annuity is purchased

25
Q

What is a deferred annuity?

A

Benefits are deferred until some time in the future; a particular time may or may not be specified

26
Q

What is an equity-indexed annuity?

A

The insurance company credits you with a return that is based on the performance of a stock-market index such as the S&P 500

27
Q

What is the annuity exclusion ratio?

A

The fraction of each annuity payment that can be excluded from income taxation

28
Q

How do you calculate the annuity exclusion ratio?

A

Original Investment / Total Annuity Benefits to be Received = % excluded from taxation

29
Q

Investors can invest in a wide variety of annuities and can also use different annuity settlement options to meet specific retirement needs. For each of the following retirement objectives, identify either (1) a specific annuity or (2) an annuity settlement option that can be used to meet the objective. Treat each situation separately.

A) Jose, age 35, is a sales representative and plans to retire at age 67. His monthly income varies. He would like to invest in an annuity that allows him to change the frequency and amount of premium payments.

A

Jose should purchase a flexible premium deferred annuity, which allows
changes in the frequency and amount of premium payments. The flexible
premium annuity can be either a fixed annuity or a variable annuity.

30
Q

Investors can invest in a wide variety of annuities and can also use different annuity settlement options to meet specific retirement needs. For each of the following retirement objectives, identify either (1) a specific annuity or (2) an annuity settlement option that can be used to meet the objective. Treat each situation separately.

B) Nancy, age 67, plans to retire in six months. She has $200,000 in a savings account. She would like to receive lifetime monthly income that is guaranteed.

A

Nancy should purchase a fixed annuity and select a life income annuity
option that guarantees her a lifetime income regardless of how long she lives.
Depending on her needs and objectives, the life income option can be selected
with a certain number of guaranteed payments.

31
Q

Investors can invest in a wide variety of annuities and can also use different annuity settlement options to meet specific retirement needs. For each of the following retirement objectives, identify either (1) a specific annuity or (2) an annuity settlement option that can be used to meet the objective. Treat each situation separately.

C) Jennifer, age 63, plans to retire in 90 days. She has $100,000 to invest in an annuity and would like to receive lifetime monthly income to supplement her Social Security benefits. However, she is concerned that she might die before she receives back the amount invested.

A

Jennifer should select a life annuity income option with either an installment
refund feature or a cash refund feature. Under the installment refund option, if
the annuitant dies before receiving total income payments equal to the purchase
price of the annuity, the payments continue to a designated beneficiary until
they equal the purchase price. Under the cash refund option, if the annuitant
dies before receiving total payments equal to the purchase price of the annuity,
the balance is paid in a lump sum to the beneficiary.

32
Q

Investors can invest in a wide variety of annuities and can also use different annuity settlement options to meet specific retirement needs. For each of the following retirement objectives, identify either (1) a specific annuity or (2) an annuity settlement option that can be used to meet the objective. Treat each situation separately.

D) Fred, age 70, recently retired and has $50,000 to invest for additional income. He wants the retirement benefits to be protected against the risk of inflation.

A

Fred should purchase a variable annuity, which is designed to provide an
inflation hedge after retirement.

33
Q

Investors can invest in a wide variety of annuities and can also use different annuity settlement options to meet specific retirement needs. For each of the following retirement objectives, identify either (1) a specific annuity or (2) an annuity settlement option that can be used to meet the objective. Treat each situation separately.

E) Janice, age 75, is a widow with no dependents who needs additional retirement income. She has $25,000 to invest in an annuity. She wants to receive the maximum amount of monthly annuity income possible.

A

Janice could consider the life annuity option with no refund. No additional
payments are made after the annuitant dies. A life income option with no refund
pays the highest amount of periodic income payments because it has no refund
feature. However, because of the risk of forfeiting the unpaid principal, if death
occurs early is not appealing, relatively few annuity purchasers elect this
option. However, the amount of funds in this case is limited ($25,000).
Because of the small amount available, a substantial amount of income cannot
be generated. As an alternative, she could have the funds paid out over a
specified period of years based on her life expectancy.

34
Q

Investors can invest in a wide variety of annuities and can also use different annuity settlement options to meet specific retirement needs. For each of the following retirement objectives, identify either (1) a specific annuity or (2) an annuity settlement option that can be used to meet the objective. Treat each situation separately.

F) Kathy, age 32, would like to invest in the stock market, but she is conservative and risk averse. She would like to participate in any stock market gains, but she also wants to protect her principal against loss.

A

Kathy could consider a fixed-indexed annuity. A fixed-indexed annuity is a
fixed, deferred annuity that allows the annuity owner to participate in the
growth of the stock market and also provides downside protection against the
loss of principal and prior interest if the annuity is held to term.

35
Q

What are the “3 stupid annuity moves” as detailed in the WSJ article?

A

No. 1: Choosing the wrong kind of annuity
No. 2: Not considering a deferred annuity
No. 3: Not choosing your insurer carefully

Consider alternatives, too

FIN3040 - Risk and Insurance (12 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions