Chapter 7: Federal Tax Considerations and Retirement Plans

Question 1

SEP

Answer 1

Simplified Employee Pension

Question 2

What is a SEP?

Answer 2

A retirement plan where the employer makes contribution to an employee’s IRA.

Question 3

Qualified Retirement Plans

Answer 3

Retirement savings plans which meet certain qualifications set by Congress (enforcement by the IRS) that allows them to have certain tax advantages.

Question 4

529 State College Tuition Plans

Answer 4

education savings plan operated by a state of educational institution.

Question 5

Benefits of a 529 Plan

Answer 5

• offers tax advantages when saving for college and other post-secondary training.
• contributions are not tax deductible
• earnings grow tax-free when used for qualified education expenses

Question 6

Tax-Sheltered Annuities (TSAs)

Answer 6

Qualified annuity plans benefitting employees of public schools under the Internal Revenue Code (IRC)

Question 7

What code is the TSA under?

Answer 7

Section 403(b) as well as other nonprofit organizations qualified under section 501(c)(3)

Question 8

Profit-Sharing

Answer 8

Defined contribution plan for employees of for-profit companies.

Question 9

Who can contribute in a profit sharing plan?

Answer 9

Only the employer can contribute and contributions are made only in years there is a profit.

Question 10

What does SIMPLE plan stand for?

Answer 10

Savings
Incentive
Match
Plan for
Employees

Question 11

What is a SIMPLE plan?

Answer 11

A small employer arranged IRA or 401(k) for which the employer matches certain employee contributions.

Question 12

Individual Annuities

Answer 12

Contributions - after tax dollars
interest - not taxable until surrender or distribution
Annuitization — Amount over cost basis is taxable

Question 13

Traditional IRA

Answer 13

A qualified retirement account for individuals, with deductible contributions and tax-deferred accumulation.

Question 14

Modified Endowment Contract (MEC)

Answer 14

A life insurance contract not passing the 7- Pay Test, resulting in the loss of tax advantages.

Question 15

What is the 7-Pay test?

Answer 15

The 7-pay test is a calculation to determine if an owner over funds the contract attempting to use it as an investment rather than as insurance.

Question 16

401 (k) Plan

Answer 16

A defined contribution plan. It can be apart of a profit-sharing plan allowing an employee to the choice of taking income in cash or deferring receipt.

Question 17

Corporate-Owned Annuities

Answer 17

An annuity contract owned by a non-natural person is not treated as an annuity for federal income tax purposes, so the contract’s gains are currently taxed as opposed to being tax deferred. There are no tax benefits when an annuity is owned by a corporation.

Question 18

Distributions at Death

Answer 18

When the annuitant dies during the accumulation phase of the annuity, the beneficiary receiving the death benefit must pay income tax on any gain embedded in the policy, at ordinary income tax rates.

Question 19

Rollover

Answer 19

A direct rollover applies when the funds are transferred from one qualified plan to the trustee of an IRA or another plan.

Question 20

How long does the owner have to rollover an IRA?

Answer 20

If the payment is made directly to the IRA owner, he/she will have 60 days to deposit the check into a new IRA to avoid taxes and penalties. this transaction is reported to the IRA and is only allowed once per year. A 20% withholding of funds is required unless a direct rollover occurs.

Question 21

Estate Taxation

Answer 21

If the annuitant dies during the annuity payout phase, the remaining value in the account will be added to the deceased annuitant’s estate for valuation.

Question 22

ERISA (Employee Retirement Income Security Act)

Answer 22

Established rules pertaining to participating, vesting and funding of retirement plans.