Lesson 12: Tax Advantaged Accounts

Question 1

Tax Advantaged Account

Answer 1

offer incentives for those who invest and save towards retirement or education

Question 2

Tax Deferral

Answer 2

Don’t need to pay taxes now, but will have to in the future (401(k), pension ,traditional IRA)
Pay taxes later

Question 3

Tax Free

Answer 3

Contributions are not tax deductible, but future earnings/growth is tax free
(roth, 529, ABLE, coverdell)
Pay taxes now

Question 4

Employee Retirement Income Security Act (ERISA)

Answer 4

Set of standards employees have to follow to make sure retirees have their retirements protected

Question 5

Defined Benefit

Answer 5

Promises specific retirement benefits
- set by a formula (years of service, avg salary, etc) - not based on how much you put in
- sponsor (not EE) determines required contributions
- sponsor selects investments and bears investment risk

Question 6

Defined Contribution

Answer 6

retirement benefits vary
- current contributions are decided by each participant
- plan participant selects investments + bears investment risk
- eg 401K

Question 7

Non Qualified Plans

Answer 7

• offered in a discriminatory manner (ie only to execs)
• to contribute larger amounts
• do not protect against bankruptcy (so carries some credit risk)

Question 8

Individual Retirement Accounts (IRAs)

Answer 8

Allow individuals to contribute earned income to a personal retirement account
- 7k annual limit (after 50 it’s 8k)

Question 9

ESA 529

Answer 9

Municipal (state) fund
- no age limit
- no federal limit on contributions, states determine

Question 10

ESA Coverdell

Answer 10

• Can be opened for any student under 18, funds must be transferred by age 30
  -$2,000 per child per year (total, not per donor)

Question 11

ABLE Account

Answer 11

• can be opened for individuals diagnosed with a disability prior to age 26
• contributions are post tax, E&G is tax free
• distributions are tax free for qualified disability expense

Question 12

Annuities

Answer 12

an annuity is a contract between an individual and a life insurance company to provide retirement income for life and address longevity risk
basically, they pay the retirement income for your entire life

Question 13

Surrender Fee

Answer 13

A fee to withdraw capital prior to annuitization
Declines annually until there is no surrender charge

Question 14

1035 Exchange

Answer 14

make a tax free transfer of one annuity contract for another