MODULE 4 BRIDGING THE INCOME GAP: IDENTIFYING OTHER SOURES OF RETIREMENT INCOME

Question 1

SINGLE WAGE EARNER LIMIT FOR IRA CONTRIBUTIONS

Answer 1

the lesser of $6000 or 100% of compensation

Question 2

A MARRIED COUPLE W/ BOTH SPOUSES WORKING LIMIT FOR IRA CONTRIBUTIONS

Answer 2

a total of $12K; each may contribute the max allowed for single wage earners

Question 3

A MARRIED COUPLE W/ BOTH SPOUSES WORKING, BOTH AGE 50 OR OLDER

Answer 3

total of $14K; each may contribute the $6K allowed for single wage earners plus an additional age 50 catch-up amount of $1000 each

Question 4

A MARRIED COUPLE W/ ONE SPOUSE WORKING

Answer 4

$6000 each; aggregate contributions to the two accounts cannot exceed the total compensation of the spouses; the nonworking spouse’s IRA is referred to as a “spousal IRA”

Question 5

A DIVORCED COUPLE INDIVIDUAL, AGE 56, WHO IS NOT WORKING AND WHO IS RECEIVING ALIMONY FROM A DIVORCE SETTLEMENT PRIOR TO 2020

Answer 5

the lesser of $7000 or 100% of compensation (taxable alimony received is considered compensation. remember, under TCJA, alimony from divorce settlements in 2019 and beyond is no longer considered earned income)

Question 6

DEDUCTIBILITY OF IRA CONTRIBUTIONS MAY BE LIMITED DUE TO AN INDIVIDUAL’S “ACTIVE PARTICIPANT” STATUS

WHAT RETIREMENT PLANS MUST BE CONSIDERED WHN DETERMINING WHETHER AN INDIVIDUAL HAS ACTIVE PARTICIPANT STATUS?

Answer 6

• qualified pension, profit sharing or stock bonus plans
• qualified annuity plans under Code Section 403(b) (TSA)
• simplified employee pension (SEP)
• SIMPLE IRA
• gov plans (not including SS, railroad retirement, or Section 457 plans)

Question 7

WHAT CRITERIA ARE USED TO DETERMINE ACTIVE PARTICIPANT STATUS IN A DEFINED BENEFIT PLAN?

Answer 7

an individual is an active participant if:

• the individual is eligible under plan provisions
• even if the individual elected not to participate
• the employer failed to make mandatory contributions
• and/or failed to perform the minimum service required

Question 8

WHAT CRITERIA ARE USED TO DETERMINE ACTIVE PARTICIPANT STATUS WITHIN: PSP, 401(K) OR STOCK BONUS PLANS?

Answer 8

an individual is an active participant if:

- the individual’s account received an employer contribution, an employee contribution, and/or a forfeiture allocation

Question 9

HOW DO AN INDIVIDUAL’S RETIREMENT PLAN CONTRIBUTIONS AFFECT ACTIVE PARTICIPANT STATUS?

Answer 9

an individual who makes voluntary or mandatory retirement plan contributions is an active participant

Question 10

HOW DO INVESTMENT EARNINGS AFFECT ACTIVE PARTICIPANT STATUS?

Answer 10

an individual is NOT an active participant if ONLY earnings (no contributions/forfeitures) are allocated to their account

Question 11

TO CONTRIBUTE TO AN IRA AN INDIVIDUAL MUST HAVE EARNED INCOME. GIVE SOME EXAMPLES OF INCOME THAT IS NOT CONSIDERED “EARNED”

Answer 11

examples include unemployment compensation, passive income, deferred compensation, pension and annuity payments, SS, worker’s comp, and capital gains

Question 12

KATHY DUGGINS IS A 37 YEAR OLD SINGLE FILER WHO CONTRIBUTED $6K TO AN IRA THIS TAX YEAR (2020. SHE WILL EARN $105K FROM EMPLOYMENT AT SANDSTONE PRODUCTS INC. DURING THE YEAR. THEY PROVIDE A 401(K) PLAN, BUT IN 3 YEARS SHE HAS BEEN W/ THE COMPANY, SHE HAS CHOSEN NOT TO PARTICIPATE.

IS SHE ELIGIBLE TO MAKE THE $6K IRA CONTRIBUTION FOR THIS YEAR?

Answer 12

yes - she has earned income in 2020

Question 13

KATHY DUGGINS IS A 37 YEAR OLD SINGLE FILER WHO CONTRIBUTED $6K TO AN IRA THIS TAX YEAR (2020. SHE WILL EARN $105K FROM EMPLOYMENT AT SANDSTONE PRODUCTS INC. DURING THE YEAR. THEY PROVIDE A 401(K) PLAN, BUT IN 3 YEARS SHE HAS BEEN W/ THE COMPANY, SHE HAS CHOSEN NOT TO PARTICIPATE.

IS SHE AN ACTIVE PARTICIPANT?

Answer 13

no. although her employer provides a 401(k) plan, she is not participating and has not participated in the plan; therefore, she has no account and no “annual additions.”

Question 14

KATHY DUGGINS IS A 37 YEAR OLD SINGLE FILER WHO CONTRIBUTED $6K TO AN IRA THIS TAX YEAR (2020. SHE WILL EARN $105K FROM EMPLOYMENT AT SANDSTONE PRODUCTS INC. DURING THE YEAR. THEY PROVIDE A 401(K) PLAN, BUT IN 3 YEARS SHE HAS BEEN W/ THE COMPANY, SHE HAS CHOSEN NOT TO PARTICIPATE.

IS SHE ELIGIBLE TO DEDUCT THE FULL CONTRIBUTION?

Answer 14

yes. since she is not an active participant, she is not subject to the deduction phaseouts, and the $6K contribution will be fully deductible

Question 15

ELMO HOFFMAN IS A 49-Y/O SINGLE FILER. HIS AGI FOR THE YEAR IS $85K. HE HAS WORKED AT WWQS FOR 20 YEARS. WWQS PROVIDES A DEFINED BENEFIT PLAN FOR ALL EMPLOYEES WHO HAVE AT LEAST ONE YEAR OF SERVICE, BUT ELMO HAS WAIVED PARTICIPATION IN THE PLAN. HE CONTRIBUTED $6K TO HIS IRA FOR THIS TAX (2020).

IS ELMO ELIGIBLE TO MAKE THE $6K CONTRIBUTION TO HIS IRA?

Answer 15

yes - he has earned income.

Question 16

ELMO HOFFMAN IS A 49-Y/O SINGLE FILER. HIS AGI FOR THE YEAR IS $85K. HE HAS WORKED AT WWQS FOR 20 YEARS. WWQS PROVIDES A DEFINED BENEFIT PLAN FOR ALL EMPLOYEES WHO HAVE AT LEAST ONE YEAR OF SERVICE, BUT ELMO HAS WAIVED PARTICIPATION IN THE PLAN. HE CONTRIBUTED $6K TO HIS IRA FOR THIS TAX (2020).

IS HE AN ACTIVE PARTICIPANT?

Answer 16

yes - he is considered an active participant in the defined benefit plan because he is eligible under the plan provisions, even though he has not chosen to participate

Question 17

ELMO HOFFMAN IS A 49-Y/O SINGLE FILER. HIS AGI FOR THE YEAR IS $85K. HE HAS WORKED AT WWQS FOR 20 YEARS. WWQS PROVIDES A DEFINED BENEFIT PLAN FOR ALL EMPLOYEES WHO HAVE AT LEAST ONE YEAR OF SERVICE, BUT ELMO HAS WAIVED PARTICIPATION IN THE PLAN. HE CONTRIBUTED $6K TO HIS IRA FOR THIS TAX (2020).

IS HE ELIGIBLE TO DEDUCT THE FULL CONTRIBUTION?

Answer 17

no. none of the contribution is deductible bc he is an active participant and has an AGI above the phaseout range. he would be able to contribute to a Roth IRA bc his income is below the start of the Roth IRA phaseout range for single people.

Question 18

SUSAN JONES, 39, IS SINGLE AND AN ACTIVE PARTICIPANT IN HER EMPLOYER’S QUALIFIED PLAN. HER AGI FOR THIS YEAR IS $66K AND SHE WILL CONTRIBUTE $6K TO HER IRA THIS TAX YEAR. WHAT AMOUNT IS DEDUCTIBLE?

Answer 18

$75K - $66K = $9K
$9K / $10K = .9
$6K x .9 = $5400
$5400 is deductible.

Question 19

SUSAN JONES, 39, IS SINGLE AND AN ACTIVE PARTICIPANT IN HER EMPLOYER’S QUALIFIED PLAN. HER AGI FOR THIS YEAR IS $66K AND SHE WILL CONTRIBUTE $6K TO HER IRA THIS TAX YEAR. WHAT AMOUNT IS DEDUCTIBLE?

IF SUSAN’S AGI FOR THIS YEAR (2020) IS $71K INSTEAD, WHAT AMT OF HER $6K IRA CONTRIBUTION IS THEN DEDUCTIBLE?

Answer 19

$75K - $71K = $4K
$4K / $10K = .4
$6000 x .4 = $2400
$2400 is deductible

Question 20

MARK SMITH AND HIS WIFE BETTY BOTH WORK, AND THEY FILE A JOINT RETURN. HE IS AN ACTIVE PARTICIPANT IN HIS EMPLOYER’S QUALIFIED PLAN. THEIR AGI FOR THIS YEAR IS $105K & THEY WILL MAKE A $12K IRA CONTRIBUTION FOR 2020. WHAT AMT IS DEDUCTIBLE? THEY ARE BOTH 39.

Answer 20

$124K - $105K = $19K
$19K / $20K = .95
$6K x .95 = $5700
$5700 is deductible for Mark. the full amount, $6K is deductible for Betty. their total deduction is $11.7K

Question 21

BOBBY BRINSON & HIS UNEMPLOYED WIFE LAURA FILE A JOINT RETURN. HE IS AN ACTIVE PARTICIPANT IN HIS EMPLOYER’S QUALIFIED PLAN. LAURA IS NOT. BOTH ARE UNDER AGE 50. THEIR AGI IS $140K AND THEY WILL CONTRIBUTE $12K TO THEIR IRAS THIS YEAR. WHAT AMT IS DEDUCTIBLE?

Answer 21

$140K > $124K; therefore, Bobby has no deduction but he could contribute to a Roth IRA bc their AGI is less than the start of the phaseout range for Roth IRAs

Laura can deduct $6K as a spousal IRA contribution. their total deduction is $6K

notice it is best to figure their AGI, then deal w/ each spouse separately. combine the results as the total.

Question 22

WHAT NEEDS TO TAKE PLACE IN ORDER FOR A DISTRIBUTION FROM A ROTH IRA TO BE CONSIDERED “QUALIFIED”?

Answer 22

(1) the account must have been opened for at least 5 Roth years, AND
(2) the distribution is made after age 59 & 1/2, death, or disability, or if it is made to a first-time homebuyer in an amount up to $10K

note there can never be a qualified Roth distribution until the owner is a “5-year Roth veteran” (started the Roth IRA clock for 5 years)

second, the time frame is 5 Roth years (not 5 calendar years). ex. Carlos contributed $100 to a Roth IRA on 3/15/2021. however, it was contributed for 2020. the first time he meets the 5-year Roth clock on Jan 1, 2025.

third, many ppl think there cannot be a qualified distribution from a Roth IRA until the owner is 59 & 1/2. not true. age 59 & 1/2 is only 1 of 4 reasons a w/d can be qualified. if the $ is w/d due to death, disability, or $10K of earnings for qualified first-time homebuyer expenses, then a w/d prior to age 59 & 1/2 could be a qualified distribution. still, 59 & 1/2 is the major milestone for retirement purposes.

Question 23

IF A DISTRIBUTION FROM A ROTH IRA IS NOT QUALIFIED, WOULD THAT MEAN THE DISTRIBUTION WOULD ALSO BE SUBJECT TO THE 10% EARLY W/D PENALTY IF THE ACCOUNT OWNER IS UNDER AGE 59 & 1/2?

Answer 23

not necessarily. the same exceptions to the 10% penalty that apply to traditional IRAs also applies to Roth IRAs. this includes:

(1) qualified higher education expenses
(2) medical expenses in excess of 10%
(3) substantially equal periodic payments

Question 24

SHIRLEY AND JIM SMITTEN ARE MARRIED & FILE JOINTLY. THEIR MODIFIED AGI IS $215K (2020). JIM CONTRIBUTES TO HIS 401(K) BUT SHIRLEY HAS NO PLAN. SHE PLANS TO CONTRIBUTE TO HER ROTH IRA & JIM TOLD YOU THAT HE WILL CONTRIBUTE TO HIS TRAD IRA. THEY’VE ASKED FOR YOUR HELP IN ANALYZING THEIR SITUATION - CAN THEY MAKE A CONTRIBUTION TO THE ROTH IRA FOR SHIRLEY AS THEY PLANNED, & MAKE A DEDUCTIBLE CONTRIBUTION INTO JIM’S IRA?

Answer 24

their AGI is $215K. shirley cannot contribute bc their AGI is too high (phaseout is from $196K to $206K. jim cannot deduct his contribution to a traditional IRA bc their AGI is greater than the phaseout range for TIRA ($104K to $124K) and he is an active participant.

shirley can contribute (but not deduct) $6K to a trad IRA bc their AGI is above the phaseout for a spousal IRA and jim is an active participant. in fact, both can contribute to a nondeductible IRA.

Question 25

PETER QUIT HIS JOB LAST YR TO PAINT FULL TIME. IN 2020 HIS NET EARNINGS ARE $100. HIS WIFE AMY’S EARNINGS ARE $300K IN 2020, BUT SHE STILL DOESN’T HAVE A RETIREMENT PLAN @ WORK. THEIR MODIFIED AGI IS $300.1K (2020. THEY WANT TO KNOW THEIR OPTIONS FOR CONTRIBUTING TO TRADITIONAL & ROTH IRAS FOR 2020. HOW MUCH CAN THEY CONTRIBUTE TO THEIR ROTH IRA’S AND TO THEIR TRAD IRA’S? THEY ARE BOTH YOUNGER THAN 50.

Answer 25

since neither is an active participant in a qualified plan, the deduction for the spousal IRA deduction doesn’t phase out. they can contribute & deduct $6K for jim’s traditional IRA and contribute & deduct $6K for shirley’s traditional IRA. they cannot contribute to the Roth IRA bc their MAGI is above the 2020 phaseout ($206K of AGI)

Question 26

IN 2020, BUSTER & PRISCILLA GLEASON’S AGI WILL BE $197K. PRISCILLA JOINED THE 401(K) PLAN @ WORK AS SOON AS IT WAS OFFERED, & SHE DEFERS $300 PER MONTH. BUSTER IS DISABLED & HAS NO INCOME. THEY HAVE TOLD YOU THEY WANT TO DEDUCT THE MAX FOR BUSTER, WHILE PRISCILLA WANTS TO CONTRIBUTE THE MAX TO HER ROTH IRA. THEY ASK YOU TO DETERMINE THOSE AMTS FOR EACH.

Answer 26

buster’s deductible contribution under the spousal contribution is $5400 and priscilla’s roth contribution is the same amount.

($206K - $197K)/$10K = .9 x $6K = $5400.

bc the roth phaseout and spousal IRA phaseouts are the same, the calculation is the same for each.

Question 27

DEFFERED ANNUITY 2 PHASES

Answer 27

(1) accumulation phase
- the client contributes capital either in single premium pmt or in a series of contributions.
- capital increases in value, either at a rate guaranteed by the ins co (fixed annuity) or at a rate dictated by the performance of underlying investments selected by the client (stocks, bonds, etc) for which the client bears the risk
(2) payout phase

Question 28

EXPLAIN FEATURES & BENEFITS OF THE VARIABLE ANNUITY AS IT RELATES TO RETIREMENT

Answer 28

variable annuity is a form of deferred annuity. unique feature is the fact its rate of accumulation is not fixed/guaranteed but varies w/ the performance of underlying portfolio of assets - thus “variable”.

the benefit to contract owners saving for retirement is that most variable annuities (like mutual funds) offer a variety of investment portfolio, including common stocks. variable annuities based on such investment portfolios put the burden of investment risk on investors’ shoulders but give investors an opportunity to get higher returns & stay ahead of inflation

Question 29

STRAIGHT LIFE INCOME ANNUITY

Answer 29

ins co considers the age & gender of the bene, and commits to a specified level payment for as long as that person lives. when the bene dies, all future pmts stop. an unhealthy bene would rarely choose this option (bc nothing to leave to surviving spouse/beneficiaries)

Question 30

LIFE INCOME W/ PERIOD CERTAIN ANNUITY

Answer 30

lifetime income is paid to bene, but a minimum number of pmts is guaranteed

Question 31

LIFE INCOME W/ REFUND ANNUITY

Answer 31

income is guaranteed for the life of the bene, but if that individual dies before the entire proceeds of the policy have been paid out, the remaining funds are refunded to a contingent bene, either as continued payment or as a lump sum

Question 32

JOINT & SURVIVOR INCOME ANNUITY

Answer 32

the ins co sends regular checks for as long as either joint bene is living. the magnitude of each pmt under any one of the life income options is affected by the conditions attached. the ins co will pay less per month on a life income settlement option if it is obliged to continue full pmts for two lives instead of one.

Question 33

INTEREST ONLY ANNUITY

Answer 33

bene chooses to preserve the principal amt of the ins proceeds & simply receive the interest the proceeds earn while being held by the ins co. that interest will be currently taxable. many co’s limit the # of months the proceeds may remain under this option.

Question 34

WHAT ARE SOME OF THE CONSIDERATIONS THAT SHOULD BE MADE BY AN INDIVIDUAL CONSIDERING THE PURCHASE OF AN ANNUITY?

Answer 34

(1) age
(2) annual income
(3) financial situation
(4) experience & objectives

you should also consider:

(1) the intended use of annuity
(2) your financial horizon
(3) liquidity needs
(4) tax status

Question 35

ID 3 BROAD OBJECTIVES A MUTUAL FUND CAN HAVE

Answer 35

(1) capital appreciation (growth) - increase in the value of the securities in the fund, which is reflected in the fund’s value
(2) current income (income) - interest or dividends paid on the underlying securities in the fund
(3) capital preservation (total return) - maintaining the value of the fund regardless of market conditions

Question 36

TERM LIFE INSURANCE VS. CASH VALUE LIFE INSURANCE

Answer 36

term life insurance
-provides a death benefit equal to the face value of the policy if death occurs while the policy is in force

cash value life insurance

• provides a death benefit AND an element of tax-deferred savings.
• though initially more expensive than term life per $1000 of death benefit coverage, cash value life ins. relives the client’s family of the financial risk of an untimely death, while also representing a pool of financial value that increases, tax-deferred, with time & w/ each premium pmt

Question 37

EXPLAIN THE LOAN PROVISION OPTION IN CASH VALUE POLICIES

Answer 37

policyholders can borrow an amt equal to some or all their accumulated cash value. typically, loans can be made up to the current surrender amount of the policy (less one year’s interest).

interest charges are not tax deductible for individuals

Question 38

PENSION MAXIMIZATION

Answer 38

using this strategy the employee would select the single life payout from their annuity/pension and use the “savings” over the joint life option to purchase a permanent life ins policy on himself, naming the spouse as bene.

when the employee dies, the pension payout will cease.the spouse, however, will receive a tax-free death benefit from the life ins to generated tax-free income. (if the spouse dies first, the employee would cancel the insurance policy & continue receiving the higher pension payout)

Question 39

DOWNSIZING

Answer 39

may be able to avoid having a mortgage & may generate excess cash. may reduce utilities, property tax, insurance, etc.

Question 40

REFINANCE

Answer 40

lower your monthly payment and may be able to “cash out” some of your equity

Question 41

REVERSE MORTGAGE

Answer 41

will receive cash in the form of a monthly payment, lump sum, or line of credit, & will not be required to repay it until death or sale of home

to qualify:

(1) borrowers must be at least age 62
(2) own their home (principal residence) outright OR carry a mortgage small enough to be paid off by the proceeds

• the max equity accessible through a reverse mortgage is 60%
• if house is sold, the sales proceeds are guaranteed to satisfy the loan, even if they fall short of the outstanding balance
• if sale proceeds exceed amt of loan, excess goes to the heirs

RISKS:

• cost/fees can be excessive (origination fee, closing costs, monthly fee for mortgage insurance, mandatory credit counseling)
• most suitable for homeowners who plan to reside in their homes until death
• homeowner is still responsible for maintenance of home (annual taxes & property ins. too)
• risk of foreclosure if they deplete their home equity too early & are unable to pay for annual property taxes & insurance

Question 42

BENEFITS ASSOCIATED W/ POST-RETIREMENT EMPLOYMENT

Answer 42

(1) fewer years of retirement need to be financed
(2) gives you an opportunity to build up your retirement plans
(3) monthly SS benefits will increase
(4) take advantage of employer’s health care coverage
(5) social & health benefits

Question 43

ALLOWABLE IRA DEDUCTION LIMITS

Answer 43

in 2020
phaseout range for deductible IRA contributions:
single filers: $65K to $75K
joint: $104K to $124K

phaseout range for nonactive participant spouse:
$196K to $206K

Roth IRA phaseouts
single: $124K to $139K
joint: $196K to $206K
married filing separate: $0 to $10K

Question 44

WHEN TO ESTABLISH A ROTH IRA

Answer 44

(1) young person in entry level jobs (lower taxes)
(2) anyone who suspects tax rates may change for the worse in the future
(3) individuals saving for a first time home
(4) individuals wanting to pass on assets tax-free to their benes