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Unit 2 > Retirement > Flashcards

Retirement Flashcards

1
Q

What are contributions?

A

Funds placed into an account to save for retirement

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2
Q

What type of contribution can be made in retirement account?

A

Only Cash

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3
Q

What do deductible contributions provide?

A

Immediate tax benefits

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4
Q

What are non-deductibel contributions?

A

contributions that do not make the equivalent amount of your income tax deductible

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5
Q

WHen are taxes due in retirement accounts vs. non-retirement accounts?

A

Non-retirement: taxes due when investors receive income or realize capital gain
Retirement: Tax-deferred

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6
Q

What does it mean that retirement accounts are tax-deferred?

A

Avoid tazxation until money is withdrawn

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7
Q

Which two retirement plans are not tax-deferred?

A
  1. Roth
  2. 401k
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8
Q

What 3 things cannot investors invest in in their retirement accounts?

A
  1. Short sales
  2. margin
  3. or Options
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9
Q

Why should investors avoid municipal bonds in retirement plans?

A

Because retirement accounts already provide the same low yield

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10
Q

What type of bonds should retimenet account holders invest in?

A

US government bonds

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11
Q

What 5 securities should retirement accounts invest in?

A
  1. Stocks
  2. Bonds
  3. Mutual FUnds
  4. UIT
  5. US Gov issue coins
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12
Q

What are distributions in retirmeent accounts?

A

Withdrawals

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13
Q

How are distributions taxed?

A

Like ordinary income

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14
Q

What penalty for early withdrawal from retirement account?

A

10% early withdrawal penalty

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15
Q

What are the 5 exceptions to early withdrawal penalties?

A
  1. disability
  2. death
  3. first time home purchases
  4. educational expenses
  5. certain medical expenses
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16
Q

What does the death exception apply to in 10% withdrawal penalty?

A

Those inheriting retirmeent assets

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17
Q

When are investors subject to Required Minimum Distributions?

A

When they turn 73

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18
Q

How long can you postpone your first RMD and under what conditions?

A

3 months if it is your first RMD

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19
Q

When must RMDs be fully distributed most of the time?

A

December 31st

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20
Q

What are two penalties of skipped RMDs?

A
  1. 25% penalty
  2. 10% if taken within two years
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21
Q

How much is the excess contribution penalty?

A

6%

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22
Q

What act must govern a plan to be considered qualified?

A

Employee Retirement Income Security Act

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23
Q

What do qualified retirment plans offer in taxes?

A

Tax reduction with pre-tax contributions

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24
Q

What is the ERISA minimum participation/non discrimation standard for qualified retirment plans?

A
  1. Must offer plan to all full-time employees
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25
Q

What two things make someone count as a full time employee for the ERISA?

A
  1. 21 or older
  2. Working 1000 hours anually
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26
Q

What are the 4 standards to be met by ERISA to have a qualified plan?

A
  1. minimum participation/non-discrimination
  2. Reporting and disclosure
  3. Funding
  4. Vesting
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27
Q

What are two requirements of disclosure necessary for ERISA qualified retirement plan?

A
  1. details of retirement plan available in writing
  2. employees provided annual updates
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28
Q

What is the funding requirement by ERISA for qualified retirement plans?

A

Dfined benefit plans must be funded appropriately

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29
Q

What are two vesting requirements for ERISA?

A
  1. Employees must earn employer-provided benefits in a reasonable amount of time
  2. Employee contributions are always 100% vested
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30
Q

What is a reasonable amount of time in which employees must earn employer-provided benefits to qualify for ERISA?

A

5 years or less

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31
Q

What document must all qualified plans be governed by?

A

The Plan Document

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32
Q

What 6 rules does the plan document identify?

A
  1. Who can contribute to the plan
  2. Employer-provided benefits
  3. Vesting schedules
  4. INvestment options
  5. Beneficiary designation rules
  6. Distribution guidelines
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33
Q

WHo administers the qualified plan?

A

Fiduciary

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34
Q

What defines a fiduciary?

A

A person who owes a duty of care and trust to another and must act primarily for the benefit of the other in a particular activity

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35
Q

What must the fiduciary submit to whom before qualified plan may be offered to employees?

A

The plan document in writing to the IRS for approval

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36
Q

What are three workplace plans?

A
  1. Qualified defined benefits plan
  2. qualified defined contribution plans
  3. non-qualified plans
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37
Q

What is the most common form of qualified defined benefit plan?

A

Pension

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38
Q

What does a qualified defined benefit plan involve?

A

Varying employer contributions and specific defined retirement benefit

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39
Q

Who (2 traits) is defined benefit plan most beneficial for?

A
  1. high salaries
  2. closest to retirement age
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40
Q

What does a qualified defined contribution plan involve?

A

Defined contributions and unknown benefit at retirement

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41
Q

What is the tax structure of all qualified defined contribution plans (3 things?

A
  1. pre tax deductible contributions
  2. tax-deferred growth
  3. distributions taxable as ordinary income
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42
Q

To whom is a 401k available to?

A

private for profit companies

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43
Q

What is the contribution limit for 401k plans?

A

22,500

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44
Q

What are solo 401k plans?

A

Plans established by self-employed individuals

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45
Q

Who uses the 403b plan?

A

Non-profit organizations

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46
Q

What three things can employees do with their money at retirement in 403b plans?

A
  1. roll it over to another retirement account
  2. turn it into an annuity that will pay them til death
  3. Take money from the account
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47
Q

For whom are Keogh HR10 plans created for?

A

Smaller professional business

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48
Q

What is the contribution limit for Keogh HR10 plans?

A

66,000 or 25% of income

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49
Q

What are profit sharing plans?

A

Business pledge percentage of profits to emplyees account

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50
Q

What are the two differences between money purchase plans and profit-sharing plans?

A
  1. Contributions to money purchase plans are not based on company’s profitability
  2. Contributions must be made every year by employee
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51
Q

What are SEP IRAs and SIMPLE IRAs

A

IRAs structured specifically for smaller companies

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52
Q

WHen is someone not subject to the RMD?

A

If they are still working at their place of employment

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53
Q

What type of plans does ERISA not govern?

A

Non-qualified plans

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54
Q

What is a benefit of not being goverened by ERISA?

A

Ability to discriminate

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55
Q

What is a deferred compensation plan?

A

Allows senior employees to defer compensation, invest it, and receive it in retirment

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56
Q

Which plan do early withdrawal penalties not apply to?

A

457

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57
Q

What is 457 plan?

A

Non-qualified plan that is available to government and certain non-profit employees.

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58
Q

What are two unique things about 457 plans?

A
  1. Allows tax-deductible contributions and
  2. tax deferred growth
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59
Q

What are 403b plans also known as?

A

Tax sheltered annuities

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60
Q

Which retirement plan has no early withdrawal penalty?

A

457

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61
Q

What is a defensive stock?

A

Helps you fend against market flucuations during economic downturns?

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62
Q

When a registered employee goes to active duty what happens?

A

Thei. license goes inactive but then after it’s two years and 90 days when they come back

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63
Q

Conditions under which registered can borrow from their customers or FINRA rule 3240.

A
  1. Written rules and procedures from firm register works at about borrowing money from customers
  2. Pre approve borrowing in writing before loan closes
  3. Relationship between rep and customer has to be ‘permissible if they are iclose contact, immediate contact
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64
Q

Rules for REIT

A
  1. must distribute at least 90 percent
  2. 75 of gross income must be real estate related
  3. 75 of total assets must be invested in real estate
  4. must be managed by board of directors,
  5. minimum of 100 shareholders
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65
Q

What kind (qualified, unqualified) is a deferred compensation plan?

A

Non-qualified

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66
Q

What are the two types of IRAs?

A
  1. traditional
  2. roth
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67
Q

Are traditional IRAs qualified or unqualified?

A

non-qualified

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68
Q

What is the maximum contrituion limit for 457 plans?

A

22,500

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69
Q

How are traditional IRAs taxed?

A

Fully taxable as ordinary income

70
Q

Are traditional IRAs deductible against earned income?

A

yes

71
Q

What is the contribution limit for an IRA?

A

The lesser of 6500 or the amount of earned income during the year

72
Q

What must investors have to contribute to an IRA?

A

Reportable income earned

73
Q

For how long can an investor contribute to their IRA towards a previous year’s contribution limit?

A

Up until the tax filing deadline of the following year

74
Q

What does a spousal IRA allow?

A

Allows for a working spouse to contribute to a non-working spouse’s IRA

75
Q

What is the contribution limit for spousal IRAs?

A

6500

76
Q

What does the catch-up provision for IRAs allow?

A

Additional contribution of 1000 dollars a year if you are age 50 or older

77
Q

In what two cases are traditional IRA contributions always deductible?

A
  1. investor is not covered by a qualified workplace plan
  2. Investor is covered by a qualified workplace plan and low income
78
Q

In what scenario are Traditional IRA contributions partially deductiable or not deductible?

A

When investor is covered by a qualified workplace plan and high income

79
Q

What does it mean to be covered by a qualified workplace plan?

A

The investor has access to a qualified retirement plan through their work

80
Q

What determines the tax status of an investors deduction if they have a qualified workplace plan and high income?

A

Income level

81
Q

How does income level affect the tax status of an investors deduction if they have access to a qualified workplace plan?

A

Higher income equals less likely customer can deduct contributions

82
Q

When are investors making non-deductible contributions to traditinal IRAs only taxed?

A

Taxed on the growth when a distribution (withdrawal) is taken.

83
Q

How is the basis amount in a traditional IRA investor making non-deductible contributions taxed?

A

taxed free upon withdrawal

84
Q

What type of investor cannot contribute to Roth IRAs?

A

high income investors

85
Q

What are the two requirement ROth IRA owners must meet to avoid taxes when taking distributions?

A
  1. Must be at least 59 and a half years old
  2. Account must be open for at least 5 years
86
Q

When does the 5 year againg period start for a ROth IRA?

A

Day of the first contribution

87
Q

What are investors taking distributions above age 59 and a half but haven’t reached the 5 year aging period subject to?

A

Oridanry income taxes on the gains above basis, but not the 10% penalty

88
Q

What type of retirement account is not subject to Required minimum distributions?

A

Roth IRA

89
Q

What are three tax benefits of Roth 401k?

A
  1. contributions are after tax
  2. assets grow tax sheltered
  3. distributions are tax free in retirement
90
Q

What’s the difference between IRAs and Roth 401k?

A

401k is a qualified workplace plan that is ERISA governed

91
Q

When are Roth 401k’s subject to required minimum distributions?

A

If they are retired

92
Q

How can RMDs for a 401k be avoided?

A

Rolling over Roth 401k asses to a Roth IRA

93
Q

When would someone rollover their Roth 401k to a Roth IRA and why?

A

When they retire so that they can avoid RMDs

94
Q

Do contribution limits apply to both Roth and Traditional IRAs combined?

A

yes

95
Q

What is 5 years an important number for in Roth IRAs?

A

The aging requirement to be tax free

96
Q

What can IRA contributions be made in? (cash, securities..)

A

Only

97
Q

Are ROth IRA qualified or unqualified?

A

non-qualified

98
Q

Are deferred compensation plans qualkified or unqualified?

A

Unqualified

99
Q

How are traditional IRAs taxed?

A

As ordinary income

100
Q

When is the basis separated from the growth for tax purposes in a traditional IRA?

A

If the investor makes a non-deductible contribution

101
Q

When are Roth 401k not subject to RMDs?

A

If they are rolled over to an IRA

102
Q

What are two insurance products that meet the legal definition of securities?

A
  1. variable life insurance
  2. Variable annuities
103
Q

What is the difference between an insured person and a policyholder?

A

Insured person: person with their life insured
Policyholder: person owning the life insurance

104
Q

What is returned to the policyholder if the policy lapses and premiums go unpaid?

A

A payout of the cash value minus any applicable fees

105
Q

What is the relationship relationship between cash value and death benefit cost and age?

A

As investor gets older, death benefit cost gets higher and cash value gets lower

106
Q

How long do you have to wait to withdraw cash from variable life insurance cash value?

A

Three years

107
Q

What happens if cash value withdrawn or borrowed is not repaid?

A

It is deducted from the death benefit

108
Q

How are cash value distributions taxed and on growth or basis?

A

Oridinary income tax on growth but not on basis

109
Q

What are three ways a policyholder for variable life insurance can stop paying premiums?

A
  1. keep death benefit for a shorter period
  2. retain insurance with a lower death benefit
  3. surrender and receive the cash value
110
Q

How does a person keep death benefit for a shorter period?

A

Surrender the life insurance take the cash value and buy new plan that’s shorter

111
Q

In what way are surrender fees based on a sliding timescale?

A

Fees are higher if surrendered in early years

112
Q

Where is the cash value stored?

A

in a separate account

113
Q

Who accepts risk when investing cash value?

A

The policyholder

114
Q

Which type of insurance products are considered securities?

A

variable life insurance

115
Q

How long does variable life insurance last?

A

Entire life of the policyholder

116
Q

Do variable life insurance have fixed premiums?

A

Yes

117
Q

What are three things that you can do with the cash value?

A
  1. withdraw or borrow
  2. return to the insurance company upon death
  3. kept upon surrender
  4. retained and potentially paid with a death benefit
118
Q

What happens to the cash value if a policy is forfeited?

A

The policyholder keeps it

119
Q

Variable annuities are a type of what product?

A

Investment company product

120
Q

What do variable annuities provide and to whom?

A

Lifelong income to a person in retirement

121
Q

Are variable annuities qualified or non-qualified retirement plans?

A

non-qualified

122
Q

What are the general two types of annuities

A
  1. immediate
  2. deferred
123
Q

what is an immediate annuity?

A

when an investor contributes large limpu sum and immediately receives payments

124
Q

What is deferred annuitiy?

A

When investor contributes over time and takes withdrawals later in retirement

125
Q

What are three Immediate Annuity Benefits?

A
  1. receive retirement income immediately
  2. provides income for life
  3. no need for lengthy accumulation phase
126
Q

What are 4 immediate annuity risks?

A
  1. requires large lump sum to qualify
  2. Lump sum inaccessible without significant fees
  3. low or negative return if death occurs earlier than expected
  4. subject to lots of up-front fees
127
Q

3 Deferred annuity benefits

A
  1. longer accumulation period allows for higher growth potential
  2. provides income for life if annuitized
  3. no need for significant lump sum to qualify
128
Q

4 deferred annuity risks

A
  1. assets may not grow as much or lose value if investments perform poorly
  2. Income is typically not received for years or decades
  3. low or negative return if death occurs earlier than expected
  4. likely subject to substantial amount of upfront fees
129
Q

What are the two phases of annuities?

A
  1. accumulation phase
  2. distribution phase
130
Q

What is the accumulation phase of variable annuities?

A

The period where money is contributed to the account as the investor builds the annuity’s assets

131
Q

Where is the money for a variable annuity kept in the accumulation phase?

A

Separate accounts

132
Q

What are accumulation units?

A

Accumulation units provide a measurement of the investor’s basis amount invested into their annuity’s “separate account”

133
Q

Who controls the separate account for variable annuities?

A

the investor

134
Q

How are assets in the separate account taxed?

A

They are tax deferred

135
Q

When does taxation apply in a variable annuity account?

A

Taxation only applies when a distribution (withdrawal) is taken.

136
Q

When must investors wait to withdrawal from an annuity and with what penalty?

A

59 1/2 and 10%

137
Q

When does the death benefit of variable annuities kick in?

A

If the account owner dies before annuitizing the contract (electing for lifetime payments)

138
Q

During what phase do variable annuities provide a death benefit?

A

Only accumulation phase

139
Q

How much will the beneficiary of a variable annuity receive if the account owner dies?

A

the beneficiary of a variable annuity will receive the Greater of the account owner’s basis or the current account value

140
Q

What is the “mortality risk” in a variable annuity?

A

It is the cost the insurance company owes when the account owner’s account is worth more than the basis when the account owner dies earlier than expected

141
Q

What are M&E (Mortality and Expense charges)

A

Charges that insurance companies charge to make up for unexpected losses

142
Q

What is the M$E ( mortality and espense ) charges percentage anually?

A

1.25%

143
Q

What is the distribution phase of variable annuities?

A

WHen customers can withdraw from the separate account

144
Q

How should an investor worried about running out of their funds in their variable annuity accounts not take out money?

A

In lump sum

145
Q

What is “annuitization”

A

When an investor seeks guaranteed income for life and they annuitize their contract

146
Q

What does annuitization involve?

A

Giving ownership of the separate account in return for payments for life

147
Q

What do accumulation units convert to when an investor annuitizes?

A

Annuity units

148
Q

What are the two primary methods of withdrawal in non-qualified variable annuities?

A
  1. not annuitizing and withdrawing funds when needed
  2. annuitizing and receiving periodic payments until death
149
Q

At what level is growth taxed when withdrawn in a variable annuity?

A

Ordinary income level

150
Q

What is Last in First Out rule?

A

If account is not annuitized, the IRS rules require the taxable growth to be distributed first

151
Q

What is pro-rata basis?

A

If the account is annuitized, each payment contains part tax-free basis and part taxable

152
Q

What is another word for pro-rata basis?

A

exclusion ratio basis

153
Q

How frequently are annuity payments made?

A

Every month

154
Q

What do future annuity amount payments depend on after the first payout?

A

The performance of the account

155
Q

What is an assumed interest rate (AIR)?

A

Conservative estimate of the projected growth of the separate account

156
Q

How does the AIR affect monthly annuity payout in a variable annuity?

A

If the seperate account performs better than the AIR, then the investor’s payout descreases, and vice versa

157
Q

What are the four types of annuitization structures?

A
  1. straight life annuitization
  2. life with period certain annuitization
  3. Unit refund annuitization
  4. Joint with last survivor
158
Q

What type of risk is associated with straight life annuitization and what is it?

A

Longevity risk, live longer than expect and have to continue payments

159
Q

What is straight life annuitization?

A

Investor is paid for life

160
Q

What happens to straight life annuitization account when investor dies?

A

Payments stop and insurance company keeps the assets

161
Q

How does life with period certain differ from straight life annuitization in payouts?

A

life with period certain guarantees a specific amount of years and if you die before those years, your remaining payments go to beneficiary instead of insurance company

162
Q

What type of people use “joint with last survivor” annuitization?

A

Married couples

163
Q

What is the joint with last survivor annuitization payout structure?

A

Pays two account owners until both pass away

164
Q

How is payment affected in noint with last survivor annuitization when one dies?

A

The payments are reduced

165
Q

What is Unit Refund annuitization?

A

Payments for life but when account owner dies, rest goes to beneficiary

166
Q

What is the tax differences between qualified and non-qualified an nuities?

A

in qualified annuities all money withdrawn is taxed as ordinary income, not just growth

167
Q

what are two pros of fixxed annuities?

A
  1. Money grows at guaranteed rate of return
  2. No investment-related risk
168
Q

What are two cons of a fixed annuity?

A
  1. grow less over time
  2. fixed rate of return gives inflation risk
169
Q

What are three variable annuity risks for the insurance company?

A
  1. mortality risk
  2. expense risk
  3. longevity risk
170
Q

What are the two types of investment products for separate accounts?

A
  1. equity based portfolios
  2. Debt-based portfolios
171
Q
A

Unit 2 (18 decks)

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