Retirement Plans Flashcards
fixed annuity
the guaranteed rate of return to the investor
Who assumes the investment risk in a fixed annuity
the insurance company
Variable annuity
- no guaranteed rate of return
- if the investments funding an annuity perform better than expected
-the annuity performs better than expected and vice versa
Who assumed the investment risk in a variable annuity
the investor, it is considered to be a security
AIR
-Illustration of a conservative interest rate that shows the annuity that would be received if the separate account grew at this rate
If the actual returns are greater than 5% AIR, then
annuity amount increases
if the actual return is lower than 5% AIR, then
annuity amount decreases
Separate account
- an account this is separate from the insurance company, used specifically to fund the annuity
- portfolio run as a management company
During annuity, if a separate account grows at the same rate as AIR, then
annuity payment is unchanged
During annuity, if the separate account grows faster than the AIR, then
annuity payment increases
During annuity, if the separate account grows slower than AIR, then
annuity payment decreases
Accumulation unit
Monies paid into a variable annuity contract are used to buy accumulation units
- NAV is computed daily
Interest, dividend payments, and capital gains realized from a separate account ______
- automatically reinvested to buy more accumulation units
- cannot be distributed until contract is complete
Big benefit to annuity contract holders
reinvested dividends and capital gains grow tax deffered
Variable annuities and inflation
- in periods of inflation, variable annuities have a greater return potential to investors since equity prices tend to rise with inflation rate over long term
Life Annuity
Pays only for that person’s life
- largest monthly payments
Life Annuity - Period Certain
Pays for that person’s life, but if that person dies before a stated time period (say 10 years), the annuity will be paid to a beneficiary for the balance of the 10 year certain period.
Joint and Last Survivor Annuity
Pays a married couple until the second party dies.
Unit Refund Annuity
If the contract holder dies earlier than expected, the balance left in the separate account is refunded to a beneficiary.
People who are not gamblers, more on safer side should invest in __
lump sum payments/ fixed annuities
- installment for designated period
- installment for
License required to sell variable annuities
- Series 7/ Series 6
- state insurance license may also be required
Suitability to recommend a variable annuity
- customer has been informed of the material features of the product
- customer would benefit from one or more of the features
GMIB
- optional rider
- Guarantees when the separate account is annuitized, if the account has not grown at the Guaranteed minimum rate, then the account will be annuitized as if it did.
- Only applies at the annuity phase
Variable Annuity Mortality Guarantee
- insurance company guarantees to pay the annuity for one’s life
- if person dies later than projected mortality, payments continue
Variable annuity Expense Guarantee
- if expense exceed a given percentage, the insurance company absorbs the excess.
tax qualified
before tax
non-tax qualified
after tax
Variable annuities are “___ qualified”
non- tax, the contribution is NOT deductible from the tax return
Cost basis in a variable annuity
the amount contributed, dollars after tax
Distributions from a variable annuity
build tax-deferred; these monies were never taxed
- payments are taxed at the amount above cost basis.
If a lump sum distriution is made from a plan, the IRS requires they use __ accounting
LIFO
LIFO accounting
the “build-up” amount comes out first since it went in last (and is 100% taxable), while the contribution amount comes out last since it went in first (and is 0% taxable).
Contract Surrender
then the customer’s cost basis is the amount invested and the sale proceeds is the amount received on redemption.
- SURRENDER FEE IS NOT DEUCTIBLE
Contract Exchange
to get another variable annuity contract or a fixed annuity contract with better features or lower costs.
ERISA Plans
Profit-sharing Plans Defined Contribution Plans Defined benefit plans tax- deferred annuity plans Payroll deduction savings plans
Tax qualified retirement plans are
deductible against the contributors income
- contributions must not be taxed
- earnings build tax deferred
- withdrawals are taxable
All ERISA plans are
tax qualified
Non- tax qualified retirement plans are
non deductible
- contributions have been taxed
- earnings build tax deferred
Contributions for IRAS can be made
until APril 15th of the following year
If the individual is not covered by another qualified retirement plan
then the contribution amount is tax deductible.
If an individual is covered by another qualified retirement plan and earns more than $76,000
the contribution amount is not deductible (but income in the account still builds tax-deferred).
If both spouses are not covered by another qualified retirement plan
then the contribution amount is tax deductible.
If both spouses are covered by qualified retirement plans, and their combined income exceeds $125,000
the contribution is not tax deductible
If one of the spouses is covered by another qualified retirement plan
the contribution amount for the covered person is not deductible, while the contribution amount for the uncovered person is deductible.
The first distribution of an IRA must be taken by
April 1st
If an individual is in a tax qualified plan, say at a corporation, and leaves the firm
the corporation gives the ex-employee a check for the vested pension benefit amount.
-then the distribution is subject to regular income tax plus a 10% penalty ta if not rolled over in 60 days
IRA transfer
made directly from plan trustee to plan trustee.
If a spouse inherits an IRA
- Rollover into their existing account
- Under than 72, can continue to make contributions to the account, major benefit is tax is only due when distributions happen
- take proceed as lump sum, but entire amount is taxable
- disclaim inheritance
If someone other than a spouse inherits an IRA
Transfer the funds to an IRA Beneficiary Distribution account, distributed over the next 10 years, each distribution is taxable but no penalty if it is before 591/2
Keogh (HR10) Plans
retirement plans for self-employed individuals, such as dentists and chiropracters.
the maximum permitted contribution for Keough Plans
- 20% of income, $58,000
Defined Contribution Plan / Money Purchase Plan
- specified fixed percentage of income
- annual contribution amount is fixed
- longer the employee remains in the plan, the greater the contribution amount and hence, the greater the pension benefit for that person
- payment must be paid. no ifs.
- max 25%
- tax qualified
Defined Benefit Plan
corporate sponsored plan that promises a “defined benefit” amount to each plan participant.
- tax qualified
The “defined benefit” amount is based upon
the employee’s earnings just before retirement
Definied benefit plans, benefit who
older employees with fewer years to retirement; since the benefit amount does not increase based upon years of service - it is based upon income prior to retirement.
Unfunded Pension Liability
the excess of benefits projected to be paid at retirement over projected plan assets available at retirement.
401k
tax qualified
Defined contribution money purchase plans
Max 401k contribution 1
19,500
SEP IRA
must be set up by the employer, with contributions made by the employer.
easier to set up than regular pension plans
SEP IRA annual contribution
25% of income statutory rate; 20% effective rate, capped at $58,000 in 2021
A major advantage of SEP IRA
flexibility regarding the annual contribution to be made - the employer can vary the contribution percentage each year.
SIMPLE IRA
only available to small businesses with 100 or fewer employees.
- established by employer and much simpler and cost efficient compared to others 401k
- no flexibility, must be made in good times and bad
Max contribution of SIMPLE IRA
up to 13,500
employer must make a matching contribution to a SIMPLE IRA of
either 2% or 3% of the employee’s salary
2% regardless if employee invests
3% if employee invests
403(b) plans
defined contribution money purchase plans established by not-for-profit entities such as universities or hospitals.
- allowed to invest in fixed or variable annuities, mutual funds
- tax deductible
- established by employer, employee chooses to elect
Max contribution for 403b Plans
25% of income, up to 19,500 as a salary reduction
Section 457 Plans
- deferred compensation plans for high salaried or long serving government employees
- non qualified
- can take distribution’s prior to 591/2
- regular tax still
Life cycle
100- minus that persons age
that number is the amount that should be invested in stocks
Life cycle for a 30 year old,
70% of assets invest in stocks, 30% in bonds
life cycle for a 70 year old
30% of assets invested in stocks, 30% inveted in bonds
Coverdell ESA Max contribution
$2,000
Contributions to Coverdell ESAs are
NOT TAX DEDUCITBLE, EARNINGS BUILD TAX DEFERRED
Who can contribute to Coverdell ESAs
not high earners
When do contributions stop to Coverdell/ When do distributions stop
18 and 30
Are coverdell ESAs distributions taxable
no, no taxes when used for qualifying expenses
529 Plan can be used for
College, and higher level
below college level, but max is 10,000
Contributions to Coverdell ESAs are
NOT TAX DEDUCTIBLE, EARNINGS BUILD TAX DEFERRED
Are 529 Plan distributions taxable
No, not when used for qualifying expenses
Max contribution to 529 Plans
set by state and can be very high >300,000
ABLE Accounts
Up to $15,000 per year (the Federal gift tax exclusion amount) can be contributed to an ABLE account, with no tax deduction. The account grows tax-deferred, and payments to pay for qualified expenses are tax-free. Qualified expenses include medical care, transportation, housing, education, and assistive technology.
Age beneficiary must be disabled for Able acounts
26
Any gifts above the annual gift tax exclusion amount ($15,000 in 2021) are subject
gift tax. Gift tax is paid by the donor, not the recipient.
tax benefit offered by 529 Plans is a 1-time gift that can be made into the account equal to 5 times the current gift tax exclusion, without the donor worrying about having to pay gift tax.
