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SIE Exam > Tax-Advantaged Accounts & Products > Flashcards

Tax-Advantaged Accounts & Products Flashcards

This deck focuses on tax-advantaged accounts, including retirement plans, variable annuities, and municipal fund securities.

1
Q

Category of retirement plans with tax deductible contributions

A

Qualified

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2
Q

Retirement plan category that can make non-deductible employee contributions on a discriminatory basis

A

Non-qualified

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3
Q

Annual IRA catch-up contribution amount allowed for individuals 50 and over

A

$1,000

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4
Q

Age at which distributions from an IRA may begin without penalty

A

59 1/2

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5
Q

In a traditional IRA account, age at which distributions must begin to avoid penalties

A

72

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6
Q

Amount of IRA insufficient distribution penalty

A

50% of amount that should have been withdrawn

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7
Q

Amount of IRA early distribution penalty

A

10% of amount distributed (plus ordinary income tax)

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8
Q

Five events prior to age 59 1/2 that will not trigger an IRA early distribution penalty

A

Death; disability; 1st time home purchase; education expenses for taxpayer, spouse, child or grandchild; medical premiums for unemployed; and excess medical expenses

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9
Q

Two examples of ineligible IRA investments

A

Collectibles and life insurance

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10
Q

Tax status of contributions made to Roth IRAs

A

After tax

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11
Q

Tax status of distributions from Roth IRAs

A

Non-taxable

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12
Q

Federal tax status of contributions made to Section 529 plan

A

After-tax

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13
Q

Tax advantage available for 529 plan contributions in many states to state residents

A

Contributions to 529 plan sponsored by that state are tax deductible on state tax returns

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14
Q

Taxation that applies to a lump sum withdrawal from an IRA account at age 55

A

Ordinary income on earnings + 10% penalty

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15
Q

Retirement plan for self-employed persons, unincorporated businesses or professional practices

A

HR-10 plan (Keogh plan)

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16
Q

Penalty for excess contributions made to an IRA account

A

6%

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17
Q

Qualified plan available to employees of non-profit organizations

A

403(b)

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18
Q

Type of qualified plan that promises a specified benefit at retirement

A

Defined benefit

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19
Q

Type of defined contribution plan that allows employee pre-tax contributions which may be matched by employer contributions up to a certain percentage

A

401(k) plan

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20
Q

Federal regulation that specifies guidelines for private sector and certain union plans

A

Employee Retirement Income Security Act (ERISA)

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21
Q

Schedule that identifies employee entitlement to pension benefits, based on years of service

A

Vesting schedule

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22
Q

ERISA clause that specifies impartial treatment for eligible employees

A

Non-discrimination clause

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23
Q

ERISA-defined employee eligibility requirements for plan participation

A

21 years of age and one year of full time service

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24
Q

Tax treatment of withdrawals from Section 529 Plans

A

Tax free withdrawals (after-tax contributions)

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25
Q

Tax nature of contributions to Section 529 Plans

A

After tax contributions

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26
Q

Distributions from tax deferred annuities are

A

100% taxable

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27
Q

A retirement plan requiring the services of an actuary to determine annual contributions

A

Defined benefit plan

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28
Q

The penalty that applies if funds are withdrawn from an annuity before age 59 1/2.

A

10% penalty on earnings

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29
Q

Life insurance company contract designed to provide a stream of guaranteed income payments for life

A

Annuity

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30
Q

The insurance company account in which variable annuity payments are invested

A

Separate account

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31
Q

The two phases of a variable annuity contract

A

Accumulation phase and Annuity phase

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32
Q

The transition from the accumulation to the payout phase of a variable annuity

A

Annuitization

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33
Q

The penalty that applies if funds are withdrawn from an annuity before age 59 1/2.

A

10% penalty on earnings

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34
Q

A risk associated with the loss of buying power from a fixed annuity’s payment

A

Purchasing power risk

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35
Q

The insurance company account in which fixed annuity payments are invested

A

General account

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36
Q

A risk assumed by the owner of a variable annuity

A

Investment risk

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37
Q

Type of annuity that guarantees the rate of return that will be earned on the investment

A

Fixed annuity

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38
Q

Distributions from 403(b) plans are

A

100% taxable

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39
Q

401(k)

A

A type of qualified, defined contribution corporate retirement plan that allows each eligible employee the option of deferring a portion of his or her salary into the plan instead of receiving current pay in cash. Employers also have the option of matching all or part of each employee’s contributions. Because these plans are qualified, they allow for tax-deductible contributions.

40
Q

403(b) plan

A

Also referred to as a tax-sheltered annuity, this plan is a qualified retirement plan offered by nonprofit organizations and education institutions. Other than the fact that these are offered by public entities rather than private corporations, they work similar to 401(k)s in that they allow eligible employees to make tax-deductible contributions.

41
Q

457(b) plan

A

A qualified retirement plan offered by state or local government entities and certain nonprofit organizations. Other than the fact that these are offered by public entities rather than private corporations, they work similar to 401(k)s in that they allow eligible employees to make tax-deductible contributions.

42
Q

529 plan

A

A type of municipal fund security that offers individuals a tax-advantaged means to save for education, such as high school, college, or graduate school. Specifically, these accounts allow for after-tax contributions, which grow tax-free. Distributions for qualified education expenses, such as tuition, books, and supplies, are completely tax-free.

43
Q

ABLE accounts

A

A type of municipal fund security that helps to ease the financial strain of individuals with disabilities by offering them tax-advantaged savings. Specifically, these accounts allow for after-tax contributions, which grow tax-free. Distributions for qualified expenses, such as education, housing, and employment training, are completely tax-free.

44
Q

accumulation phase

A

The first phase of an annuity, where investors make cash contributions to the plan. During this time, investors have an insurance-like feature known as a guaranteed death benefit, which protects the owner’s beneficiary in case the owner dies before taking distributions from the plan.

45
Q

accumulation unit

A

Received by investors during the first phase of an annuity as they make cash contributions into the plan. These units represent an interest in the insurance company’s separate account and will fluctuate in value as the market value of the portfolio changes.

46
Q

adviser-sold plan

A

A 529 plan that is purchased through a broker-dealer. These might be higher cost, but they allow investors to benefit from the advice of an investment professional.

47
Q

annuitant

A

The contract owner of an annuity.

48
Q

annuitization

A

The second phase of an annuity, where the investor begins taking income from the plan. These distributions can begin starting at age 59 1/2 without penalty. Withdrawals prior to this date are subject to a 10% penalty on the earnings.

49
Q

annuity

A

A contract between an individual and a life insurance company. They are used for retirement savings, as the insurance company will pay income to the contract holder that is guaranteed for life.

50
Q

annuity units

A

Received by investors once they annuitize their annuity contracts and begin taking payouts from the insurance company. These units help measure the value of investors’ portfolios and are one important factor in determining the amount of distributions investors will receive.

51
Q

catch-up contribution

A

Allows individuals age 50 or over to contribute an additional $1,000 per year to their IRAs.

52
Q

deferred annuity

A

A type of annuity that accumulates earnings until a future date decided by the contract owner. On this date, payments for life begin for the annuitant.

53
Q

deferred compensation plan

A

A type of non-qualified corporate plan, which is typically only offered to executives of a company, allowing them to defer current compensation until retirement. Because these plans are non-qualified, contributions are after-tax.

54
Q

defined benefit plan

A

A type of qualified corporate retirement plan, such as a pension plan, that is 100% funded by the company and promises to pay each employee a specified income benefit at retirement. Because these plans are qualified, they allow for tax-deductible contributions.

55
Q

defined contribution plan

A

A type of qualified corporate retirement plan, such as a 401(k), in which retirement income depends on the amount contributed and the performance of those investments. Because these plans are qualified, they allow for tax-deductible contributions.

56
Q

direct-sold plan

A

A 529 plan that is purchased directly through the plan provider without the help of an investment professional. These are typically lower cost, but investors will not have access to the advice of an investment professional.

57
Q

Employee Retirement Income Security Act (ERISA)

A

A law passed by Congress that governs qualified corporate retirement plans. According to ERISA, for a plan to be qualified and eligible for tax-deductible contributions, it must be offered to all full-time employees with at least 21 years of age and one year of service with the employer. The plan must also have a vesting schedule.

58
Q

fixed annuity

A

An annuity contract that guarantees the owner a fixed rate of return over the life of the contract. To generate this fixed return, all premiums are invested in the insurance company’s general account. Because investors are guaranteed a return, fixed annuities are not considered a security.

59
Q

general account

A

The account of an insurance company in which customer premiums are invested into conservative options that deliver a guaranteed fixed rate of return. All premiums for a fixed annuity are invested into this account.

60
Q

guaranteed death benefit

A

An insurance-like feature in an annuity contract that states that if the owner dies during the accumulation phase, which is the period in which she is making contributions to the plan, her beneficiary will receive the greater of the current value of the contract or the amount contributed.

61
Q

immediate annuity

A

A type of annuity in which payments for life begin shortly after the contract is issued and contributions are made by the annuitant.

62
Q

Keogh plan

A

Also referred to as an HR(10) plan, it is a type of qualified, defined contribution corporate retirement plan that allows self-employed individuals and owners of unincorporated businesses to contribute to retirement. Because these plans are qualified, they allow for tax-deductible contributions.

63
Q

municipal fund security

A

Similar to a mutual fund, it is a collection of capital from many investors that is invested to achieve a stated investment objective. However, these are exempt from the Invest-ment Company Act because they are issued by state and local governments rather than by private entities. Examples include 529 plans, ABLE accounts, and local government investment pools.

64
Q

non-qualified corporate plan

A

A corporate retirement plan, such as a deferred compensation or payroll deduction plan, that is not required to meet strict ERISA guidelines. Instead, companies have the flexibility to choose which employees are offered to participate in the plan. Because these plans are discrim-inatory, they do not allow deductible contributions. Instead, after-tax contributions are made, which grow tax-deferred, and when distributions are taken, only the growth is taxed as ordinary income.

65
Q

non-discriminatory

A

An ERISA requirement for a plan to be qualified and eligible for tax-deductible contributions. This means that the plan must be offered to all full-time employees with at least 21 years of age with one year of service.

66
Q

pension plan

A

A type of qualified, defined benefit corporate retirement plan that is 100% funded by the company and promises to pay each employee a specified income benefit at retirement. The benefit is based on the employee’s salary, age, and years of service. Because these plans are qualified, they allow for tax-deductible contributions.

67
Q

payroll deduction plan

A

A type of non-qualified corporate plan that allows employees, after-tax, to deduct a portion of their salary for retirement savings.

68
Q

profit-sharing plan

A

A type of qualified, defined contribution corporate retirement plan that allows companies to contribute to their employees’ retirement based on the companies’ profits. Because these plans are qualified, they allow for tax-deductible contributions

69
Q

program disclosure document

A

A disclosure document provided by states, which describes in detail the 529 plan the state offers.

70
Q

qualified corporate retirement plan

A

A corporate retirement plan, such as a defined benefit plan or defined contribution plan, that meets ERISA guidelines. These plans offer pre-tax or tax-deductible contributions and tax-deferred growth, with all distributions being fully taxed as ordinary income.

71
Q

required beginning date (RBD)

A

The date on which an owner of a traditional IRA must begin taking distributions from the account. Specifically, these withdrawals must begin by April 1st following the individual’s 70 1/2 birthday. Any shortfalls in this distribution are penalized with a 50% tax on the under-distribution amount.

72
Q

required minimum distribution (RMD)

A

Requires the owner of a traditional IRA to begin minimum withdrawals specified by IRS rules from the account by April 1st following the individual’s 70 1/2 birthday. Any shortfalls in this distribution are penalized with a 50% tax on the under-distribution amount.

73
Q

rights of accumulation

A

Offer investors an opportunity to receive breakpoints on new mutual fund purchases based on the current value of those customers’ invested funds.

74
Q

Roth 401(k)

A

A special type of employer-sponsored retirement plan that combines a traditional 401(k) with a Roth IRA. These plans allow the employee to contribute either pre-tax dollars to his 401(k) or after-tax dollars to a Roth account while the company makes all tax-deductible matching contributions to the employee’s 401(k).

75
Q

Roth IRA

A

A type of IRA that requires after-tax contributions, but allows the assets in the plan to grow tax-free. Distributions from the plan are also completely tax-free as long as the assets have been in the plan for at least five years and withdrawals do not begin prior to age 59 1/2. Only individuals who have income below a certain threshold are allowed to contribute to a Roth IRA.

76
Q

separate account

A

The account of an insurance company into which customer premiums are invested for a variable annuity. Within this account, individuals can invest their contributions into various subaccounts, which are essentially just mutual funds with different risk and reward profiles. Because the returns of the separate account are market driven, investors benefit from the highs of the market, while simultaneously risking the lows of the market.

77
Q

spousal IRA

A

Allows an individual with earned income to make a separate contribution to a traditional IRA on behalf of a non-working spouse with no compensation.

78
Q

subaccount

A

An account, similar to a mutual fund, that is contained within the insurance company’s separate investment account. It provides investors the opportunity to invest in different types of funds, each having its own risks and objectives.

79
Q

surrender charges

A

A fee charged by an insurance company when money is withdrawn from an annuity with a certain period of time from a purchase payment. These charges are typically assessed as a percentage of the amount withdrawn and generally decline to zero over time. However, while these charges are in existence, they create a lack of liquidity for the investor.

80
Q

tax-deductible contribution

A

Also referred to as a pre-tax contribution, occurs when individuals make a contribution to a retirement plan before taxes on their income are paid, which allows inves-tors a slight tax break, as they do not have to pay income taxes on those funds today.

81
Q

tax-deferred

A

The manner in which investments grow within a retirement plan, an annuity, a 529 plan, and an ABLE account. Tax-deferred means that there is no tax paid annually on any investment earnings, such as dividends, capital gains, or interest income. Taxes are only paid when withdrawals are made.

82
Q

traditional IRA

A

The most common type of IRA, which can be established by any individual with earned income. Depending on the individual’s income level and whether or not she is eligible for a corporate plan, contributions can be either pre-tax or after-tax and made up to age 70 1/2.

83
Q

underfunded pension plan

A

A pension plan that does not have sufficient assets to pay retirement obligations to employees. This becomes a risk if the investments inside the plan do not perform as expected.

84
Q

unfunded pension liabilities

A

Exist when future pension payment obligations to retirees exceed the value of the funds available to pay them. This situation could result in a default on pension benefits or other debts, negatively impacting the issuer’s credit.

85
Q

variable annuity

A

An annuity contract between an individual and an insurance company that pays the owner a fluctuating payout over his lifetime based on the market performance of his investments. To generate this variable return, all premiums are invested into the insurance company’s separate investment account and grow tax-deferred until the investor takes distributions from the account.

86
Q

vesting schedule

A

An ERISA requirement for a plan to be qualified and eligible for tax-deductible contributions. A vesting schedule specifies when plan participants have ownership rights to employer contributions made on their behalf; these contributions cannot be taken away from the employee.

87
Q

What does the acronym ERISA refer to?

A

ERISA stands for Employee Retirement Income Security Act.

It defines what types of plans may be considered qualified plans for the purposes of retirement planning.

88
Q

What does it mean for a plan to be “qualified”?

A

Qualified plans allow the investor to contribute to the plan prior to taxes being taken out of their paycheck. This means they have a lower gross income, which is good for tax purposes, but it also means they have never paid taxes on those contributions to the retirement plan.

89
Q

What are the tax characteristics of an ERISA plan?

A
  • Contributions are made with pre-tax dollars
  • The earnings grow in the plan tax-deferred
  • All distributions are taxed as ordinary income
90
Q

What are the tax characteristics of a non-qualified corporate plan?

A
  • Contributions are made with after-tax dollars
  • The earnings in the plan grow tax-deferred
  • When distributions are taken from the plan, only the growth is taxed as ordinary income
91
Q

What is the maximum contribution in an IRA Account?

A
  • Currently the cap on contributions is $6,000 per year for those under age 50 and $7,000 for those over 50 (referred to as a catch-up contribution)
92
Q

Up until what date may a prior year contribution be made to an individual’s IRA?

A

Individuals may make IRA contributions until April 15th of the following year, i.e. an individual can contribute for 2018 until April 15th of 2019.

93
Q

Before what age and at what rate are early withdrawals from a traditional IRA penalized?

A

Before 59 1/2, early withdrawals are penalized at 10%.

94
Q

When do mandatory distributions begin from a traditional IRA?

A

Mandatory distributions from an IRA must begin on the April 1st of the calendar year following an individual’s 70 1/2 birthday.

95
Q

What is the age for mandatory distributions in a ROTH IRA?

A

Unlike Traditional IRAs, Roth IRAs do not have a mandatory age distribution.

96
Q

An employee’s pension payments are based on his salary and length of service. He does not bear the risk of the pension being affected by market performance. He is enrolled in a

A

defined benefit plan

SIE Exam (14 decks)

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