Chapter 10 - Annuities and Retirement Plans

Question 1

Variable annuity requirements

Answer 1

The money insecurities must be held in the insurance companies separate account.

There’s this company must have a net worth of $1 million, or the separate account must have a net worth of $1 million.

Question 2

Appropriateness of a variable annuity

Answer 2

Variable annuity should not be recommended to investors who are trying to say for a large purchase or expense such as college tuition or a second home. Variable annuity products are more appropriate for an investor who is looking to create an income stream.

Question 3

Annuity payout options

Answer 3

Listed in order of largest monthly payment:

• life only/straight life
• life with period certain
• joint with last survivor

Question 4

Assumed interest rate (AIR)

Answer 4

Once the contract has been annuitized, the insurance company such a benchmark for the separate accounts performance, known as the assumed interest rate (AIR). It is not a guaranteed rate of return; it is only used to adjust the value of the annuity units up or down based on the actual performance of the separate account.

Question 5

SEP characteristics

Answer 5

Contribution: lesser of 25% of employee’s compensation or $57,000.

Employer’s contributions are immediately tax-deductible by the employer.

Question 6

IRA rollovers & transfers

Answer 6

May take possession of the funds for a maximum of 60 calendar days prior to depositing the funds into another qualified account.

The best for me only rollover an IRA once every 12 months.

An investor may transfer an IRA directly from one custodian to another by signing an account transfer form. The investor never takes possession of the assets in the account. Investors may directly transfer their IRAs as often as they like.

Question 7

Tax-sheltered annuities (TSAs) and Tax-deferred accounts (TDAs)

Answer 7

For non-profits and public organizations such as:

• Public educational institutions
• Nonprofit organizations
• Religious organizations
• Nonprofit hospitals

Question 8

403(B)

Answer 8

In order for school to be considered a public school and qualify to establish a plan for its employees, the school must be supported by the state, the local government, or a state agency. State-supported schools are:

• Elementary schools
• High schools
• State colleges and universities
• Medical schools

Question 9

Deferred Compensation vs Defined Benefit vs Defined Contribution

Answer 9

Deferred compensation: the employee agrees to defer the receipt of money owed to the employee from the employer until after the employee retires.

Defined benefit: set up to provide employees with a fixed percentage of their salaries during their retirement and require the services of an actuary to determine the employer’s contribution to the plan based on the participant’s life expectancy and benefits promised.

Defined contribution: both the employee and the employer may contribute a percentage of the employees earnings into the plan (such as a 401(k)).

Question 10

ERISA

Answer 10

Employee retirement income security act of 1974

A federal law that establishes legal and operational guidelines for private pension and employee benefit plans.

Our plans governed by ERISA may not discriminate among who may participate in the plan:

• They are at least 21 years old
• They have worked at least one year full-time (1,000 hrs)