Ch 14 - Generalities

Question 1

Tax-deferred growth

Answer 1

Central benefit of:
Retirement plans
Education savings plans

Question 2

Retirement account contributions

Answer 2

Must be made in cash

Question 3

Retirement account suitability

Answer 3

Avoid strategies with unlimited risk
Cannot utilize short sales
Cannot utilize margin
Municipal bonds are unsuitable

Question 4

Excess contribution penalty

Answer 4

6% on the amount over-contributed

Question 5

Early withdrawal penalty

Answer 5

Retirement distributions before 59 1/2
Subject to a 10% penalty
Exceptions:
-Disability
-Death
-First-time home purchase
-Educational expenses
-Certain medical expenses

Question 6

60-day rollovers

Answer 6

Avoid taxes if funds returned to the retirement plan within 60 days
Considered a taxable disbursement if not returned
May be performed once a year
Distributions are tax-reportable

Question 7

Trustee-to-trustee transfers

Answer 7

Direct transfer of retirement assets between institutions
No limit (may be performed unlimited times)
Non-tax reportable

Question 8

Required minimum distributions (RMDs)

Answer 8

Retirement withdrawal requirement
Applies at age 73
Annual amount must be distributed year-end
First RMD can be postponed to April 1st of the following year
25% penalty if not taken (10% if taken within 2 years)

Question 9

Automated Customer Account Transfer Service (ACATS) system

Answer 9

used to facilitate trustee to trustee transfers between brokerage firms

delivering old firm has ONE business day to validate the request
if good, the delivering old firm has THREE business days to transfer the funds

Question 10

ERISA

Answer 10

Legislation governing qualified plans

Question 11

General ERISA requirements

Answer 11

Minimum participation standards/non-discrimination
–Must offer the plan to all full-time employees
–Cannot offer the plan to executives only (this would be discrimination)

Reporting and disclosure
–Details of retirement plan available in writing
–Employees provided annual updates

Funding
–Defined benefit plans must be funded appropriately

Vesting
–Employees must earn employer-provided benefits in a reasonable amount of time (five years or less)

Question 12

ERISA Section 404(c)

Answer 12

Employers and fiduciaries avoid liability if:
-Making proper disclosures
-Offering diversified investment choices (3 choices)
—generally broad-based stock (equity) fund, broad-based bond (debt security) fund, and month market funds
-Allowing frequent investment changes (at least quarterly)

Question 13

Defined benefit plans

Answer 13

Varying contributions made over time
Defined retirement benefit

Most beneficial for employees:
-With higher salaries
-Closest to retirement age

Question 14

Pensions

Answer 14

Common form of defined benefit plan
Pay retirement income until death

Question 15

Unfunded pension liabilities

Answer 15

Payouts exceed assets (forecasted)

Question 16

Defined contribution plans

Answer 16

Defined contributions
Unknown benefit at retirement

Most plans allow employees to contribute a specific amount (e.g., 7% of salary) and invest their contributions. Additionally, employers can make contributions on behalf of employees (e.g., matching contributions up to 5% of the employee’s salary).

Question 17

401(k) plan

Answer 17

Qualified retirement plan
For private (non-government) companies

2025 employee contribution limit for 401(k) plans is $23,500.

Question 18

Solo 401(k) plan

Answer 18

Qualified retirement plan
For private (non-government) self-employed businesses with no employees
Working spouses do not count

Question 19

403(b) plan

Answer 19

Qualified retirement plan
For non-profit organizations, public school, and religious organizations
Also known as tax-sheltered annuities

2025 employee contribution limit for 403(b) plans is $23,500.

Question 20

Keogh (HR-10) plans

Answer 20

Qualified retirement plan
For self-employed businesses

2025 contribution limit is lesser of:
–$70,000
–25% of income

Question 21

Money purchase plans

Answer 21

Qualified retirement plan
Employer must contribute a fixed percentage of salary annually
& not based on company’s profit

Question 22

Profit-sharing plans

Answer 22

Qualified retirement plan
Employer shares a portion of profits
Employer under no obligation to contribute

Question 23

SEP and SIMPLE IRAs

Answer 23

Qualified retirement plans
For small businesses
Higher contribution limits than traditional or Roth IRAs

Question 24

Deferred compensation plan

Answer 24

Non-qualified retirement plan
Allows senior employees to defer compensation, invest it, and receive it in retirement
457 plan

Question 25

457 plan

Answer 25

Government & certain non-profit retirement plan Allows pre-tax contributions and tax-deferred growth No early withdrawal penalty

Question 26

Traditional IRAs

Answer 26

Potentially deductible contributions 100% taxable distributions

Question 27

Traditional IRA contributions

Answer 27

2025 contribution limit is lesser of: -$7,000 -Annual earned income Age 50+ can contribute $1,000 more Spousal IRA allows non-working spouse contribution

Question 28

Deductible traditional IRA contributions

Answer 28

Always allowed if not covered by a qualified plan If covered by a qualified plan: -Deductible if low-mid income -Non-deductible if high income

Question 29

Roth IRAs

Answer 29

Non-deductible contributions 100% tax-free distributions if: -Age 59 1/2 or older -Roth IRA is aged 5 years Income Limits: For those who are single filers, your Modified Adjusted Gross Income (MAGI) must be under $146,000 in 2024 to make a full Roth IRA contribution. For joint filers, the MAGI threshold is $230,000. If your MAGI exceeds these thresholds, your contribution limit will be reduced.

Question 30

Roth IRA contributions

Answer 30

2025 contribution limit is lesser of: =$7,000 =Annual earned income Contribution limits apply to both Roth and traditional IRAs combined Cannot contribute if high income NOT subject to RMD NOT workplace plan so cannot be qualified DOES subject to 5yr aging period

Question 31

Roth 401(k)s

Answer 31

Qualified workplace plan Similar tax structure to a Roth IRA NOT subject to RMD DOES subject to 5yr aging period

Question 32

Qualified domestic relations order (QDRO)

Answer 32

Orders qualified retirement assets to be split Typically utilized during divorce proceedings Distribution not taxable Receipt of funds may be taxable --Not taxable if placed into a similar retirement plan --Taxable as ordinary income if not placed into a similar retirement plan --No early withdrawal penalty (A59.5) qualified funds only, which include: 401k, 403b, simple/sep ira , DB, Keough HR10, profit sharing, money purchase

Question 33

Transfer incident to divorce

Answer 33

nonqualified funds: traditional ira, roth ira, Deferred compensation plan, 457 Orders non-qualified retirement assets to be split Utilized during divorce proceedings Distribution not taxable Receipt of funds may be taxable --Not taxable if placed into a similar retirement plan --Taxable as ordinary income if not placed into a similar retirement plan **Early withdrawal penalty applies if receiver below age 59 1/2

Question 34

Spousal IRA beneficiary choices

Answer 34

Claim IRA as their own Claim assets into inherited IRA, and --Take RMDs annually, or --Distribute all assets within 10 years

Question 35

Non-spouse eligible designated beneficiary choices

Answer 35

a minor child of the decedent (deceased IRA owner), a permanently disabled person, a chronically ill person, or a person not more than 10 years younger than the decedent. Claim assets into inherited IRA, and ==Take RMDs annually, or ==Distribute all assets within 10 years

Question 36

Non-spouse designated beneficiary choices

Answer 36

Claim assets into inherited IRA, and Distribute all assets within 10 years

Question 37

Variable annuities

Answer 37

Unlimited non-deductible contributions Contribution options: -Lump sum -Periodic contributions Offers tax-deferred growth Distributions taxable above basis

Question 38

Accumulation phase

Answer 38

When contributions are made Death benefit applies "mentioning accumulation units" means still in accumulation stages 7,500 accumulation unites and $10 NAV means worth 75,000

Question 39

Death benefit

Answer 39

Beneficiary keeps GREATER of: --Amount invested --Account value Applies if the account owner dies during the accumulation phase

Question 40

Variable annuity insurance company risks

Answer 40

Mortality risk: Investor dies earlier than expected, triggering the death benefit Expense risk: Business expenses rise Longevity risk: Investor lives longer than expected, forcing annuity payments to be paid longer

Question 41

Separate account

Answer 41

Where assets are held Customer in control of investing Investment choices: =Equity-based portfolios ==Hedge against inflation =Debt-based portfolios ==Subject to inflation risk

Question 42

Distribution phase

Answer 42

Investor receives income in retirement Non-annuitization options =Lump sum =Periodic payments Annuitization options: =Straight life annuity =Life with period certain =Joint and last survivor

Question 43

Non-qualified annuity taxation

Answer 43

Growth is taxable as ordinary income Withdrawals (non-annuitization) =Growth is distributed first (LIFO) Annuitization =Basis and growth distributed simultaneously =Taxed on a “pro-rata” basis (a.k.a. exclusion ratio) Not subject to RMDs

Question 44

Fixed annuities

Answer 44

Like a variable annuity, but: =Not a security =General account instead of a separate account =More exposed to inflation risk

Question 44

Qualified annuity taxation

Answer 44

All distributions taxed (growth and basis) as ordinary income Subject to RMDs starting at age 73

Question 45

straight life annuities

Answer 45

make payment to annuitant until death, only if annuitized

Question 46

Three specific risks related to variable annuities YET ONLY APPLICABLE to insurance company, not investors

Answer 46

-expense risks -mortality risks -longevity risks

Question 47

Assumed interest rate (AIR)

Answer 47

conservative estimate of return used during distribution phase of VA separate account performs better, payout increases if worse, payout decreases same as aIR, no change

Question 48

Viatical (life) settlements

Answer 48

Policy holder sells life insurance to third party Typically involves policy holders with terminal illnesses Third party takes over premium payments Third party receives a death benefit

Question 49

Variable life insurance

Answer 49

Coverage for the entire life of the policyholder Fixed premiums Guaranteed death benefit Cash value invested in a separate account Cash value grows based on investment performance Policyholder subject to investment risk Cash value may be --Withdrawn or borrowed --Returned to the insurance company upon death --Kept upon surrender of the policy --Retained and potentially paid with a death benefit Considered a security

Question 50

Universal variable life insurance

Answer 50

Coverage for the entire life of the policyholder Flexible premiums Flexible death benefit Cash value invested in a separate account Cash value grows based on investment performance Policyholder subject to investment risk Cash value may be --Withdrawn or borrowed --Returned to the insurance company upon death --Kept upon surrender of the policy --Retained and potentially paid with a death benefit Considered a security

Question 51

Coverdell ESAs

Answer 51

Savings accounts for child’s educational expenses Cover virtually all types of education Assets grow tax-deferred

Question 52

Coverdell ESA contributions

Answer 52

$2,000 per person per year limit Non-deductible Can no longer be made at age 18 USUALLY, high income earners (250k) are ineligible for these - cannot open or contribute to them

Question 53

Coverdell ESA distributions

Answer 53

Not taxable if used for education Full distribution or rollover by age 30 Rollovers only to family members Penalties if not used for education: --Ordinary income taxes on gains --Additional 10% penalty

Question 54

529 plans

Answer 54

Also known as qualified tuition programs (QTPs) State-sponsored education savings plans Assets grow tax-deferred Assets invested in state-approved funds Plan participant may make two changes annually Cover college expenses Cover up to $10,000 of non-college tuition expenses annually May move to another state plan once per calendar year

Question 55

qualified tuition programs (QTPs)

Answer 55

529 plans

Question 56

529 plan parties

Answer 56

Plan participant -Controls and manages plan for a beneficiary Beneficiary -Person receiving plan assets to pay for education -may be change by participant any time without taxconsequence

Question 57

Prepaid tuition plans

Answer 57

Pays for future tuition costs at today’s rates

Question 58

College savings plans

Answer 58

Assets grow tax-deferred in funds

Question 59

529 plan contributions

Answer 59

Subject to gift taxes $19,000 annual gift tax exemption (can contribute 5x at once) Generally non-deductible Some states allow for state tax deduction

Question 60

529 plan distributions

Answer 60

Tax-free if used for education expenses Penalties if not used for education: -Ordinary income taxes on gains -Additional 10% penalty on gains (avoided when beneficiary recd scholarship, no longer needed the money in account)

Question 61

ABLE accounts

Answer 61

Savings plans for people with disabilities Must be disabled by age 26 to qualify After-tax contributions Tax-sheltered growth Qualified distributions are tax-free

Question 62

qualified education expense for Qualified Tuition Program

Answer 62

that is 529 -tuition, textbooks, computer equipment, room and board (at lease half=time), apprenticeship programs, costs related to special needs student, payment of student loans (up to $10k)

Question 63

beneficiary on education plans

Answer 63

may change to family members" =natural adopted children parents, stepparents , grandparents siblings nices/nephews aunts uncles spouse of any of above spouses first cousins