Retirement Flashcards
1
Q
What are contributions?
A
Funds placed into an account to save for retirement
2
Q
What type of contribution can be made in retirement account?
A
Only Cash
3
Q
What do deductible contributions provide?
A
Immediate tax benefits
4
Q
What are non-deductibel contributions?
A
contributions that do not make the equivalent amount of your income tax deductible
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
6
Q
What does it mean that retirement accounts are tax-deferred?
A
Avoid tazxation until money is withdrawn
7
Q
Which two retirement plans are not tax-deferred?
A
- Roth
- 401k
8
Q
What 3 things cannot investors invest in in their retirement accounts?
A
- Short sales
- margin
- or Options
9
Q
Why should investors avoid municipal bonds in retirement plans?
A
Because retirement accounts already provide the same low yield
10
Q
What type of bonds should retimenet account holders invest in?
A
US government bonds
11
Q
What 5 securities should retirement accounts invest in?
A
- Stocks
- Bonds
- Mutual FUnds
- UIT
- US Gov issue coins
12
Q
What are distributions in retirmeent accounts?
A
Withdrawals
13
Q
How are distributions taxed?
A
Like ordinary income
14
Q
What penalty for early withdrawal from retirement account?
A
10% early withdrawal penalty
15
Q
What are the 5 exceptions to early withdrawal penalties?
A
- disability
- death
- first time home purchases
- educational expenses
- certain medical expenses
16
Q
What does the death exception apply to in 10% withdrawal penalty?
A
Those inheriting retirmeent assets
17
Q
When are investors subject to Required Minimum Distributions?
A
When they turn 73
18
Q
How long can you postpone your first RMD and under what conditions?
A
3 months if it is your first RMD
19
Q
When must RMDs be fully distributed most of the time?
A
December 31st
20
Q
What are two penalties of skipped RMDs?
A
- 25% penalty
- 10% if taken within two years
21
Q
How much is the excess contribution penalty?
A
6%
22
Q
What act must govern a plan to be considered qualified?
A
Employee Retirement Income Security Act
23
Q
What do qualified retirment plans offer in taxes?
A
Tax reduction with pre-tax contributions
24
Q
What is the ERISA minimum participation/non discrimation standard for qualified retirment plans?
A
- Must offer plan to all full-time employees
25
What two things make someone count as a full time employee for the ERISA?
1. 21 or older
2. Working 1000 hours anually
26
What are the 4 standards to be met by ERISA to have a qualified plan?
1. minimum participation/non-discrimination
2. Reporting and disclosure
3. Funding
4. Vesting
27
What are two requirements of disclosure necessary for ERISA qualified retirement plan?
1. details of retirement plan available in writing
2. employees provided annual updates
28
What is the funding requirement by ERISA for qualified retirement plans?
Dfined benefit plans must be funded appropriately
29
What are two vesting requirements for ERISA?
1. Employees must earn employer-provided benefits in a reasonable amount of time
2. Employee contributions are always 100% vested
30
What is a reasonable amount of time in which employees must earn employer-provided benefits to qualify for ERISA?
5 years or less
31
What document must all qualified plans be governed by?
The Plan Document
32
What 6 rules does the plan document identify?
1. Who can contribute to the plan
2. Employer-provided benefits
3. Vesting schedules
4. INvestment options
5. Beneficiary designation rules
6. Distribution guidelines
33
WHo administers the qualified plan?
Fiduciary
34
What defines a fiduciary?
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
35
What must the fiduciary submit to whom before qualified plan may be offered to employees?
The plan document in writing to the IRS for approval
36
What are three workplace plans?
1. Qualified defined benefits plan
2. qualified defined contribution plans
3. non-qualified plans
37
What is the most common form of qualified defined benefit plan?
Pension
38
What does a qualified defined benefit plan involve?
Varying employer contributions and specific defined retirement benefit
39
Who (2 traits) is defined benefit plan most beneficial for?
1. high salaries
2. closest to retirement age
40
What does a qualified defined contribution plan involve?
Defined contributions and unknown benefit at retirement
41
What is the tax structure of all qualified defined contribution plans (3 things?
1. pre tax deductible contributions
2. tax-deferred growth
3. distributions taxable as ordinary income
42
To whom is a 401k available to?
private for profit companies
43
What is the contribution limit for 401k plans?
22,500
44
What are solo 401k plans?
Plans established by self-employed individuals
45
Who uses the 403b plan?
Non-profit organizations
46
What three things can employees do with their money at retirement in 403b plans?
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
47
For whom are Keogh HR10 plans created for?
Smaller professional business
48
What is the contribution limit for Keogh HR10 plans?
66,000 or 25% of income
49
What are profit sharing plans?
Business pledge percentage of profits to emplyees account
50
What are the two differences between money purchase plans and profit-sharing plans?
1. Contributions to money purchase plans are not based on company's profitability
2. Contributions must be made every year by employee
51
What are SEP IRAs and SIMPLE IRAs
IRAs structured specifically for smaller companies
52
WHen is someone not subject to the RMD?
If they are still working at their place of employment
53
What type of plans does ERISA not govern?
Non-qualified plans
54
What is a benefit of not being goverened by ERISA?
Ability to discriminate
55
What is a deferred compensation plan?
Allows senior employees to defer compensation, invest it, and receive it in retirment
56
Which plan do early withdrawal penalties not apply to?
457
57
What is 457 plan?
Non-qualified plan that is available to government and certain non-profit employees.
58
What are two unique things about 457 plans?
1. Allows tax-deductible contributions and
2. tax deferred growth
59
What are 403b plans also known as?
Tax sheltered annuities
60
Which retirement plan has no early withdrawal penalty?
457
61
What is a defensive stock?
Helps you fend against market flucuations during economic downturns?
62
When a registered employee goes to active duty what happens?
Thei. license goes inactive but then after it's two years and 90 days when they come back
63
Conditions under which registered can borrow from their customers or FINRA rule 3240.
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
64
Rules for REIT
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
65
What kind (qualified, unqualified) is a deferred compensation plan?
Non-qualified
66
What are the two types of IRAs?
1. traditional
2. roth
67
Are traditional IRAs qualified or unqualified?
non-qualified
68
What is the maximum contrituion limit for 457 plans?
22,500
69
How are traditional IRAs taxed?
Fully taxable as ordinary income
70
Are traditional IRAs deductible against earned income?
yes
71
What is the contribution limit for an IRA?
The lesser of 6500 or the amount of earned income during the year
72
What must investors have to contribute to an IRA?
Reportable income earned
73
For how long can an investor contribute to their IRA towards a previous year's contribution limit?
Up until the tax filing deadline of the following year
74
What does a spousal IRA allow?
Allows for a working spouse to contribute to a non-working spouse's IRA
75
What is the contribution limit for spousal IRAs?
6500
76
What does the catch-up provision for IRAs allow?
Additional contribution of 1000 dollars a year if you are age 50 or older
77
In what two cases are traditional IRA contributions always deductible?
1. investor is not covered by a qualified workplace plan
2. Investor is covered by a qualified workplace plan and low income
78
In what scenario are Traditional IRA contributions partially deductiable or not deductible?
When investor is covered by a qualified workplace plan and high income
79
What does it mean to be covered by a qualified workplace plan?
The investor has access to a qualified retirement plan through their work
80
What determines the tax status of an investors deduction if they have a qualified workplace plan and high income?
Income level
81
How does income level affect the tax status of an investors deduction if they have access to a qualified workplace plan?
Higher income equals less likely customer can deduct contributions
82
When are investors making non-deductible contributions to traditinal IRAs only taxed?
Taxed on the growth when a distribution (withdrawal) is taken.
83
How is the basis amount in a traditional IRA investor making non-deductible contributions taxed?
taxed free upon withdrawal
84
What type of investor cannot contribute to Roth IRAs?
high income investors
85
What are the two requirement ROth IRA owners must meet to avoid taxes when taking distributions?
1. Must be at least 59 and a half years old
2. Account must be open for at least 5 years
86
When does the 5 year againg period start for a ROth IRA?
Day of the first contribution
87
What are investors taking distributions above age 59 and a half but haven't reached the 5 year aging period subject to?
Oridanry income taxes on the gains above basis, but not the 10% penalty
88
What type of retirement account is not subject to Required minimum distributions?
Roth IRA
89
What are three tax benefits of Roth 401k?
1. contributions are after tax
2. assets grow tax sheltered
3. distributions are tax free in retirement
90
What's the difference between IRAs and Roth 401k?
401k is a qualified workplace plan that is ERISA governed
91
When are Roth 401k's subject to required minimum distributions?
If they are retired
92
How can RMDs for a 401k be avoided?
Rolling over Roth 401k asses to a Roth IRA
93
When would someone rollover their Roth 401k to a Roth IRA and why?
When they retire so that they can avoid RMDs
94
Do contribution limits apply to both Roth and Traditional IRAs combined?
yes
95
What is 5 years an important number for in Roth IRAs?
The aging requirement to be tax free
96
What can IRA contributions be made in? (cash, securities..)
Only
97
Are ROth IRA qualified or unqualified?
non-qualified
98
Are deferred compensation plans qualkified or unqualified?
Unqualified
99
How are traditional IRAs taxed?
As ordinary income
100
When is the basis separated from the growth for tax purposes in a traditional IRA?
If the investor makes a non-deductible contribution
101
When are Roth 401k not subject to RMDs?
If they are rolled over to an IRA
102
What are two insurance products that meet the legal definition of securities?
1. variable life insurance
2. Variable annuities
103
What is the difference between an insured person and a policyholder?
Insured person: person with their life insured
Policyholder: person owning the life insurance
104
What is returned to the policyholder if the policy lapses and premiums go unpaid?
A payout of the cash value minus any applicable fees
105
What is the relationship relationship between cash value and death benefit cost and age?
As investor gets older, death benefit cost gets higher and cash value gets lower
106
How long do you have to wait to withdraw cash from variable life insurance cash value?
Three years
107
What happens if cash value withdrawn or borrowed is not repaid?
It is deducted from the death benefit
108
How are cash value distributions taxed and on growth or basis?
Oridinary income tax on growth but not on basis
109
What are three ways a policyholder for variable life insurance can stop paying premiums?
1. keep death benefit for a shorter period
2. retain insurance with a lower death benefit
3. surrender and receive the cash value
110
How does a person keep death benefit for a shorter period?
Surrender the life insurance take the cash value and buy new plan that's shorter
111
In what way are surrender fees based on a sliding timescale?
Fees are higher if surrendered in early years
112
Where is the cash value stored?
in a separate account
113
Who accepts risk when investing cash value?
The policyholder
114
Which type of insurance products are considered securities?
variable life insurance
115
How long does variable life insurance last?
Entire life of the policyholder
116
Do variable life insurance have fixed premiums?
Yes
117
What are three things that you can do with the cash value?
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
What happens to the cash value if a policy is forfeited?
The policyholder keeps it
119
Variable annuities are a type of what product?
Investment company product
120
What do variable annuities provide and to whom?
Lifelong income to a person in retirement
121
Are variable annuities qualified or non-qualified retirement plans?
non-qualified
122
What are the general two types of annuities
1. immediate
2. deferred
123
what is an immediate annuity?
when an investor contributes large limpu sum and immediately receives payments
124
What is deferred annuitiy?
When investor contributes over time and takes withdrawals later in retirement
125
What are three Immediate Annuity Benefits?
1. receive retirement income immediately
2. provides income for life
3. no need for lengthy accumulation phase
126
What are 4 immediate annuity risks?
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
3 Deferred annuity benefits
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
4 deferred annuity risks
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
What are the two phases of annuities?
1. accumulation phase
2. distribution phase
130
What is the accumulation phase of variable annuities?
The period where money is contributed to the account as the investor builds the annuity's assets
131
Where is the money for a variable annuity kept in the accumulation phase?
Separate accounts
132
What are accumulation units?
Accumulation units provide a measurement of the investor's basis amount invested into their annuity's "separate account"
133
Who controls the separate account for variable annuities?
the investor
134
How are assets in the separate account taxed?
They are tax deferred
135
When does taxation apply in a variable annuity account?
Taxation only applies when a distribution (withdrawal) is taken.
136
When must investors wait to withdrawal from an annuity and with what penalty?
59 1/2 and 10%
137
When does the death benefit of variable annuities kick in?
If the account owner dies before annuitizing the contract (electing for lifetime payments)
138
During what phase do variable annuities provide a death benefit?
Only accumulation phase
139
How much will the beneficiary of a variable annuity receive if the account owner dies?
the beneficiary of a variable annuity will receive the Greater of the account owner's basis or the current account value
140
What is the "mortality risk" in a variable annuity?
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
What are M&E (Mortality and Expense charges)
Charges that insurance companies charge to make up for unexpected losses
142
What is the M$E ( mortality and espense ) charges percentage anually?
1.25%
143
What is the distribution phase of variable annuities?
WHen customers can withdraw from the separate account
144
How should an investor worried about running out of their funds in their variable annuity accounts not take out money?
In lump sum
145
What is "annuitization"
When an investor seeks guaranteed income for life and they annuitize their contract
146
What does annuitization involve?
Giving ownership of the separate account in return for payments for life
147
What do accumulation units convert to when an investor annuitizes?
Annuity units
148
What are the two primary methods of withdrawal in non-qualified variable annuities?
1. not annuitizing and withdrawing funds when needed
2. annuitizing and receiving periodic payments until death
149
At what level is growth taxed when withdrawn in a variable annuity?
Ordinary income level
150
What is Last in First Out rule?
If account is not annuitized, the IRS rules require the taxable growth to be distributed first
151
What is pro-rata basis?
If the account is annuitized, each payment contains part tax-free basis and part taxable
152
What is another word for pro-rata basis?
exclusion ratio basis
153
How frequently are annuity payments made?
Every month
154
What do future annuity amount payments depend on after the first payout?
The performance of the account
155
What is an assumed interest rate (AIR)?
Conservative estimate of the projected growth of the separate account
156
How does the AIR affect monthly annuity payout in a variable annuity?
If the seperate account performs better than the AIR, then the investor's payout descreases, and vice versa
157
What are the four types of annuitization structures?
1. straight life annuitization
2. life with period certain annuitization
3. Unit refund annuitization
4. Joint with last survivor
158
What type of risk is associated with straight life annuitization and what is it?
Longevity risk, live longer than expect and have to continue payments
159
What is straight life annuitization?
Investor is paid for life
160
What happens to straight life annuitization account when investor dies?
Payments stop and insurance company keeps the assets
161
How does life with period certain differ from straight life annuitization in payouts?
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
What type of people use "joint with last survivor" annuitization?
Married couples
163
What is the joint with last survivor annuitization payout structure?
Pays two account owners until both pass away
164
How is payment affected in noint with last survivor annuitization when one dies?
The payments are reduced
165
What is Unit Refund annuitization?
Payments for life but when account owner dies, rest goes to beneficiary
166
What is the tax differences between qualified and non-qualified an nuities?
in qualified annuities all money withdrawn is taxed as ordinary income, not just growth
167
what are two pros of fixxed annuities?
1. Money grows at guaranteed rate of return
2. No investment-related risk
168
What are two cons of a fixed annuity?
1. grow less over time
2. fixed rate of return gives inflation risk
169
What are three variable annuity risks for the insurance company?
1. mortality risk
2. expense risk
3. longevity risk
170
What are the two types of investment products for separate accounts?
1. equity based portfolios
2. Debt-based portfolios
171
