Exam FX - Qualified Plans, and Federal Tax Considerations for Life Insurance and Annuities

What type of plan is a 401(k)

Qualified profit-sharing plan

If a retirement plan is qualified, what does that mean?

The plan has favorable tax treatment

What is the name for an overfunded life insurance policy?

A Modified Endowment Contract (MEC)

When would life insurance policy proceeds be included in the insured's taxable estate?

When there is an incident of ownership at the time of death

What is required to qualify an individual to contribute to a traditional IRA?

Earned income

For a retirement plan to be qualified, it must be designed for whose benefit?

Employees

In a direct rollover, how is the money transferred from one retirement plan to a new one?

From trustee to trustee

What are the consequences of withdrawing funds from a traditional IRA prior to the age of 50 1/2?

10% penalty

What is the penalty for excessive contributions to a traditional IRA?

6%

Who qualifies for tax-sheltered annuities, or 403(b) plans?

Employees of nonprofit organizations under Section 501(c)(3) and employees of public school systems

What qualified plan is suitable for the self-employed?

HR-10 or Keogh

What are some examples of qualified plans?

IRA, 401(k), HR-10 (Keogh), SEP, SIMPLE

In what form of payment must the contributions to a traditional IRA be made?

In cash

If the beneficiary of a life insurance policy receives death benefit payments that consist of principal and interest, which portion, if any, will be taxed?

Interest only

SIMPLE plans are available to groups of how many employees?

No more than 100

In qualified plans, are employer contributions taxed as income to the employees?

No, employer contributions are not taxed as income to the employees.

Is the death benefit of a life insurance policy taxed to the beneficiary if it's received as a lump sum?

No, lump-sum benefits are received tax free

Upon surrender of a life insurance policy, what portion of the cash value will be taxed?

Only the portion in excess of the premium paid

An employer is sponsoring a qualified retirement plan for its employees where the employer contributes money whenever the business has profit. What is this type of plan called?

Profit-sharing plan

What is the primary purpose of a 401(k) plan?

Provide retirement income

What is the main purpose of the 7-pay Test?

To determine if a life insurance policy is a Modified Endowment Contract

According to the taxation rules of life insurance policies, how are cash value increases taxed?

Cash value growth is tax deferred.

Why are dividends in life insurance polifices not taxable?

Dividends are not considered income for tax purposes; they are a return of unused premium.

What portion of a nonqualified annuity payment would be taxed?

Interest earned on principal

What is the general taxation rule for death benefits payable to the beneficiary of a life insurance policy?

Death benefits are generally not subject to income taxes.

What are the income tax benefits of a qualified plan?

Employer contributions are tax deductible and are not taxed as income to the employee. The earnings accumulate tax deferred.