Qualified plans and federal tax considerations for life insurance and annuities
Traditional IRA RMD penalty
10% penalty for early nonqualified distributions prior to age 59 ½ (some exceptions apply) Distributions are taxable
Roth IRA Contributions
100% of income up to an IRS-specified limit
Traditional IRA Contributions
100% of income up to an IRS-specified limit
Qualified distribution cannot occur until account is open for ? years and owner is age ?
5 years age 59½
Roth IRA Excess contribution penalty is
6%
Traditional IRA Excess contribution penalty
6%
Traditional IRA Payouts must begin by age of
72
Q: What are the consequences of withdrawing funds from a traditional IRA prior to the age of 59 1/2?
A: 10% penalty
Q: A policyowner cancels his life policy but instructs the insurance company to transfer the cash value of his policy to an annuity. This nontaxable transaction is called
A: 1035 exchange. In accordance with Section 1035 of the Internal Revenue Code, certain exchanges of life insurance policies and annuities may occur as nontaxable exchanges.
Q: An IRA uses immediate annuities to pay out benefits, the IRA owner is nearly 75 years old when he decides to collect distributions. What kind of penalty would the IRA owner pay?
A: 50% tax on the amount not distributed as required When immediate annuities are used to pay IRA benefits, distributions must begin no later than age 70½ in order for the annuitant to avoid penalties. The penalty is 50% of the shortfall from the required annual amount.
Q: What is the penalty for excessive contributions to a traditional IRA?
A: 6%
Q: What is the name for an overfunded life insurance policy?
A: A Modified Endowment Contract (MEC)
Q: Which concept is associated with "exclusion ratio"?
A: Annuity pavments A portion of an annuity payment is taxable, while another portion is not. The return of the principal paid in is nontaxable. The portion that is taxable is the actual amount of advent. less the expected return or the principal paid in. This relationship is called the "exclusion ratio.
Q: Employer contributions made to a qualified plan
A: Are subject to vesting requirements. Qualified plans must have a vesting requirement.
Q: According to the taxation rules of life insurance policies, how are cash value increases taxed?
A: Cash value growth is tax deferred.
Q: What is the general taxation rule for death benefits payable to the beneficiary of a life insurance policy?
A: Death benefits are generally not sublect to income taxes.
Q: Why are dividends in life insurance policies not taxable?
A: Dividends are not considered income for tax purposes; they are a return of unused premium.
Q: What is required to qualify an individual to contribute to a traditional IRA?
A: Earned income
Q: For a retirement plan to be qualified, it must be designed for whose benefit?
A: Employees
Q: Who qualifies for tax-sheltered annuities, or 403(b) plans?
A: Employees of nonprofit organizations under Section 501(c)(3) and employees of public school systems
Q: What are the income tax benefits of a qualified plan?
A: Employer contributions are tax deductible and are not taxed as income to the employee. The earnings accumulate tax deferred.
Q: In a direct rollover, how is the money transferred from one retirement plan to a ne
A: From trustee to trustee
Q: Life insurance death proceeds are
A: Generally not taxed as income. Life insurance death benefits are generally not taxed as income.
Q: What qualified plan is suitable for the self-employed?
A: HR-10 or Keogh
Q: What are some examples of qualified plans?
A: IRA, 401(k), HR-10 (Keogh), SEP, SIMPLE
Q: In what form of payment must the contributions to a traditional IRA be made?
A: In cash
Q: What portion of a nonqualified annuity payment would be taxed?
A: Interest earned on principal
Q: 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?
A: Interest only
Q: Which of the following is TRUE of a qualified plan?
A: It has a tax benefit for both employer and employee A qualified plan is approved by the IRS, which then gives both the employer and employee benefits in deductibility of contributions and tax deferral of growth.
Q: If an insured surrenders his life insurance policy, which statement is true regarding the cash value of the policy?
A: It is only taxable if the cash value exceeds the amount paid for premiums. The cash value of a surrendered policy is only considered to be taxable as income if the cash value exceeds the amount of premiums paid for the policy.
Q: SIMPLE plans are available to groups of how many employees?
A: No more than 100
Q: In qualified plans, are employer contributions taxed as income to the employees?
A: No, employer contributions are not taxed as income to the employees.
Q: Is the death benefit of a life insurance policy taxed to the beneficiary if it's received as a lump sum?
A: No, lump-sum benefits are received taxfree.
Q: Upon surrender of a life insurance policy, what portion of the cash value will be taxed?
A: Only the portion in excess of the premium paid
Q: 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?
A: Profit-sharing plan
Q: What is the primary purpose of a 401(k) plan?
A: Provide retirement income
Q: What type of plan is a 401(k)?
A: Qualified profit-sharing plan
Q: What part of the Internal Revenue Code allows an owner of a life insurance policy or annuity to exchange or replace their current contract with another contract without creating adverse tax consequences?
A: Section 1035 Policy Exchange As long as the funds are transferred intact and the form is filed, taxation is deferred.
Q: An annuitant dies before the effective date of a purchased annuity. Assuming that the annuitant's wife is the beneficiary, what will occur?
A: The interest will continue to accumulate tax deferred. If the contract holder dies before the annuity starting date, the contract's interest becomes taxable. If the beneficiary of the annuity is a spouse, the tax can continue to be deferred
Q: If a retirement plan is qualified, what does that mean?
A: The plan has favorable tax treatment.
Q:4: All of the following are NOT general requirements of a qualified plan
A: The plan must provide an offset for social security benefits. Plans must meet the general requirements established by the IRS.
Q: What is the main purpose of the 7-pay Test?
A: To determine if a life insurance policy is a Modified Endowment Contract
Q: When would life insurance policy proceeds be included in the insured's taxable estate?
A: When there is an incident of ownership at the time of death
Traditional IRA Contributions are tax deductible? or not?
Contributions are tax deductible (Made with "pre-tax dollars")
Roth IRA Distributions are taxable or not?
NOT
Roth IRA RMD
No required minimum age for payouts
Q: Which of the following terms is used to name the nontaxed return of unused premiums?
Q: Dividend The return of unused premiums is called a dividend. Dividends are not considered to be income for tax purposes, since they are the return of unused premiums.
Traditional IRA Grows tax
deferred
Roth IRA Grows tax
free (if account open for at least 5 years)
Roth IRA Contributions are
not tax deductible (Made with "after-tax dollars")
