Ch 14: Annuities & Individual Retirement Accounts

How are contributions to a traditional IRA income-tax deductible?

(1) is not an active participant in an employer-sponsored retirement plan (2) has taxable compensation below certain income thresholds.

Key elements of a fixed indexed annuity

(1) the participation rate, (2) the maximum cap rate, (3) the indexing method used (4) the guaranteed minimum value.

Annuity payout options typically include:

-Cash - Life income (no refund) - Life income with period certain - Installment refund option - Inflation annuity option - Joint-and-survivor annuity option

Scott and Allison are married and file a joint tax return. Scott is a graduate student who works part time and earned $15,000 in 2018. He is not eligible to participate in his employer's retirement plan because he is a part-time worker. Allison is a high school teacher who earned $60,000 in 2018 and is an active participant in the school district's retirement plan. Assume you are a financial planner and the couple asks for your advice. Based on the preceding facts, answer each of the following questions. d. Explain to Scott and Allison the advantages of a Roth IRA over a traditional IRA

1. Roth IRA are not tax deductible and withdrawals are also tax free. 2. It have less restrictions then traditional IRA. 3. Transactions under it,donot incur a tax liability. 4. Contributions can still be made to it , even if the person qualifies for a retirement plan. 5. Assets under Roth IRA can be passed on to heirs.

Joint Annuity

Annuity written on the lives of two or more people. *Under a joint life annuity the income payments terminate upon the death of the 1st covered person to die *Under joint-and-survivor annuity, the income payments terminate when the last annuitant dies

Scott and Allison are married and file a joint tax return. Scott is a graduate student who works part time and earned $15,000 in 2018. He is not eligible to participate in his employer's retirement plan because he is a part-time worker. Allison is a high school teacher who earned $60,000 in 2018 and is an active participant in the school district's retirement plan. Assume you are a financial planner and the couple asks for your advice. Based on the preceding facts, answer each of the following questions. c. Assume that Scott graduates and the couple's modified adjusted gross income is $130,000 in 2018. Both Scott and Allison participate in their employers' retirement plans. Can either Scott or Allison, or both, establish a Roth IRA? Explain your answer.

C. Modified adjusted gross income (MAGI) is $13000 in 2015. Yes , they both can establish a Roth IRA as their income range don't fall in the range of $186,000 - $ 196,000 . So they can contribute up to $5,500 only.

What are considered to be premature distribution from a traditional IRA?

Distributions before the age 59 1/2 -10% tax penalty must be paid on the amount of the distribution included in gross income

Investors can invest in a wide variety of annuities and use different annuity settlement options to meet specific retirement needs. For each of the following retirement objectives, identify either a specific annuity or an annuity settlement option that can be used to meet the objective. Treat each situation separately. e. Janice, age 75, is a widow with no dependents who needs additional retirement income. She has $25,000 to invest in an annuity. She wants to receive the maximum amount of monthly annuity income possible

Equity indexed annuity

Investors can invest in a wide variety of annuities and use different annuity settlement options to meet specific retirement needs. For each of the following retirement objectives, identify either a specific annuity or an annuity settlement option that can be used to meet the objective. Treat each situation separately. f. Kathy, age 32, would like to invest in the stock market, but she is conservative and risk averse. She would like to participate in any stock market gains, but she also wants to protect her principal against loss

Equity indexed annuity

Investors can invest in a wide variety of annuities and use different annuity settlement options to meet specific retirement needs. For each of the following retirement objectives, identify either a specific annuity or an annuity settlement option that can be used to meet the objective. Treat each situation separately. c. Jennifer, age 63, plans to retire in 90 days. She has $100,000 to invest in an annuity and would like to receive lifetime monthly income to supplement her Social Security benefits. However, she is concerned that she might die before she receives back the amount invested.

Fixed annuity

Investors can invest in a wide variety of annuities and use different annuity settlement options to meet specific retirement needs. For each of the following retirement objectives, identify either a specific annuity or an annuity settlement option that can be used to meet the objective. Treat each situation separately. b. Nancy, age 67, plans to retire in six months. She has $200,000 in a savings account. She would like to receive lifetime monthly income that is guaranteed.

Fixed variants

When should distributions from a traditional IRA start?

No later than April 1 of the year following the calendar year in which the individual attains age 70½

What does an annuity provide?

Periodic payments to an annuitant, which continue for either a fixed period or for the duration of a designated life or lives *Fundamental purpose of a life annuity is to provide lifetime income that cannot be outlived

Scott and Allison are married and file a joint tax return. Scott is a graduate student who works part time and earned $15,000 in 2018. He is not eligible to participate in his employer's retirement plan because he is a part-time worker. Allison is a high school teacher who earned $60,000 in 2018 and is an active participant in the school district's retirement plan. Assume you are a financial planner and the couple asks for your advice. Based on the preceding facts, answer each of the following questions. a. Is Scott eligible to establish and deduct contributions to a traditional IRA? Explain your answer

Scott earned $15,000 in 2015 and Allison earned $60,000 in 2015 ,so the total income of both of them in 2015 , is $75,000. Scott is eligible to establish a traditional IRA as his spouse , is enrolled in school's retirement plan. According to IRA specifications, if a married couple is filing jointly with a spouse covered under retirement plan with a income group of less than $184,000 then a full deduction upto the amount of your contribution limit is allowed to them.

Why do variable annuities have numerous fees & charges?

These charges include an investment management fee, a charge for administrative expenses, a management and expense risk charge for the guaranteed death benefit and other guarantees, and a surrender charge that declines over time. In the aggregate, total fees and expenses can be substantial

Scott and Allison are married and file a joint tax return. Scott is a graduate student who works part time and earned $15,000 in 2018. He is not eligible to participate in his employer's retirement plan because he is a part-time worker. Allison is a high school teacher who earned $60,000 in 2018 and is an active participant in the school district's retirement plan. Assume you are a financial planner and the couple asks for your advice. Based on the preceding facts, answer each of the following questions. b. Is Allison eligible to establish and deduct contributions to a traditional IRA? Explain your answer.

Total income of Scott and Allison is $75,000 in 2015. Allison is eligible to establish and deduct contribution to a traditional IRA as specified by IRA rules , according to which , if a married couple is jointly filing with a income range of $98,000 or less , then they are allowed a full deduction upto the limit of their contribution amount.

Major types of IRA's

Traditional IRA & Roth IRA

Variable annuities

Typically pay a guaranteed death benefit if the annuitant dies before retirement *The typical death benefit is the higher of the two amounts: the account value of the annuity or the amount of total premiums paid adjusted for any withdrawls

Investors can invest in a wide variety of annuities and use different annuity settlement options to meet specific retirement needs. For each of the following retirement objectives, identify either a specific annuity or an annuity settlement option that can be used to meet the objective. Treat each situation separately. a. Jose, age 35, is a sales representative and plans to retire at age 67. His monthly income varies. He would like to invest in an annuity that allows him to change the frequency and amount of premium payments.

Variable annuity

Investors can invest in a wide variety of annuities and use different annuity settlement options to meet specific retirement needs. For each of the following retirement objectives, identify either a specific annuity or an annuity settlement option that can be used to meet the objective. Treat each situation separately. d. Fred, age 70, recently retired and has $50,000 to invest for additional income. He wants the retirement benefits to be protected against the risk of inflation.

Variable annuity

What happens during the accumulation period?

Variable annuity premiums purchase accumulation units which are then converted into annuity units at retirement *the # of annuity units remains constant during retirement, but the value of the annuity units changes periodically so that the income payments will change over time

Qualified longevity Annuity Contract (QLAC):

a contract in which a lump sum premium is paid today to provide lifetime income at some future date, typically two to 40 years in the future

Fixed indexed annuity

a deferred annuity that allows the owner to participate in the growth of the stock market and provides downside protection against the loss of principal and prior interest earnings

multi-year guaranteed annuity (MYGA)

a deferred annuity that allows you to invest a lump sum for a specific time period at a fixed rate of interest, typically three to 10 years. It is similar to a certificate of deposit (CD) in a bank except the interest rate is substantially higher.

Traditional IRA

allows workers to take a tax deduction for part or all of their IRA contributions. The investment income accumulates income-tax free on a tax-deferred basis, and the distributions are taxed as ordinary income.

What is a qualified distribution from a Roth IRA

any distribution that (1) is made after a five-year holding period beginning with the first tax year for which a Roth contribution is made (2) is paid when the individual attains age 59½, becomes disabled, dies, or uses the money to pay qualified first-time home-buyer expenses.

What is the difference between a Roth IRA & a traditional IRA?

contributions to a Roth IRA can be made after age 70½, and the minimum distribution rules after attainment of age 70½ do not apply

Why are distributions from a traditional IRA taxed as ordinary income except what?

except for any nondeductible IRA contributions, which are received income-tax free.

What is the max annual IRA contribution for an individual worker? 2018

limited to $5,500 ($6,500 if age 50 or older) or 100 percent of taxable compensation, whichever is less.

Variable Annuity

pays a lifetime income, but the income payments vary depending on the investment experience of the subaccount in which the premiums are invested -Purpose is to provide an inflation hedge by maintaining the real purchasing power of the periodic payments

Immediate Annuity

pays periodic income payments that are guaranteed and fixed in amount *Fixed annuity can be purchased so that the income payments starts immediately or the payments can be deferred to some later date *Deferred annuities typically provide for flexible premiums

Longevity Annuity

single-premium deferred annuity that begins paying benefits only at an advanced age, such as age 85.

How can one be eligible for a traditional IRA?

the participant must have taxable compensation and be younger than age 70½.

Exclusion Ratio

used to determine the nontaxable and taxable portions of the periodic annuity payments. The exclusion ratio is determined by dividing the investment in the contract by the expected return.