CHAPTER 5 ANNUITIES AND RETIREMENT PLANS

KEOGH Plans

KEOGH Plans 1.Purpose A.The Keogh Act (HR-10) was established to assist self-employed individuals or partners in creating a qualified tax deductible retirement program. B. A self-employed individual may have an IRA and/or a Keogh. If he or she has both, more earned income would be sheltered. Corporate officers or corporate employees are not eligible.

KEOGH Plans - Funding

KEOGH Plans 2.Funding A.The same as with IRA accounts (mutual funds, annuities, trust accounts, savings accounts, etc.) B.Cash value life Insurance permitted

KEOGH Plans - Contributions

KEOGH Plans - Contributions 3.Contributions A.25% of net earned income up to maximum specified limits (whichever is less) 1. 20% of 'before contribution' income

Tax Treatment for Individual Tax-qualified Annuity Contracts (TSAs) - Annuitization Period

(TSAs) - Annuitization Period 2.Annuitization Period A.Entire payment fully taxable as ordinary income

Tax Treatment of Individual Non-tax-qualified Variable Annuity Contracts - Accumulation Period

1.Accumulation Period A.Exclusion from current taxation to annuitant of net investment income and realized capital gains; deferment of tax liability until annuity payout, contract withdrawals, or surrender B.Tax consequences for Lump-sum Cash Withdrawals 1.The entire amount above the cost basis is taxable at the taxpayer's rate (at ordinary income tax rates) C.The 1986 Tax Reform Act imposes a 10% tax penalty on the annuitant for withdrawals prior to age 59 ½ unless annuitized (applies to interest portion only) D.Partial withdrawals are taxable as ordinary income first and a return of cost basis last (LIFO: last in, first out).

Two Accounts at Insurance Company 1.General Account

1.General Account A.The insurance company's reserves (backing all payment to the annuitant) are invested in a portfolio comprised of fixed debt securities and real estate mortgages. The general account is the same one that handles the investment of proceeds from the company life contracts. B.Funds from the sale of fixed annuities go into the general account.

Valuation of a Variable Annuity Contract - Payout Life Annuity

1.Life Annuity A. Payments that are made monthly during the contract holder's lifetime and terminate only upon death, no matter how long that person lives B.Largest monthly paymentof the various settlement options C.Most risky since there is no beneficiary

Securities purchased in tax-qualified accounts generally held for long-term growth

10.Securities purchased in tax-qualified accounts generally held for long-term growth A. Qualified annuities (TSAs) are purchased with pre-tax dollars. B.Non qualified annuities are purchased with after-tax dollars. 1. Both types offer tax deferred growth

Two Accounts at Insurance Company 2. Separate Account

2. Separate Account A. Funds from the sale of variable annuities go into the separate account. B.The separate account is formed as an individual entity to avoid jeopardizing the assets of the parent company and other affiliated companies. C. The assets of a separate account are invested in a portfolio much the same as a mutual fund. D Investments can be made directly by the separate account. E. Investments can be made indirectly by separate accounts organized as a unit investment trust (wrap-around variable annuities). 1. Funds are invested directly in the unit investment trust which in turn invests in the shares of a mutual fund.

Traditional Individual Retirement Investment Account (IRA): Taxation and Deductibility of Traditional IRAs 4

2.An individual is considered to be an active participant in a retirement plan if he or she is eligible to participate in a: a.Qualified pension plan b.Qualified profit-sharing plan c.401K plan d.Government-sponsored retirement plan e.Tax sheltered annuity (TSA) f.Simplified employee pension plan (SEP IRA)

Traditional Individual Retirement Investment Account (IRA): Funding

2.Funding A.Contributions to IRAs can be invested in: 1.Bank, savings and loan, or credit union accounts 2.Stocks, bonds, unit investment trust, mutual funds 3.Government bonds 4.Annuity contracts (fixed or variable) 5.Trust accounts with a ban 6.Any combination of the above NOTE: Cannot purchase life insurance in an IRA

Valuation of a Variable Annuity Contract - Payout Joint and Last Survivor Life Annuity

2.Joint and Last Survivor Life Annuity A.Payments are made monthly during the lives of two people and continue until both have died

Employee Retirement Income Security Act (ERISA) 2

3. ERISA is intended to protect covered employees from imprudent investment decisions made by their employers. 4. The test for any investment is the amount of risk involved. 5.All private qualified plans must conform with ERISA in order to maintain favorable tax status with IRS. 6. ERISA allows for covered call writing if it conforms to the plan's objectives.

Valuation of a Variable Annuity Contract - Accumulation Units

3.Accumulation Units A. Accounting measure used to determine a contract owner's interest in the separate account during the pay in (accumulation) period of a deferred annuity contract 1. Valued at end of each business day 2. Deduction of applicable charges (sales charges, taxes, etc.) 3. The value of a contract owner's interest in separate account equals the value of one accumulation unit times number of units accumulated

Traditional Individual Retirement Investment Account (IRA): Contributions 2

3.Contributions D. Compensation includes wages, salaries, fees, commissions, and other amounts received for personal services. 1.'Earned income only' does not include interest income, rents, dividends, or any other income derived from investments. E. Contributions can be made for a tax year anytime between January 1 of that year and April 15 of the following year but not beyond April 15. 1.Between January 1 and April 15 of each year, contributions may be made either for the prior tax year, the current tax year, or both. 2. Although a person may file his or her tax return in January (indicating an IRA contribution), he or she may wait until April 15 to actually deposit the contribution.

Traditional Individual Retirement Investment Account (IRA): Contributions

3.Contributions A.100% of earned income up to specified maximum limits (whichever is less) 1.The limit in 2013 •$5,500 ($6,500 if you're age 50 or older), . Please know the current limit. B.Individuals who turn age 50 before the close of the taxable year may make a $1,000 'catch up' contribution (in 2013). C.A couple with one working spouse and one non-working spouse can invest $5,500 each (in 2011). Two accounts are required.

Valuation of a Variable Annuity Contract - Payout Life Annuity With Period Certain

3.Life Annuity With Period Certain A.Monthly payments are made to the annuitant during his or her lifetime. B.If annuitant dies before a specified number of payments have been made, the insurance company guarantees that the distributions continue and will be paid to the decedent's beneficiary until the end of the period certain

Traditional Individual Retirement Investment Account (IRA): Taxation and Deductibility of Traditional IRAs

4. Taxation and Deductibility of Traditional IRAs A.Active Participant Rule 1.The active participant rule states that if an individual is an active participant in an employer-sponsored retirement plan and has earned income in excess of certain levels, that person cannot take an income tax deduction for his or her contribution to an IRA. a.Note the second part of the active participant rule: "... and has earned income in excess of certain levels." Only active participants who have AGI above specified limits will see their deductions effected. These individuals are subject to phase out rules meaning that as their AGI rises, the deductible amount of their IRA contribution decreases. At the upper end of these income limits, no deduction is available.

Traditional Individual Retirement Investment Account (IRA): Taxation and Deductibility of Traditional IRAs 2

4. Taxation and Deductibility of Traditional IRAs A.Active Participant Rule Active participants whose incomes are less than the minimum income limit can make the maximum allowable contribution each year and take a corresponding deduction for that amount. They are eligible to make this contribution and take the deduction even if they are covered by an employer-sponsored retirement plan. For those persons covered by an employer-sponsored retirement plan whose incomes exceed the minimum income limit, the deduction for an IRA contribution is phased out according to a schedule at the upper limit of which no deduction is allowed. The important thing to remember is that if an individual is an active participant in a retirement plan and if his or her AGI for the year exceeds the upper limits of the schedule, that person cannot take a deduction for an IRA contribution for that year.

Valuation of a Variable Annuity Contract - Annuity Units

4.Annuity Units A. Accounting measure used to determine the amount of each payment to an annuitant during annuity (payout) period of annuity contract 1. When a variable annuity is annuitized, the accumulation units are redeemed and the proceeds are used to buy annuity units. An assumed interest rate (AIR) is used to assist with the calculation. AIR does not guarantee any rate of return; it is just a base for future projections (usually conservative). B.A fixed number of annuity unitsare redeemed each month upon annuitization (the value changes with the value of the securities in the separate account). 1. Annuitants receive the fluctuating value of a fixed number of units redeemed each month for life.

Valuation of a Variable Annuity Contract - Payout Refund Life Annuity

4.Refund Life Annuity A.The value of a guaranteed number of units will be paid either to the annuitant or beneficiary B.Least risky option

KEOGH Plans - Taxation of Keogh Plans

4.Taxation of Keogh Plans A.Contributions 1. Contributions made to the plan are tax deductible. 2. Contributions to the plan are not currently taxable to the individual on whose behalf they are made. 3. Additional voluntary contributions are not deductible but accumulations are tax deferred. 4. Once put into the plan, the funds accumulate on a tax free basis until they are withdrawn at retirement. 5. Excess contributions are subject to a 6% accumulative penalty tax. 6. Removal of Excess Contributions a.May be done before income taxes are paid

401K Payroll Deduction Plans

401K Payroll Deduction Plans 1. Funded by employee by deferring current income 2. Immediate vesting of employee's contribution 3. Tailor funds investing to employee's individual goals

403B - Tax Sheltered Annuity Programs(TSAs)

403B - Tax Sheltered Annuity Programs(TSAs) 1.Participants A. Public education institutions B. Tax exempt, non-profit organizations C. Church organizations 2.Salary reduction plan (payroll deduction)

Traditional Individual Retirement Investment Account (IRA): ROTH IRA

5. Roth IRAs A.Available to anyone who has earned income regardless of age B.Contributions are not tax deductible but 'qualified' distributions are federal income tax free 1.To be 'qualified,' money must have been in the Roth IRA for at least five years and be paid out on or after age 59 ½ or due to death or disability. 2.If distributions are not qualified, they are subject to tax as ordinary income plus a 10% early withdrawal penalty prior to age 59 ½. 3.Distributions do not have to begin by age 70 ½ like they do in traditional IRAs. C. Rollovers are permitted from traditional IRAs to Roth IRAs. 1. The 10% early withdrawal penalty is waived upon rollover; however, income taxes must be paid on the amount being rolled over at ordinary income tax rates.

Investment Policies of Separate Accounts - Investment Return

5.Components of Investment Return to the Separate Account (Similar to Mutual Fund) A. Dividend income B. Interest income C. Realized capital gains or losses D. Unrealized appreciation or depreciation

Valuation of a Variable Annuity Contract - Payout Installments for a Designated Period

5.Installments for a Designated Period A.The annuitant receives payments for a set period of time and then the payments stop regardless of whether or not the annuitant is still living

KEOGH Plans - Payout Period

5.Payout Period A. At death, disability, or age 59 ½ B. Distribution of funds must begin by age 70 ½ (by April 1 st of the following year) C. Distributions are taxable as ordinary income.

KEOGH Plans - Additional

6. Must include full-time employees (over 1,000 hours) with one year of service who are at least age 21 7. Immediate vesting 8. Early withdrawal penalties apply (10%)

Valuation of a Variable Annuity Contract - Payout Installments for a Designated Amount

6.Installments for a Designated Amount A.The annuitant receives a designated amountunder the contract until his or her account is exhausted.

Investment Policies of Separate Accounts - Registration Requirement

6.Registration Requirement A. Variable annuities are considered to be a security and are required to be registered under the Securities Act of 1933. B. Separate account is viewed by the SEC as an investment company and must be registered under the Investment Company Act of 1940 C. Variable annuity sales organizations must meet the registration requirement under the Securities Exchange Act of 1934 and must qualify as a broker/dealer. D. State life insurance license is also required to sell any type of annuity

Traditional Individual Retirement Investment Account (IRA): Traditional IRA Transfers and Rollovers

6.Traditional IRA Transfers and Rollovers A.Transfer 1.You can move a traditional IRA from one custodian to another as often as you would like. You simply complete written instructions to your current IRA custodian, a bank for example, to transfer the money directly to your new account. B. Rollover 1.You can also take physical possession of your traditional IRA money once a year provided that you re-deposit the funds in an IRA within 60 days. 2.Any amount not rolled over will be subject to tax at ordinary income rates. 3.If under age 59 ½, subject to a 10% penalty tax also

Traditional Individual Retirement Investment Account (IRA): Traditional IRA Transfers and Rollovers 2

6.Traditional IRA Transfers and Rollovers C. The amount rolled over or transferred is not limited. D. Lump sum distributions from a qualified retirement plan qualify for a tax free rollover. E. It is permissible for a person to have two or more IRAs in effect at the same time. F.Accumulation Period 1.Tax on earned income and realized capital gains is deferred

Traditional Individual Retirement Investment Account (IRA): Traditional IRA Transfers and Rollovers 3

6.Traditional IRA Transfers and Rollovers G.Distribution Period 1.Taxed as ordinary incomewhen they are received 2.No income averaging on lump sum payouts. 3.Penalties with respect to early distributions (prior to age 59 ½ unless disabled) a.Plan assets become subject to ordinary income tax rates plus a 10% penalty tax 4. Funds must begin to be distributed by the year in which the participant attains the age 70 ½

Investment Policies of Separate Accounts - Mortality and Sales Charge

7.Mortality expense and Operating expense guarantees A. Set maximum expense ceilings to be charged to clients 8.Sales Charge A.8 ½% max (like mutual funds)

Employee Retirement Income Security Act (ERISA) 3

7.Vesting schedule required A.Vesting means ownership of employer contributions by the employee 8.Discrimination prohibited A.Percentage of contributions must be the same for all 9.Pension Benefit Guaranty Corporation (PBGC) A.A federal corporation established under ERISA (1974 Act) to guarantee defined benefit pension benefits in covered plans by administering terminated plans and placing liens on corporate assets for certain pension liabilities that were not funded

Investment Policies of Separate Accounts - Methods of purchasing

9.Methods of purchasing A.ImmediateAnnuity Contract 1.Lump-sum Purchase a.Used to purchase an annuity from which the annuitant may immediately begin to receive payments. B.Single Payment Deferred Annuity C. Periodic Pay Deferred Annuity 1.Usually permits monthly payments and has a level sales load

Fixed Annuity Contracts

A.Fixed dollar payments to annuitant for life B.Guaranteed minimum rate of interest; funds invested in general account 1. Excess Interest a.If the insurance company's investments that secure the annuity generate more money than anticipated, the contract holder may share in the excess income. C.Investment risk assumed by insurance company D.Annuitant relinquishes control of principal upon commencement of annuity payments but retains certain rights with regard to principal as described in annuity contract E.A fixed annuity guarantees lifetime payments of a fixed amount.

Tax Treatment of Individual Non-tax-qualified Variable Annuity Contracts - Annuitization Period

A.The annuitant's cost basis of contract is adjusted by a formula to compute the excluded amount. B.The annuitant's cost is divided by a life expectancy multiple found in IRS tables. The resulting figure is the yearly amount of the excluded income and represents the annual return of cost basis. C.The remaining amount of each payment is taxable as ordinary income.

Traditional Individual Retirement Investment Account (IRA): Taxation and Deductibility of Traditional IRAs 3

Active participants whose deductions are phased out or eliminated can still make non-deductible contributions up to the maximum limit and have the earnings on those contributions grow tax deferred until they are distributed. Individuals not covered by an employer-sponsored retirement plan may deduct their full IRA contribution (limited only by the maximum or 100% of income requirement) no matter what their earned income or AGI levels are.

VARIABLE ANNUITY CONTRACTS

Annuity Contracts: An annuity is an investment contract between a life insurance company and an annuitant. The insurance company agrees to make periodic payments to that party for as long as he or she lives in exchange for the deposit of a specific sum of money. The annuitant is the recipient of the annuity. There is no life insurance protection.

Money paid into qualified plan

Based on earned income. Can't come from inheritance, etc.

Combined Annuity Contracts

Combined Annuity Contracts A.These contracts provide part of the annuity payment on a fixed basis and part on a variable basis.

Corporate Pension Plans

Corporate Pension Plans 1. Defined contribution plans are usually set up by larger employers with younger work forces. 2. Defined benefit plans are usually set up by small employers with older employees. 3. Deferred compensation plans are usually non-qualified.

Employee Retirement Income Security Act (ERISA)

Employee Retirement Income Security Act (ERISA) 1.Party-In-Interest A. Anyone involved with the plan including administrators, officers, fiduciaries, trustees, custodians, council, and employees 2.Fiduciary A.Definition 1.Anyone who exercises any discretionary authority or control over the management of a plan, exercises any authority or control over the management or disposition of its assets, or who is paid a fee or other compensation for investment advice B.Responsibilities and Liabilities 1.ERISA requires that each fiduciary of the plan act with reasonable care, skill, prudence, and diligence.

Keogh Contributions by owner

Employee must be at least 21 years old, must have worked for the business at least 1 year and have to work full time, at least 1,000 hours a year. Owner of the business has to put the same percentage of their own money into the employees keogh, same percentage as what owner puts into his. This is based on the employees salary.

403 B

For profit company might invest in any of the following plans except. 403 B, that is for non profit and teachers and preachers.

Investment Objective of a Variable Annuity

Investment Objective of a Variable Annuity 1.Tax deferred growth during the accumulation period 2.Possibility of income keeping pace with inflation (inflationary hedge) 3.Lifetime payments upon annuitization

Investment Policies of Separate Accounts 1

Investment Policies of Separate Accounts 1. Detailed in each prospectus 2. In General - conservation of invested capital and long term capital accumulation. 3. Professionally Managed by board of Managers 4. Voting Rights - changes in investment policy, elections of managers and proxies (authority to represent someone else)

Non Qualified Accounts

Money going is not tax deductible, ROTH IRA, Education IRA, Coverdales, 529 plan (amount varies by state on this plan). Put money into and not deduct from taxes, CAN GROW TAX FREE. Not tax deferred, tax free.

IRS different rules for Variable Annuity vs Mutual fund

Mutual fund you get dividends from interest on bonds and stocks that have dividends coming in. They add those together and get the gross investment income subtract expenses, get net investment income, to avoid taxation have to pay 90 % or more out so the mutual fund does not have to pay any taxes. Get Capital gains checks too, you can reinvest or spend the money. Either way, you get taxed that year on the amount of dividends on the taxable gains for that year.

QUALIFIED PLANS (FUNDED WITH PRE-TAX DOLLARS)

QUALIFIED PLANS (FUNDED WITH PRE-TAX DOLLARS) Traditional Individual Retirement Investment Account (IRA): Created by the 'Employee Retirement Income Security Act' and commonly referred to as the 'Pension Reform Act of 1974' or 'ERISA.'

Roth 401K

Roth 401K 1. A 401K plan that is very similar to Roth IRA but with much higher contribution limits 2. Contributions are made with after-tax dollars and qualified distributions are tax free. 3. There are no income limitations as with the Roth IRA.

SEP-IRA

SEP-IRA 1.Total contributions cannot exceed 25% of employee's income up to maximum specified limits 2.Used by small businesses and corporations that do not have a pension plan A.Employer gets deduction for contribution B.Employee eligibility requirements C. Reduced paperwork and administrative expenses 3.Immediate vesting (ownership of funds)

Sept IRA is like a keogh

Sept IRA is more simpler than Keogh but they are similar.

Tax Treatment for Individual Tax-qualified Annuity Contracts (TSAs) - Accumulation Period

TSAs 1.Accumulation Period A.Exclusion from current taxation to annuitant of net investment income and realized capital gains; deferment of tax liability until annuity payout, contract withdrawals, or surrender B.Any withdrawal will be fully taxable as ordinary income since annuitant has a zero cost basis. C.The 1986 Tax Reform Act imposes a 10% tax penalty on the annuitant for withdrawals prior to age 59 ½ unless annuitized (applies to entire amount withdrawn).

Refund life Annuity

The favorite Annuity is the refund life annuity.

Qualified Plan

This means it qualifies for tax deduction means taken off taxes or reduces amount owed for this year. Have to take money out by 70 1/2 of a qualified, April 1st in the year after turning 70 1/2. Pay taxes on the money when you take it out. Before 59 1/2 add 10% penalty.

Traditional Individual Retirement Investment Account (IRA): Purpose

Traditional Individual Retirement Investment Account (IRA): Purpose 1.Purpose A.To allow individuals to establish a retirement plan of their own on a tax-deductible basis

Valuation of a Variable Annuity Contract

Valuation of a Variable Annuity Contract 1. Value of contract expressed in terms of units instead of shares 2. Unit value derived from value of investment portfolio in separate account A. Portfolio of a registered separate account valued on each business day at the close of the NYSE (like NAV of a mutual fund / forward pricing)

Variable Annuity Contracts

Variable Annuity Contracts Variable dollar payments to annuitant for life B.Benefit payments may increase or decrease depending upon performance of the separate account C.No guaranteed rate of interest or rate of return 1.May result in a loss of capital 2.This is a suitability consideration. D.Investment risk assumed by annuitant E.Annuitant relinquishes control of principal upon commencement of annuity payments but retains certain rights with regard to principal as described in annuity contract F.A variable annuity guarantees lifetime payments based on a fixed number of units with a fluctuating value.

Variable Annuities

Variable Annuity is like an open end mutual fund. Issues Shares, take in money, registered with the SEC, you can redeem them and take money out when you want to. It has a management team that decides what to buy, when to sell, just like an open end fund. No difference from open end fund.

Keogh Account

When putting money into Keogh use 20% of the gross which would be 100,000. This 20% of 100,000 would be 20,000 into Keogh plan. The Adjusted gross income is 80,000. The Keogh would actually be 25 % of the 80,000 (x.25% = 20,000) which is what the info is based on.

IRS different rules for Variable Annuity vs Mutual fund 2

With Variable Annuity, IRS allows those to be reinvested and not pay taxes on it that year. Taxes are deferred until you cash in the accumulation units. Then you will owe taxes on anything above the cost basis, not as capital gain but as ordinary income. If in retirement could be in lower tax bracket and pay less taxes.