Chapter 7 ExamFX

Who can make a fully deductible contribution to a traditional IRA

An individual not covered by an employer-sponsored plan who has earned income Individuals who are not covered by an employer-sponsored plan may deduct the amount of their IRA contributions regardless of their income level.

Which concept is associated with "exclusion ratio"?

Annuities payments A portion of an annuity payment is taxable, while another portion is not. The return of the pricipal paid in is nontaxable. The portion that is taxable is the actual amount of payment, less the expected return of the principal paid in. This relationship is called the "exclusion ratio"

An employee quits her job where she has a balance of $10,000 in her qualified plan. If she decides to do a direct transfer from her plan to a Traditional IRA, how much will be transferred from one plan administrator to another and what is the tax consequences of a direct transfer?

10,000, no tax consequence During an IRA direct transfer (or direct rollover), the full amount gets reinvested from one plan to the other.

Life insurance death proceeds are

Generally not taxed as income

An insured decides to surrender his $100,000 Whole Life policy. The premiums paid into the policy added up to $15,000. At policy surrender, the cash surrender value was $18,000. What part of the surrender value would be income taxable?

$3,000 The difference between the premiums paid and the cash value would be taxable. ex: the difference between the premium paid $15,000 and the cash value 18,000 is 3,000.

Which of the following terms is used to name the nontaxed return of unused premiums

Dividend The return of unused premiums is called dividend. Dividends are not considered to be income for tax purposes, since they are the return of unused premiums.

what is true regarding taxation of dividends in participating policies?

Dividends are not taxable. they are not considered to be income for tax purposes, since they are the return of unused premium. The interest earned, however, on dividends is subject to taxation as ordinary income.

Which of the following is used to determine the annuity amounts that are not taxable?

Exclusion ratio that should be excluded from taxes. During the accumulation phase, the contributions to the annuity have already been taxed. Therefore, the contributions are not taxed during the income period.

In a direct transfer, how is the money transferred from one retirement plan to a traditional IRA?

From trustee to trustee Distribution is made directly from the trustee of the first plan to the trustee or administrator/custodian of the new IRA plan.

In life insurance policies, cash value increases

Grow tax deferred Generally life insurance cash values are only income taxed if the policy is surrendered (totally or partially) and the cash value exceeds the premiums paid.

Which of the following statements is TRUE concerning whole life insurance?

Lump-sum death benefits are not taxable. Dividend interest is taxable; policy loans are not tax deductible, and premiums are not tax deductible.

Death benefits payable to a beneficiary under a life insurance policy are generally

Not subject to income taxation by the Federal Government. When premiums are paid with after tax dollars, the death benefit is generally not subject to federal income taxation.

Traditional IRA contributions are tax deductible based on which of the following?

Owner's income may be limited of the owner's income exceeds a certain level.

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?

Section 1035 Policy Exchange As long as the funds are transferred intact and the form is filed, taxation is deferred.

A 60 year old participant in a 401 k plan takes a distribution and rolls it over to an IRA within 60 days. What is true?

The amount of the distribution is reduced by the amount of a 20% withholding tax Distributions from 401k plans are taxable as ordinary income in the year of the distribution. If the distribution is rolled over to a traditional ira, taxes are deferred until the required minimum IRA distributions begin. Since this client actually took a distribution (instead of making a t rustee-to-trustee roll over) the distribution is subject to 20% withholding tax.